Centerra Gold Reports Second Quarter Earnings (Before Unusual Items) of $0.06 Per Share
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TORONTO, ONTARIO, Jul 31 (MARKET WIRE) --
(This news release contains forward-looking information that is subject
to the risk factors and assumptions set out on page 9 and in our
Cautionary Note Regarding Forward-looking Information on page 11. All
figures are in United States dollars.)
Centerra Gold Inc. (TSX: CG) today reported second quarter earnings
before unusual items of $13.8 million or $0.06 per common share based on
revenues of $142.6 million compared to net earnings of $18.6 million or
$0.09 per common share on revenues of $103.7 million in the same quarter
of last year.
Centerra's consolidated gold production for the second quarter of 2008
totaled 158,303 ounces at a total cash cost of $553 per ounce compared to
153,414 ounces at a total cash cost of $349 per ounce in the
corresponding quarter of 2007. Cash provided by operations, net of
working capital changes and other operating items was $10.6 million
compared to $7.4 million in the second quarter of 2007. (Total cash cost
is a non-GAAP measure and is discussed under "Non-GAAP Measures" in the
Management's Discussion and Analysis issued in conjunction with this news
release).
During the second quarter of 2008 the Company recorded an unusual item of
$42.2 million resulting in net earnings of $56.0 million or $0.26 per
share. The unusual item of $42.2 million is a non-cash gain representing
an adjustment to the value of treasury shares which the Company believes
are likely to be issuable in connection with any future potential
settlement of outstanding issues with the Government of the Kyrgyz
Republic. The gain represents the difference between the market value of
10 million treasury shares at March 31, 2008 ($131.3 million) and the
value at May 30, 2008 ($89.1 million), immediately prior to the expiry on
June 1, 2008 of the August 2007 Agreement on New Terms between the
Company and the Government.
As disclosed in the Company's news release of June 2, 2008, Centerra has
resumed the international arbitration previously initiated by the Company
in accordance with its Investment Agreement, which provides that all
disputes with respect to the Kumtor project are subject to international
arbitration. However, Centerra continues to hold discussions with the
Government working group responsible for Kumtor. To allow for such
discussions, the parties have agreed to a limited postponement of the
arbitration proceedings to September 29, 2008. See "Other Corporate
Developments - Kyrgyz Republic".
Second Quarter Events
- Gold production guidance for 2008 remains unchanged.
- Initial access achieved to the SB Zone at Kumtor.
- Framework agreements entered into between the Company and Cameco
Corporation and the Kyrgyz Government in August 2007 were not ratified by
the Kyrgyz Parliament and expired.
- Management reorganization, Stephen A. Lang appointed CEO and Jeffrey S.
Parr appointed CFO.
- Bruce Walter appointed Vice Chair to assist the Company in its growth
initiatives.
Commentary
Stephen Lang, President and CEO of Centerra Gold commented, "I am pleased
to report that we are right on our plan for both gold production and
costs other than reflecting the change to total cash cost relative to the
adjustment for the inclusion of revenue-based taxes and royalties. The
second half of the year we are on track to increase gold production
significantly, with 70% of Kumtor's annual gold production forecast for
the second half of 2008. While the expiration of the agreement with the
Kyrgyz Government in June was a setback, we are continuing discussions
with the government and its working group to advance the negotiations to
reach a fair and acceptable agreement for all parties. We are confident
that in time we will achieve this, but in the meantime the Company
continues to operate and produce gold at Kumtor uninterrupted."
Financial and Operating Summary
Revenues for the second quarter of 2008 were $142.6 million compared to
$103.7 million during the same period one year ago. Second quarter 2008
revenue reflects a 33% increase in realized gold price ($889 per ounce in
the second quarter of 2008 versus $667 per ounce in the second quarter of
2007).
The Company produced a total of 158,303 ounces of gold in the second
quarter of 2008, compared to 153,414 ounces of gold produced in the
second quarter of 2007.
Centerra's total cash cost per ounce of gold was $553 in the second
quarter compared to $349 in the second quarter of 2007. The
year-over-year increase in unit cash costs was primarily due to a $164
per ounce increase in operating costs, which included increased
maintenance costs, higher fuel costs and higher costs for other
consumables, labour and royalties. Second quarter total cash cost
decreased $57 per ounce compared to the first quarter 2008 total cash
cost of $610 per ounce due primarily to the higher gold production.
(Total cash cost is a non-GAAP measure and is discussed under "Non-GAAP
Measures" in the Management's Discussion and Analysis for the three
months ended June 30, 2008, issued in conjunction with this news release.)
Cash provided by operations was $10.6 million for the second quarter of
2008 compared to $7.4 million for the prior year second quarter. The
increase reflects the higher gold prices received and reduced working
capital levels.
Capital expenditures in the second quarter of 2008 amounted to $22.1
million of which $11.1 million was spent on sustaining capital projects
and $10.9 million invested in growth capital primarily related to the SB
Zone underground development at Kumtor ($2.9 million), completion of the
heap leach facility at Boroo ($2.4 million) and pit 3 pre-stripping at
Boroo ($4.6 million). Centerra's cash position at the end of June 2008
was $108.0 million, compared to $105.5 million at December 31, 2007.
Exploration expenditures for the second quarter were $5.1 million dollars
compared to $4.2 million in the second quarter of 2007 reflecting higher
spending at Kumtor in 2008.
Other Corporate Developments
Kyrgyz Republic
On June 2, 2008, the Company reported that the previously announced
framework agreements entered into between the Company, Cameco Corporation
and the Government of the Kyrgyz Republic on August 30, 2007 had not been
ratified by the Parliament of the Kyrgyz Republic within the time frame
agreed by the parties and had therefore expired.
In the circumstances and in response to court proceedings described
below, on June 4, 2008, the Company resumed international arbitration
previously initiated by the Company in accordance with its Investment
Agreement, which provides that all disputes with respect to the project
are subject to international arbitration.
Centerra is continuing to hold discussions with the Government working
group responsible for Kumtor. To allow for such discussions the parties
have agreed to a limited postponement of the arbitration proceedings to
September 29, 2008.
As previously disclosed, a Vice-Speaker of the Parliament, K.S. Isabekov,
has filed two lawsuits against the Government of the Kyrgyz Republic
seeking to invalidate the licenses and agreements pursuant to which the
Kumtor mine is operated. Although the Company and its subsidiary Kumtor
Gold Company (KGC), the owner of the project, were not parties to those
lawsuits, and despite their objections to the court's jurisdiction on the
basis of the Investment Agreement's arbitration clause and the on-going
international arbitration, they have since been ordered to appear as
third parties by the Kyrgyz court.
The Vice-Speaker's lawsuits seek to annul: the Government's decree
approving the December 31, 2003 agreements implementing the restructuring
of the project; the 2003 agreements giving effect to the restructuring,
including the Investment Agreement and the Concession Agreement providing
for Kumtor's right to explore and develop the main Kumtor deposit within
the Kumtor concession; the exploration license covering all of the Kumtor
deposits; the mining license covering the Southwest Zone; the mining
license covering the Sarytor area; the Government's decree approving the
1993 Concession Agreement (superceded by the 2003 Concession Agreement)
and the 1993 Concession Agreement itself. The Vice-Speaker argues that
the 2003 agreements and 1993 Concession Agreement required Parliamentary
approval to be effective and that as no such approval was obtained, such
agreements are void. He also argues that the licenses are invalid because
they were granted without a competition having been held and pursuant to
agreements that are themselves invalid for lack of Parliamentary
ratification.
As previously reported, on May 12, 2008, the Supreme Court of the Kyrgyz
Republic, pending resolutions of the claims before the lower courts,
issued an order suspending: the 2003 decree; the 2003 Concession
Agreement; and the mining and exploration licenses. Acting on the order,
the State Agency on Geology and Mineral Resources Management notified
Kumtor that as issues relating to the 2003 decree and the Concession
Agreement are regulated by "international legislation", operations within
the concession area as well as work on the underground decline (to
further develop the SB zone) should be continued but that operations on
the licenses should be stopped. In response to the notice, Kumtor halted
activity on the mining and exploration licenses and suspended development
of the Sarytor deposit. All Kumtor mining operations are taking place in
the concession area and continue uninterrupted.
On June 17, 2008, as has previously been reported, the Bishkek Inter
District Court issued an order invalidating the Southwest and Sarytor
mining and Kumtor exploration licenses. The court has not yet ruled on
the validity of the decrees and agreements (including the 2003 Investment
Agreement and Concession Agreement).
Having been joined involuntarily as third parties, KGC and the Company
are now defending the validity of the agreements, licenses and decrees in
the Kyrgyz court actions on procedural and substantive grounds. At the
same time, KGC and the Company are maintaining their position that the
Investment Agreement's arbitration clause confers exclusive jurisdiction
over questions surrounding the validity of the agreements and licensees
on the international arbitration tribunal. With respect to the relevant
agreements and decrees, the Kyrgyz Ministry of Justice issued various
legal opinions repeatedly affirming that the Government had the legal
capacity to enter into and perform the agreements. After reactivating the
international arbitration proceedings on June 2, 2008, Centerra and KGC,
on June 13, 2008, added claims based on the Vice-Speaker's lawsuits and
their consequences. At the initial conference on June 23, 2008, Centerra
filed an application for interim relief in the arbitration, requesting
that all parties to the arbitration be directed to maintain the status
quo and treat the licenses, agreements and decrees at issue in the Kyrgyz
Republic as valid and enforceable. The Kyrgyz Republic has taken the
position in its response to such application that, among other things,
the 2003 Investment Agreement required but did not receive Parliamentary
approval and therefore is not in effect. A hearing on the application
will be held on September 29, 2008.
Since February of 2008, Kumtor has been made the subject of several new
tax assessments and other proceedings in the Kyrgyz Republic. These
include an investigation by the Kyrgyz Republic financial police into
alleged tax evasion in relation to the grant of tax exemptions pursuant
to the Investment Agreement governing the Kumtor project and an audit by
the state tax inspectorate to determine the amount of taxes that Kumtor
would have owed for the years 2005 to 2008 had the Investment Agreement
and the Concession Agreement relating to the project not been in effect.
The financial police have requested, and have been provided by Kumtor
with, information and documents relating to the project and have
interviewed senior Kumtor personnel. Kumtor has also received assessments
from tax authorities relating to value-added taxes, land taxes and
customs duties alleged to be owed by Kumtor. Kumtor is cooperating with
the relevant authorities and continues to pay all taxes in accordance
with applicable laws and the Investment Agreement and believes that there
is no basis for these investigations or assessments.
Mongolia
On June 29, 2008 Mongolia held parliamentary elections. According to the
General Election Commission the Mongolian People's Revolutionary Party
(MPRP), who held a slight majority in the prior parliament, obtained 39
out of 76 seats and the Mongolian Democratic Party obtained 25 seats. The
results for 10 seats are in dispute and are to be recounted. The Company
expects a new government will be formed shortly. Centerra is hopeful that
the new government will resume negotiations with respect to an investment
agreement for the Gatsuurt Project.
Upon a satisfactory investment agreement being reached and the final
settlement of the Gatsuurt LLC claim, the Company expects to begin the
development of Gatsuurt. Material increases in potential production costs
at Gatsuurt could impact the economic recovery of ore from the deposit
and ultimately a decision to develop the project.
The World Bank is providing $9.3 million from International Development
Association funds for a Mining Sector Technical Assistance Project (MTSA)
in Mongolia, aimed at improving the nation's ability to regulate and
financially benefit from its burgeoning mining industry, while reducing
government corruption. The World Bank estimated that mining accounted for
about 20% of real GDP, 56% of gross industrial output, 69% of exports,
and 36% of revenue for Mongolia in 2007.
Operations Update
Kumtor
At the Kumtor mine, gold production was 111,164 ounces in the second
quarter of 2008 representing a 34% increase from the same quarter in
2007, due to higher ore grades and increased recovery. The ore grade in
the second quarter averaged 3.41 g/t with a recovery of 76.3% compared to
2.60 g/t with a recovery of 71.3% in the same quarter of 2007.
Total cash cost per ounce, a non-GAAP measure of production efficiency,
increased to $631 in the second quarter of 2008 from $491 in the second
quarter of 2007, but decreased from $766 in the first quarter of 2008.
The increase in cash cost per ounce is primarily due to higher mining
costs ($195 per ounce) resulting from an increase in mining expenses
noted above and capitalization of pre-stripping costs related to the SB
Zone in 2007, higher milling costs ($22 per ounce), higher administration
costs ($15 per ounce), higher taxes (unrelated to income) and other costs
($31 per ounce), partially offset by an increase in ounces produced ($123
per ounce).
Mine fleet maintenance costs increased due to the additional costs of
maintaining the expanded fleet, which includes thirty CAT 785 haul trucks
and four Leibherr shovels acquired during 2006 and 2007 and the existing
thirty-nine CAT 777 trucks, that have undergone significant component
replacement and repairs to attain industry standards for mechanical
availability and utilization. Major mine consumables costs increased
primarily due to higher commodity prices and higher consumption resulting
from increased material movement.
Exploration expenditures totaled $3.6 million for the second quarter of
2008, an increase from $2.7 million in the second quarter 2007.
During the second quarter of 2008 capital expenditures were $10.9 million
which included $7.1 million sustaining capital spent mainly on the
tailings dam build-up, shear key construction and till dewatering program
and $3.7 million invested in growth capital mainly for the SB Zone
underground development ($2.9 million).
The SB Zone underground decline has advanced 53 metres and has presently
exited the permafrost zone of influence. The underground development
continues to advance towards the hanging wall of the Kumtor fault zone.
Boroo
At the Boroo mine in the second quarter of 2008, gold production was
47,139 ounces lower than the second quarter of 2007 due to reduced ore
grades, 2.92 g/t versus 3.76 g/t 2007 and lower recovery 83.5% compared
to 85.5% . On April 29, 2008, Boroo received a temporary 6-month permit
to start heap leach production and solution was being applied by the end
of the quarter to the heap leach pads. The first heap leach ounces are
expected to be poured in July. Final permits and approvals of the heap
leach reserves and feasibility study have not yet been obtained.
Total cash costs per ounce, a non-GAAP measure of production efficiency,
increased to $370 in the second quarter of 2008 from $180 in the second
quarter of 2007. The cash cost increased from the same quarter in 2007 as
the result of higher mine costs ($59 per ounce), higher mill costs ($24
per ounce) increased royalties ($24 per ounce) and a reduction in ounces
produced ($88 per ounce). Partially offsetting these costs was a
reduction in administration and other costs ($5 per ounce).
Major mine consumables costs increased primarily due to higher prices and
higher consumption resulting from the increased material movement.
Increased rental costs are a result of a requirement to increase the
material mined by 9% to address the Pit 3 geotechnical challenges and
substitute rental trucks for those being rebuilt. The salaries of
national hourly mine employees have increased as a result of the new
collective agreement. Royalties paid in respect of the Boroo operation
increased as a result of amendments in the third quarter of 2007 to the
Stability Agreement with the Mongolian Government which increased the
royalty rate from 2.5% to 5% effective August 3, 2007.
During the second quarter of 2008, capital expenditures of $10.7 million
included $3.9 million sustaining capital and $6.8 million invested in
growth capital primarily related to completing the construction of the
heap leach facility ($2.4 million) and $4.6 million in capitalized
pre-stripping of pit 3.
Exploration Update
Kyrgyz Republic
Drilling activities in the second quarter of 2008 focused on the Kumtor
Central Pit.
Kumtor Pit
Drilling focused on wide-spaced drill testing for strike and down dip
extensions to the main mineralized horizons in a relatively unexplored
area to the northeast of the pit high-wall. As well, as testing the down
dip extension of the high-grade Stockwork Zone to confirm the grade and
extent of potential high-grade underground mineralization below the
current planned open pit. Additionally, drilling commenced in the Saddle
area of the Central Pit between the SB and Stockwork Zones.
Drill hole D1190, on section 230, and D1194A, on section 238, were
completed to test the dip and strike extensions of the mineralization
intersected in hole D1165 which was completed in the third quarter 2007
returning assays of 8.6 g/t Au over 13.9 metres. Both drill holes
returned mineralization with hole D1190 intersecting 3.3 g/t Au over 2.0
metres at 3290 metre elevation and hole D1194A returning intercepts of
1.9 g/t over 3.2 metres and 2.1 g/t over 3.8 metres at the 3650 metre
elevation.
Drill hole D1199, on section 182, which was designed to test the down dip
extension of the NB zone mineralization to the northeast of the Central
Pit, intersected 1.7 g/t Au over 5.0 metres and 2.3 g/t Au over 8.0
metres at 3525 metre elevation.
In the third and fourth quarters of 2008, further wide-spaced drilling
will focus on testing the remaining near surface areas, which has had
little or no previous drilling, between the Central pit highwall and the
Lysii glacier.
In the second quarter of 2008, ten holes were completed in the Central
Pit area to test the down dip extension of high grade mineralization
intersected in Soviet drill holes in the Stockwork Zone below the KS 8
pit design. Drilling results from the Stockwork Zone have been
encouraging with indication of potential for a high-grade underground
deposit.
This drilling has outlined potential for a high-grade mineralized zone on
three sections over a strike length of 160 metres and down dip for 200
metres from the bottom of the planned open pit. The high-grade zone is
open along strike to the northeast and down dip.
Some of the better intercepts are as follows: 10.1 g/t Au over 39.1
metres which includes 24.1 g/t Au over 3.8 metres and 31.0 g/t Au over
3.3 metres in drill hole D1197 and 10.1 g/t Au over 20.4 metres including
15.3 g/t Au over 12.6 metres in drill hole D1205. Also 7.1 g/t Au over
50.2 metres which includes 12.5 g/t Au over 10.7 metres in drill hole
D1214 and 7.3 g/t Au over 30.5 metres which includes 14.5 g/t Au over 9.6
metres in drill hole D1216. Drill hole D1215 was designed to test the
prospective structure on section 82 between the Stockwork and SB Zones at
elevations below the depth of previous drilling. This hole intersected
significant mineralization including 6.5 g/t Au over 17.1 metres, 18.6
g/t Au over 4.0 metres, 6.0 g/t Au over 3.0 metres, 5.0 g/t Au over 6.4
metres, 2.8 g/t Au over 13.0 metres and 2.4 g/t Au over 3.0 metres at
elevations from 3520 to 3406 metre. These results are encouraging
indicating that there is exploration potential at depth. Further drilling
is planned in the third quarter as soon as mining is completed and the
area is accessible for drilling.
True widths for the mineralized zones are typically from 40% to 95% of
the stated intercept.
Sarytor
During the second quarter, one diamond drill was operating at Sarytor to
test the down dip underground potential of the deposit. One drill hole
was completed and two holes abandoned.
Drill hole SR-08-186A was designed to test the host structure down dip of
known mineralization. The drill hole intersected 3.0 g/t Au over 14.7
metres.
Drilling was suspended as a result of the challenge to the Sarytor and
Southwest licenses and the exploration license. Further drilling is
planned as soon as the license issues are resolved and the work
suspension is lifted.
True widths for the mineralized zones are typically from 70% to 95% of
the stated intercept.
A complete listing of the drill results and supporting maps for the
Kumtor pit and Sarytor have been filed on the System for Electronic
Document Analysis and Retrieval ('SEDAR') and are available at the
company's web site at: www.centerragold.com.
Management Changes
During the second quarter of 2008, Stephen A. Lang was promoted to
President and Chief Executive Officer and appointed to Centerra's board
of directors to replace Leonard A. Homeniuk upon his retirement. Jeffrey
S. Parr, Vice President Finance was promoted to Chief Financial Officer
to replace David M. Petroff, who resigned to pursue other interests.
Additionally, the board appointed Bruce Walter as Vice Chair, to assist
in leading the growth of the Company.
On July 30, 2008, Ron Colquhoun was appointed Vice President and Chief
Operating Officer.
Outlook for 2008
Centerra expects consolidated gold production in 2008 of 770,000 to
830,000 ounces, which is unchanged from prior guidance. Total cash cost
is expected to be $409 to $449 per ounce in 2008. (This includes
revenue-based taxes and royalties incurred in the Kyrgyz Republic under
its existing (2003) Investment Agreement of approximately 7.5% of
revenue.) The Company's prior total cash cost guidance for 2008 of $360
to $400 per ounce (re-confirmed in the first quarter) assumed that a new
agreement for the Kumtor project would be implemented and be retroactive
to January 1, 2008. The revenue-based tax under the proposed new
agreement was excluded from total cash cost in our prior guidance because
such new tax was not considered a royalty or production tax. The impact
of including the revenue-based taxes and royalties under the existing
Investment Agreement (7.5%) for all of 2008 results in an increase of
approximately $49 per ounce on total cash cost. In addition, the Company
has experienced rising costs at both sites. However, the Company is only
changing its guidance for total cash cost relative to the adjustment for
the inclusion of revenue-based taxes and royalties as described above.
Total cash cost is a non-GAAP measure and is discussed under "Non-GAAP
Measures" in the Management's Discussion and Analysis issued in
conjunction with this news release.
Gold production for the full year 2008 at the Kumtor mine is expected to
be between 580,000 and 620,000 ounces, unchanged from prior guidance.
Greater than 70% of the ounce production at Kumtor is planned for the
second half of 2008. Total cash cost for 2008 is expected to be $416 to
$456 per ounce reflecting the impact of approximately $66 per ounce
relative to the adjustment for the inclusion of revenue-based taxes and
royalties as described above.
At Boroo, the Company expects gold production of 190,000 to 210,000
ounces in 2008. Total cash cost is expected to be $380 to $420 per ounce
in 2008. These numbers are unchanged from the prior guidance.
Centerra's revenues, earnings and cash flows are sensitive to changes in
the gold price. The Company estimates that a $25 per ounce change in the
spot gold price for the last six months of 2008 would change aggregate
revenues, net earnings and cash from operations by approximately $13.5
million, $11.6 million (or $0.05 per share) and $11.8 million,
respectively.
A 10% change in the cost of diesel fuel would result in a $6 per ounce
impact on Centerra's total cash cost per ounce.
The production and cost forecasts for 2008 are forward-looking
information and are based on key assumptions and subject to material risk
factors that could cause actual results to differ materially and which
are discussed under the heading "Caution Regarding Forward-Looking
Information".
In particular, material assumptions or factors used to forecast
production and costs include the following:
- a gold price of $900 per ounce,
- exchange rates:
-- $1USD:$1CAD
-- $1USD:34.5 Kyrgyz Som
-- $1USD:1,127 Mongolian Tugrik
-- $1USD:0.6398 Euro
- prices for fuel oil, reagents and other consumables remaining
consistent with current levels,
- mine production at the Kumtor pit being maintained at current levels
and ensuring continued access to the SB Zone as planned,
- no delays in or interruption of scheduled production from our mines,
including due to natural phenomena, labour disputes or other development
and operation risks,
- the Company's schedule for final permitting and approvals for the Boroo
heap leach are obtained as planned,
- in respect of total cash cost guidance, the existing (2003) Investment
Agreement for Kumtor will be effective through 2008, and
- all necessary permits, licences and approvals are received in a timely
manner.
For further discussion of the factors that could cause actual results to
differ materially, please refer to "Risk Factors" in Centerra's Annual
Management's Discussion and Analysis and to Centerra's 2007 Annual
Information Form including the section titled "Risk Factors", available
on SEDAR at www.sedar.com. For information on forward-looking information
see "Caution Regarding Forward-Looking Information".
Exploration and Business Development
Exploration costs are expected to total $25 million and business
development program is forecast at $5.0 million for 2008 to support
merger and acquisition initiatives of the Company for the year.
Capital Expenditures
The capital requirement in 2008 is estimated to be $88 million, including
$45 million of sustaining capital. Growth capital is forecast at $43
million, which includes $24 million for Kumtor (the largest expenditures
would be $13 million for the development of the SB Zone underground
decline in 2008, $4 million for two additional haul trucks, $2 million
for replacement of the ball mill ring gear and $3 million for additional
de-watering equipment) and $19 million for Boroo (the largest
expenditures would be $12 million for the pre-stripping of Pit 3 and $5
million to complete the heap leach facility). The development of the SB
Zone underground decline at Kumtor, pre-stripping of Pit 3 at Boroo and
the heap leach facility construction will be capitalized and amortized
based on units of production consistent with the Company's accounting
policies.
The estimated capital requirement of $88 million has increased from the
Company's prior guidance for 2008 of $78 million. Sustaining capital has
increased $5.0 million and growth capital is up $5.0 million.
Administration
Annual corporate and administration expenses without unusual items are
expected to amount to approximately $40 million in 2008.
Corporate Income Taxes
The corporate income tax rate for Boroo for 2008, and subsequent years,
pursuant to an amendment to its Stability Agreement entered into in the
third quarter of 2007, is 25% for income in excess of 3 billion tugriks
(about $2.5 million at current exchange rates) and 10% for income up to
that amount.
The corporate income tax rate for Kumtor, as provided in its Investment
Agreement, is 10%. In addition, the agreement requires Kumtor to pay 2%
of net income to the Issyk Kul Social Fund. Kumtor continues to record
and pay taxes based on its existing Investment Agreement.
Qualified Person
The new drilling results for Kumtor in this news release and on
Centerra's website and the other scientific and technical information in
this news release were prepared in accordance with the standards of the
Canadian Institute of Mining, Metallurgy and Petroleum and National
Instrument 43-101 - Standards of Disclosure for Mineral Projects ("NI
43-101") and were reviewed, verified and compiled by Centerra's
geological and mining staff under the supervision of Ian Atkinson,
Certified Professional Geologist, Centerra's Vice-President, Exploration,
who is the qualified person for the purpose of NI 43-101.
The Kumtor deposit is described in Centerra's most recently filed Annual
Information Form (the "AIF") and in a technical report dated March 28,
2008 prepared in accordance with NI 43-101. The AIF and technical report
have been filed on SEDAR at www.sedar.com. The technical report describes
the exploration history, geology and style of gold mineralization at the
Kumtor deposit. Sample preparation, analytical techniques, laboratories
used and quality assurance-quality control protocols used during the
drilling programs at the Kumtor site are described in the technical
report.
Cautionary Note Regarding Forward-looking Information Statements
contained in this news release including those under the heading "Outlook
for 2008", and the documents incorporated by reference herein, contain
statements which are not current statements or historical facts and are
"forward-looking information" within the meaning of applicable Canadian
securities laws. All statements, other than statements of historical
fact, contained or incorporated by reference in this news release
constitute forward-looking information. Wherever possible, words such as
"plans", "expects" or "does not expect", "budget", "forecasts",
"projections", "anticipate" or "does not anticipate", "believe",
"intent", "potential", "strategy", "schedule", "estimates" and similar
expressions or statements that certain actions, events or results "may",
"could", "would", "might" or "will" be taken, occur or be achieved and
other similar expressions have been used to identify forward-looking
information. These forward-looking statements relate to, among other
things Centerra's expectations regarding, future growth, results of
operations (including, without limitation, future production and sales,
and operating and capital expenditures), performance (both operational
and financial), business and political environment and business prospects
(including the timing and development of new deposits and the success of
exploration activities) and opportunities.
Although the forward-looking information in this news release reflects
Centerra's current beliefs on the date of this news release based upon
information currently available to management and based upon what
management believes to be reasonable assumptions, Centerra cannot be
certain that actual results, performance, achievements, prospects and
opportunities, either expressed or implied, will be consistent with such
forward-looking information. By its very nature, forward-looking
information necessarily involves significant known and unknown risks,
assumptions, uncertainties and contingencies that may cause Centerra's
actual results, assumptions, performance, achievements, prospects and
opportunities in future periods to differ materially from those expressed
or implied by such forward-looking information. These risks and
uncertainties include, among other things, risks relating to the outcome
of litigation commenced in the Kyrgyz Republic by Vice Speaker Isabekov
and of the international arbitration commenced by Centerra, both of which
are described above under the heading "Other Corporate Developments -
Kyrgyz Republic", gold prices, replacement of reserves, reduction in
reserves related to geotechnical risks, ground movements, political risk,
nationalization risk, changes in laws and regulations, civil unrest,
labour unrest, legal compliance costs, reserve and resource estimates,
production estimates, exploration and development activities,
competition, operational risks, environmental, heath and safety risks,
costs associated with reclamation and decommissioning, defects in title,
seismic activity, cost and availability of labour, material and supplies,
increases in production and capital costs, permitting and construction to
raise the tailings dam height and increase the capacity of the existing
Kumtor tailing dam, illegal mining, enforcement of legal rights,
decommissioning and reclamation cost estimates, future financing and
personnel. There may be other factors that cause results, assumptions,
performance, achievements, prospects or opportunities in future periods
not to be as anticipated, estimated or intended. See "Risk Factors" in
the Company's most recently filed Annual Information Form and Annual
Management's Discussion and Analysis available on SEDAR at www.sedar.com.
There can be no assurances that forward-looking information and
statements will prove to be accurate, as many factors and future events,
both known and unknown could cause actual results, performance or
achievements to vary or differ materially, from the results, performance
or achievements that are or may be expressed or implied by such
forward-looking statements contained in this news release. Accordingly,
all such factors should be considered carefully when making decisions
with respect to Centerra, and prospective investors should not place
undue reliance on forward-looking information. Forward-looking
information is as of July 30, 2008. Centerra assumes no obligation to
update or revise forward-looking information to reflect changes in
assumptions, changes in circumstances or any other events affecting such
forward-looking information, except as required by applicable law.
About Centerra
Centerra is a growth-oriented, gold mining company focused on acquiring,
exploring, developing and operating gold properties primarily in Central
Asia, the former Soviet Union and other emerging markets worldwide.
Centerra is a leading North American-based gold producer and the largest
Western-based gold producer in Central Asia and the former Soviet Union.
Centerra's shares trade on the Toronto Stock Exchange (TSX) under the
symbol CG. The Company is based in Toronto, Canada.
Conference Call
Centerra invites you to join its second quarter 2008 conference call on
Thursday, July 31, 2008 at 12:00 pm. Eastern Time. The call is open to
all investors and the media. To join the call, please dial (212) 231-2905
(International callers) or (800) 926-5124 (Toll-Free North American).
Alternatively, an audio feed web cast will be available on
www.centerragold.com. A recording of the call will be available on
www.centerragold.com shortly after the call, and via telephone until
midnight on Thursday, August 7, 2008 by calling (416) 626-4100 or (800)
558-5253 and using passcode 21388544.
Additional information on Centerra is available on the Company's web site
at www.centerragold.com and at SEDAR at www.sedar.com.
MDA and Financial Statements and Notes follow
Centerra Gold Inc.
Management's Discussion and Analysis ("MD&A")
For the period ended June 30, 2008
The following discussion has been prepared as of July 30, 2008, and is
intended to provide a review of the financial position and results of
operations of Centerra Gold Inc. ("Centerra" or the "Company") for the
three and six month periods ended June 30, 2008 in comparison with those
as at June 30, 2007. This discussion should be read in conjunction with
the unaudited interim consolidated financial statements and the notes of
the Company for the three and six month periods ended June 30, 2008. This
MD&A should also be read in conjunction with the Company's audited annual
consolidated financial statements for the three years ended December 31,
2007, the related MD&A included in the 2007 Annual Report, and the 2007
Annual Information Form. The financial statements of Centerra are
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and, unless otherwise specified, all dollar amounts
are in United States dollars. The Company's 2007 Annual Report and Annual
Information Form are available at www.centerragold.com and on the System
for Electronic Document Analysis and Retrieval ("SEDAR") at
www.sedar.com.
TABLE OF CONTENTS
Consolidated Financial Results 2
Highlights 2
Three Month Period Ended June 30, 2008 Compared with the Three Month
Period Ended June 30, 2007 3
Six Month Period Ended June 30, 2008 Compared with the Six Month
Period Ended June 30, 2007 6
Mine Operations 8
Other Financial Information - Related Party Transactions 15
Quarterly Results - Last Eight Quarters 16
Other Corporate Developments 17
Critical Accounting Estimates 19
Changes in Accounting Policies 20
Outlook 22
Non-GAAP Measures 25
Caution Regarding Forward-Looking Information 28
Consolidated Financial Results
Centerra's consolidated financial results for the three and six month
periods ended June 30, 2008 reflect fully consolidated interests in the
Kumtor and Boroo mines, a 63% interest in the REN joint venture and a
100% interest in the Gatsuurt project.
Highlights
----------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------------------------------------
Financial % %
Summary 2008 2007 Change Change 2008 2007 Change Change
----------------------------------------------------------------------------
Revenue - $
millions 142.6 103.7 38.9 38% 255.2 186.0 69.2 37%
----------------------------------------------------------------------------
Cost of
sales - $
millions(1) 84.8 47.9 36.9 77% 135.3 93.7 41.6 44%
----------------------------------------------------------------------------
Net earnings
before
unusual
items - $
millions(3) 13.8 18.6 (4.8) (26)% 37.5 24.6 12.9 52%
----------------------------------------------------------------------------
Unusual
items - $
millions 42.2 0.0 42.2 100% 37.7 0.0 37.7
100%----------------------------------------------------------------------------
Net earnings
- $ millions 56.0 18.6 37.4 201% 75.2 24.6 50.6 206%
----------------------------------------------------------------------------
Earnings per
common share
- $ basic
and diluted 0.26 0.09 0.17 189% 0.35 0.11 0.24 218%
----------------------------------------------------------------------------
Cash
provided by
operations
$ millions 10.6 7.4 3.2 43% 38.6 15.2 23.4 154%
----------------------------------------------------------------------------
Weighted
average
common
shares
outstanding
- basic
(thousands)
(2) 216,318 216,247 71 0% 216,318 216,243 75 0%
----------------------------------------------------------------------------
Weighted
average
common
shares
outstanding
- diluted
(thousands)
(2) 217,456 216,782 674 0% 217,599 216,564 1,035 1%
----------------------------------------------------------------------------
Gold sold -
ounces 160,373 155,605 4,768 3% 284,348 283,176 1,172 0%
----------------------------------------------------------------------------
Gold
produced -
ounces 158,303 153,414 4,889 3% 278,698 286,419 (7,721) (3)%
----------------------------------------------------------------------------
Cost of
sales - $/oz
sold 529 308 221 72% 476 331 186 50%
----------------------------------------------------------------------------
Total cash
cost(4) -
$/oz
produced 553 349 204 59% 577 377 200 53%
----------------------------------------------------------------------------
Total
production
cost(4) -
$/oz
produced 653 412 241 59% 682 455 227 50%
----------------------------------------------------------------------------
Average
realized
gold price
$/oz 889 667 222 33% 898 657 241 37%
----------------------------------------------------------------------------
Average gold
spot price -
$/oz 896 667 229 34% 911 659 252 38%
----------------------------------------------------------------------------
(1) Cost of sales excludes regional office administration.
(2) As of July 30, 2008, the Company had 216,318,188 common shares issued
and outstanding.
(3) Net earnings before unusual items is a non-GAAP measure
(4) Total cash cost and total production cost are non-GAAP measures and are
discussed under "Non-GAAP Measures".
Three Month Period Ended June 30, 2008 compared with the Three Month
Period Ended June 30, 2007
Gold Production and Revenue
Revenue in the second quarter of 2008 increased to $142.6 million from
$103.7 million in the same quarter last year reflecting higher realized
gold prices and an increase in ounces sold (160,373 ounces in the second
quarter of 2008 compared with 155,605 ounces in the same period of 2007).
Gold production for the quarter was 158,303 ounces compared to 153,414
ounces of gold reported in the second quarter of 2007. The Boroo mine
produced 23,046 fewer ounces of gold than in the second quarter of 2007.
This was offset by an increase of 27,935 ounces of gold at the Kumtor
mine. Lower gold production at Boroo was primarily attributable to the
milling of lower grade ore averaging 2.92 g/t in the second quarter of
2008 compared to 3.76 g/t milled in the same quarter of 2007.
Centerra realized an average gold price of $889 per ounce for the second
quarter of 2008, an increase of 33% from the $667 per ounce realized in
the same quarter in 2007. Since Centerra's gold production is unhedged
and gold is sold at the prevailing spot price, the increase in the
average realized gold price was due to higher spot gold prices, which
averaged $896 per ounce for the period compared to $667 per ounce for the
same period in 2007.
Cost of Sales
Cost of sales in the quarter was $84.8 million, which is higher than the
same quarter of 2007 ($47.9 million) due primarily to higher cost ounces
which were in inventory in the first quarter of 2008 flowing through
sales in the second quarter and increasing operating costs.
At Kumtor, operating costs increased $20.7 million for the second quarter
of 2008 compared to the same period of 2007. The increase is due to a
higher mining rate in 2008 compared to 2007, increased maintenance
expenditures attributed to the mobile fleet and the mill, higher fuel
consumption rates and costs and higher costs for consumables and labour.
In addition, revenue-based taxes were higher in 2008 due to higher gold
production and the higher gold price. See "Mine Operations - Kumtor".
Boroo's operating costs increased by approximately $5.3 million due
primarily to the increased cost of consumables, labour, royalties and
maintenance. Royalties paid in respect of the Boroo operation increased
as a result of amendments in the third quarter of 2007 to the Stability
Agreement with the Mongolian Government, which increased the royalty rate
from 2.5% to 5% effective August 3, 2007. See "Mine Operations - Boroo".
Cost of sales per ounce sold increased to $529 compared to $308 for the
same period in 2007. This reflects higher-cost ounces which were in
inventory in the first quarter of 2008 flowing through sales in the
second quarter and increasing operating costs.
The Company's total cash cost per ounce produced was $553, up from $349
in the second quarter of 2007. This increase is primarily due to
increased operating costs, described above. See "Mine Operations -
Kumtor" and "Mine Operations - Boroo".
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization for the second quarter of 2008
increased to $17.0 million from $11.7 million in the same quarter of
2007, mainly due to Kumtor's expanded truck fleet. On a per unit basis,
depreciation, depletion and amortization for the second quarter of 2008
was $106 per ounce sold compared to $75 per ounce sold in the same
quarter of 2007, primarily reflecting the addition of capital equipment
at Kumtor and amortization of pre-stripping capitalized in 2007 at Boroo.
Accretion and Reclamation Expense
Accretion and reclamation expense in the second quarter of 2008 was 0.4
million compared to $0.7 million in the same quarter of 2007.
Exploration
Exploration costs in the second quarter of 2008 increased to $5.1 million
from $4.2 million in the same quarter of 2007 reflecting an increase in
exploration spending at Kumtor.
Capital Expenditures
Capital expenditures of $22.1 million in the second quarter of 2008
included $11.1 million of sustaining capital and $10.9 million invested
in growth capital primarily related to the SB Zone underground
development at Kumtor ($2.9 million), completion of the heap leach
facility at Boroo ($2.4 million) and pit 3 pre-stripping at Boroo ($4.6
million).
Corporate Administration
Corporate administration costs for the second quarter 2008 were $7.5
million compared to $6.0 million in the same quarter of 2007. The
increase is primarily due to $5.0 million of non-recurring expenses
related to management changes in June 2008 partially offset by lower
stock-based compensation expense reflecting a 65% decrease in the share
price in the second quarter of 2008.
Income Tax Expense
Income tax in the amount of $6.2 million was expensed in the second
quarter of 2008 compared to $8.2 million in the second quarter of 2007.
The $2.0 million decrease in the quarter is primarily the result of the
fact that Boroo's income, subject to tax at 25%, declined, whereas the
increase in income resulting from unusual items is not subject to tax.
In accordance with an amendment to the Stability Agreement concluded with
the Mongolian Government in 2007, the income tax rate generally
applicable to Boroo for the term of the Stability Agreement is 25% for
income in excess of 3 billion tugriks (about $2.5 million at the current
exchange rate) and 10% for income up to that amount.
The income tax rate applicable to Kumtor, as provided in its Investment
Agreement, is 10%. In addition, the agreement requires Kumtor to pay 2%
of net income to the Issyk Kul Social Fund. Kumtor continues to record
and pay taxes based on the Investment Agreement.
Net Earnings Before Unusual Items
Net earnings before unusual items for the quarter were $13.8 million, or
$0.06 per share, compared to $18.6 million or $0.09 per share for the
same period in 2007, reflecting higher expenses which were partially
offset by increased revenue due to higher gold prices.
Unusual Items
On June 2, 2008 the Company reported that the previously announced
framework agreement ("Agreement on New Terms"), entered into between the
Company and the Kyrgyz Government on August 30, 2007, was not ratified by
the Kyrgyz Parliament within the time frame agreed by the parties and
therefore expired. As such, the Company has reclassified the amount
recorded as contingently issuable common shares issuable from equity to
long-term liabilities. Subsequently, Centerra held discussions with the
Government working group responsible for Kumtor.
The Company believes that if a settlement with the Kyrgyz Government
occurs through ongoing negotiations such a settlement will include the
issuance of treasury shares. The ultimate value of the contingently
issuable common shares will be determined based on the Company's share
price when the agreement with Kyrgyz Government is finalized and the
number of shares to be issued is determined. While this amount cannot be
reasonably determined at this time, the Company believes that the share
price on May 30, 2008, the last day of trading prior to the expiry of the
Agreement on New Terms, reflects the minimum amount of a range of
possible values. See "Other Corporate Developments - Kyrgyz Republic".
Net Earnings After Unusual Items
Net earnings after unusual items for the second quarter of 2008 were
$56.0 million, or $0.26 per share, compared to net earnings of $18.6
million, or $0.09 per share, for the same quarter of 2007, reflecting the
unusual items discussed above.
Liquidity and Capital Resources
Cash provided from operations was $10.6 million for the second quarter of
2008 compared to $7.4 million for the same quarter of 2007, reflecting
the higher average price for gold received during this period and reduced
working capital levels.
Cash used in investing activities in the second quarter of 2008 was $18.7
million for capital spending, compared to $29.1 million in the same
quarter of 2007. In the second quarter of 2008, Centerra spent and
accrued $11.1 million on sustaining capital projects and $10.9 million on
growth projects. Expenditures on growth projects at Kumtor was $3.7
million included $2.9 million on the SB Zone underground development
while sustaining capital was $7.1 million. At Boroo, sustaining capital
was $3.9 million and growth capital was $6.9 million including $4.5
million in Pit 3 pre-stripping and $2.4 million for the heap leach
project.
As at June 30, 2008, the Company had entered into contracts to purchase
capital equipment and operational supplies totalling $32.8 million
(Kumtor $30.4 million, Boroo $2.4 million). These contracts are expected
to be settled over the next twelve months.
Cash on hand was $108.0 million at the end of the second quarter of 2008,
compared to $105.5 million at December 31, 2007.
The Company believes it has sufficient cash to carry out its operational
business plan for 2008. For information on forward-looking information
see "Caution Regarding Forward-Looking Information".
Six Month Period Ended June 30, 2008 Compared with the Six Month Period
Ended June 30, 2007
Revenue for the first six months of 2008 increased by $69.2 million, or
37%, to $255.2 million compared to $186.0 million in the same period of
2007 due primarily to higher gold prices. Gold production of 278,698
ounces in the first six months of 2008 was on plan but lower than the
286,419 ounces reported in the same period of 2007. The average realized
gold price for the first six months of 2008 was $898 per ounce compared
to $657 per ounce in the same period of 2007 reflecting higher spot
prices for gold.
Net earnings before unusual items in the first six months of 2008 were
$37.5 million, or $0.17 per share, compared to $24.6 million, or $0.11
per share, for the same period in 2007, reflecting the higher gold prices.
Net earnings after unusual items in the first six months of 2008 were
$75.2 million, or $0.35 per share, compared to net earnings of $24.6
million, or $0.11 per share, in the same period of 2007. The increase
reflects higher gold prices and unusual items in the second quarter of
2008.
Cash flow provided by operations for the first six months of 2008 was
$38.6 million compared to $15.2 million in the same period of 2007
reflecting higher net earnings. Cash used in investing activities totaled
$36.1 million in the six months of 2008 compared to $73.2 million in the
prior year, reflecting decreased spending at Kumtor. Significant capital
was spent in the first half of 2007 to expand the mining fleet at Kumtor.
Asset Retirement Obligations
The total future asset retirement obligations were estimated by
management based on the Company's ownership interest in all mines and
facilities, estimated costs to reclaim the mine sites and facilities and
the estimated timing of the costs to be incurred in future periods.
The Company has estimated the net present value of the total asset
retirement obligations to be $22.3 million as at June 30, 2008 (December
31, 2007 - $20.9 million). These payments are expected to commence over
the next 3 to 5 years. The Company used an average credit-adjusted
risk-free rate of 8% to calculate the present value of the asset
retirement obligations.
During the first quarter 2008, the closure study at Boroo was updated by
an independent consultant. The future decommissioning and reclamation
costs for the Boroo mine are now estimated to be $8.6 million ($3.2
million - June 30, 2007). As a result, an increase of $0.8 million to
Boroo's asset retirement obligation was recorded in the first half of
2008.
The Company's future undiscounted decommissioning and reclamation costs
for the Kumtor mine have been estimated to be $21.0 million before
salvage value of $14.9 million. A review of the closure cost estimate for
Kumtor is being updated by an independent contractor and is expected to
be finalized in the fourth quarter 2008. A resulting adjustment to the
asset retirement obligation at Kumtor would be recorded as applicable
during the fourth quarter.
Share capital
As of July 30, 2008, Centerra had 216,318,188 shares issued and
outstanding. In addition, at the same date, the Company had 1,828,976
share options outstanding under its share option and share appreciation
rights plan with exercise prices between Cdn$5.17 and Cdn$14.29 per
share, and with expiry dates between 2012 and 2016.
Gold hedges
The Company had no gold hedges in place in the second quarter of 2008 and
no deferred charges were recognized.
Market Update
A significant factor in determining profitability and cash flow from the
Company's operations is the price of gold. The spot market gold price
based on the London PM fix was approximately $930 per ounce at the end of
the second quarter of 2008. For the three months ended June 30, 2008, the
gold price averaged $896 per ounce compared to $667 per ounce for the
same period in 2007.
The Company receives its revenues through the sale of gold in U.S.
dollars. The Company has operations in the Kyrgyz Republic and Mongolia,
and its corporate head office is in Toronto, Canada. During the second
quarter of 2008, the denomination of the currencies of Centerra's
operating costs and capital expenditures were approximately 36% in Kyrgyz
som, 29% in Mongolian tugrik, 21% in Canadian dollars, 11% in Euros and
the balance in British pounds and Australian dollars. In the second
quarter of 2008, certain suppliers began pricing materials in Euros
rather than U.S. dollars, as a hedge against the weakening American
currency; this explains the increase in Euro-denominated costs. On
average, in the first six months of 2008, the currencies of the Kyrgyz
Republic and Canada fell against the U.S. dollar by approximately 1.9%
and 2.6%, respectively, from their value at December 31, 2007; the Euro
and the Australian dollar strengthened against the U.S. dollar by
approximately 6.3% and 8.1% respectively, whilst the Mongolian tugrik and
British pound remained virtually unchanged against the currency. The
impact of these movements over the six months to June 30, 2008 has been
to reduce operating costs by an estimated $0.7 million.
Mine Operations
Centerra owns 100% of the Kumtor and Boroo mines and therefore all
operating and financial results are on a 100% basis.
Kumtor
The Kumtor open pit mine, located in the Kyrgyz Republic, is the largest
gold mine in Central Asia operated by a Western-based producer. It has
been operating since 1997 and has produced about 6.4 million ounces of
gold. During the second quarter of 2008, Kumtor experienced 2 lost-time
accidents. There were no reportable environmental incidents during the
quarter.
----------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------------------------------------
Kumtor
Operating % %
Results 2008 2007 Change Change 2008 2007 Change Change
----------------------------------------------------------------------------
Gold sold -
ounces 115,374 88,943 26,431 30% 182,490 146,706 35,784 24%
----------------------------------------------------------------------------
Revenue - $
millions 102.6 59.6 43.0 72% 164.1 96.8 67.3 70%
----------------------------------------------------------------------------
Average
realized
gold price -
$/oz 889 670 219 33% 899 660 239 36%
----------------------------------------------------------------------------
Cost of
sales - $
millions(1) 74.4 41.1 33.4 81% 108.5 76.5 32.0 42%
----------------------------------------------------------------------------
Cost of
sales - $/oz
sold 645 461 184 40% 595 522 73 14%
----------------------------------------------------------------------------
Tonnes mined
- 000s 29,605 28,702 903 3% 58,557 52,372 6,185 12%
----------------------------------------------------------------------------
Tonnes ore
mined -
000s 1,082 1,630 (548) (34%) 2,251 2,456 (205) (8%)
----------------------------------------------------------------------------
Tonnes
milled -
000s 1,410 1,348 62 5% 2,519 2,710 (191) (7%)
----------------------------------------------------------------------------
Average mill
head grade -
g/t(2) 3.41 2.60 0.81 31% 2.98 2.39 0.59 25%
----------------------------------------------------------------------------
Recovery - % 76.3 71.3 5.0 7% 75.8 70.6 5.2 7%
----------------------------------------------------------------------------
Gold
produced -
ounces 111,164 83,229 27,935 34% 185,894 149,436 36,458 24%
----------------------------------------------------------------------------
Total cash
cost(3) -
$/oz 631 491 140 29% 685 556 129
23%----------------------------------------------------------------------------
Total
production
cost(3)-
$/oz 730 583 147 25% 794 646 148 23%
----------------------------------------------------------------------------
Capital
expenditures
- $
millions 10.9 20.5 (9.7) (47%) 18.5 46.0 (27.5) (60%)
----------------------------------------------------------------------------
(1) Cost of sales for 2008 and comparative periods exclude regional office
administration.
(2) g/t means grams of gold per tonne.
(3) Total cash cost and total production cost are non-GAAP measures and are
discussed under "Non-GAAP Measures".
Second Quarter 2008 vs. Second Quarter 2007
Revenue and Gold Production
Revenue in the second quarter of 2008 increased to $102.6 million from
$59.6 million in the second quarter of 2007 primarily as a result of the
higher realized gold price and higher sales volumes (115,374 ounces in
the second quarter of 2008 compared to 88,943 ounces in the same period
of 2007). Kumtor produced 111,164 ounces of gold in the second quarter of
2008 compared to 83,229 ounces of gold in the second quarter of 2007. The
increase results primarily from higher ore grades and increased recovery.
The ore grade averaged 3.41 g/t with a recovery of 76.3% in the second
quarter of 2008, compared to 2.60 g/t with a recovery of 71.3% in the
same quarter of 2007.
The realized gold price in the second quarter of 2008 was $889 per ounce
compared to $670 per ounce in the same period in 2007.
Cost of Sales
Cost of sales at Kumtor in the second quarter of 2008 was $74.4 million
compared to $41.1 million in the same quarter of 2007. This is primarily
due to increases in operating costs and higher mined and milled tons.
Operating costs at Kumtor increased $20.7 million for the second quarter
2008 compared to the same quarter of 2007. Costs increased primarily due
to higher mine fleet maintenance costs ($17.2 million vs. $11.1 million
for the same quarter last year), higher consumable costs ($21.1 million
vs. $14.3 million for the same quarter last year), higher national labour
costs ($8.0 million vs. $6.3 million). Mine fleet maintenance costs
increased due to the additional costs of maintaining the expanded fleet,
which includes thirty CAT 785 haul trucks and four Leibherr shovels
acquired during 2006 and 2007 and the existing thirty-nine CAT 777
trucks, that have undergone significant component replacement and repairs
to attain industry standards for mechanical availability and utilization.
Major mine consumables costs increased primarily due to higher commodity
prices and higher consumption resulting from increased material movement.
The ultimate impact of these cost changes on the reported results is
dependent on the relative levels of capital and operating activities and
the buildup or drawdown of inventories during the periods presented.
Cost of sales per ounce sold increased to $645 compared to $461 for the
second quarter of 2007. This reflects an increase in the operating costs
as described above, and the recovery of higher-cost ounces which were in
inventory in the first quarter of 2008 flowing through sales in the
second quarter of 2008.
Total cash costs per ounce increased to $631 in the second quarter of
2008 from $491 in the second quarter of 2007 primarily due to higher
mining costs ($195 per ounce) resulting from an increase in mining
expenses noted above and capitalization of pre-stripping costs related to
the SB Zone in 2007, higher milling costs ($22 per ounce), higher
administration costs ($15 per ounce), higher taxes unrelated to income
and other costs ($31 per ounce), partially offset by an increase in
ounces produced ($123 per ounce).
Exploration
Exploration expenditures totaled $3.6 million for the second quarter of
2008, which has increased from $2.7 million in the second quarter 2007.
This is primarily as a result of increased spending on contractor and
national labour, increased spending on fuel, drill bits, personal
protective equipment, and supply costs.
Capital Expenditures
Capital expenditures in the second quarter was $10.9 million, which
included $7.1 million of sustaining capital spent mainly on the tailings
dam build-up, shear key construction and till dewatering program and $3.7
million invested in growth capital mainly for the SB Zone underground
development ($2.9 million).
First Six Months of 2008 vs. First Six Months of 2007
Revenue and Gold Production
Revenue for the first six months of 2008 increased to $164.1 million from
$96.8 million in the same period of 2007 primarily as a result of the
higher realized gold price and higher sales volumes (182,490 ounces for
the six months of 2008 compared to 146,706 ounces in the same period of
2007). Kumtor produced 185,894 ounces of gold for the first six months of
2008 compared to 149,436 ounces of gold in the same period of 2007. The
increase results primarily from higher ore grades and increased recovery,
which is partially offset by a 7% reduction in throughput. The ore grade
averaged 2.98 g/t with a recovery of 75.8% for the six months period of
2008, compared to 2.39 g/t with a recovery of 70.6% in the same period of
2007. Mill throughput was impacted by the shutdown of the ball mill in
February/March 2008 for repairs to the ring gear and the replacement of
the ball mill shell.
The higher average realized gold price per ounce for both the three and
six month periods in 2008 was due to higher gold spot prices.
Cost of Sales
Cost of sales at Kumtor in the first six months of 2008 was $108.5
million compared to $76.5 million in the same period of 2007. This is
primarily due to an increase in gold sales over the period plus increases
in operating costs.
Operating costs at Kumtor increased $32.1 million for the first six
months 2008 compared to the same period of 2007. Costs increased
primarily due to higher fleet maintenance costs ($31.5 million vs. $20.2
million for the same period last year), higher consumable costs ($39.7
million vs. $28.0 million for the same period last year), higher national
labour costs ($14.9 million vs. $13.1 million).
Cost of sales per ounce sold increased to $595 compared to $522 for the
first six months of 2007. This reflects an increase in the operating
costs as described above, associated with ounces produced and sold in
2008.
Total cash costs per ounce increased to $685 for the first six months of
2008 from $556 in the same period of 2007 primarily due to higher mining
costs ($187 per ounce) resulting from an increase in mining expenses
noted above and capitalization of pre-stripping costs related to the SB
Zone in 2007, higher milling cost ($18 per ounce), higher administration
costs ($3 per ounce), higher taxes unrelated to income and other costs
($30 per ounce), partially offset by an increase in ounces produced ($109
per ounce).
Exploration
Exploration expenditures totaled $6.7 million for the first six months of
2008, which has increased from $6.5 million in the first six months 2007,
mainly due to increased fuel, material and supply costs.
Capital Expenditures
Capital expenditures for the first six months was $18.5 million, which
included $10.6 million spent on sustaining projects including the
tailings dam build-up, shear key construction and till dewatering program
and $7.9 million invested in growth capital mainly for the SB Zone
underground development ($6.6 million).
Boroo
Located in Mongolia, this open pit mine was the first hard rock gold mine
in Mongolia and to date has produced over 1.1 million ounces. During the
second quarter of 2008 the mine had no lost-time accidents and had no
reportable environmental spills.
----------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------------------------------------
Boroo
Operating % %
Results 2008 2007 Change Change 2008 2007 Change Change
----------------------------------------------------------------------------
Gold sold -
ounces 44,999 66,662 (21,663) (32%) 101,858 136,470 (34,612) (25%)
----------------------------------------------------------------------------
Revenue - $
millions 39.9 44.1 (4.2) (10%) 91.1 89.2 1.9 2%
----------------------------------------------------------------------------
Average
realized
gold price -
$/oz 888 662 226 34% 895 654 241 37%
----------------------------------------------------------------------------
Cost of
sales - $
millions(1) 10.4 6.8 3.6 53% 26.8 17.2 9.6 56%
----------------------------------------------------------------------------
Cost of
sales - $/oz
sold 232 103 129 125% 263 126 137 109%
----------------------------------------------------------------------------
Tonnes mined
- 000s 5,222 4,397 825 19% 9,687 8,387 1,300 16%
----------------------------------------------------------------------------
Tonnes mined
heap leach -
000s 516 944 (428) (45%) 1,348 1,868 (520) (28%)
----------------------------------------------------------------------------
Tonnes ore
mined direct
mill feed
000's 481 460 21 5% 1,207 1,086 121 11%
----------------------------------------------------------------------------
Tonnes ore
milled -
000s 604 651 (47) (7%) 1,212 1,267 (55) (5%)
----------------------------------------------------------------------------
Average mill
head grade -
g/t(2) 2.92 3.76 (0.84) (22%) 2.83 3.83 (1.00)
(26%)---------------------------------------------------------------------------
Recovery - % 83.5 85.5 (2.0) (2%) 84.4 86.9 (2.5 (3%)
----------------------------------------------------------------------------
Gold
produced -
ounces 47,139 70,185 (23,046) (33%) 92,805 136,983 (44,178) (32%)
----------------------------------------------------------------------------
Total cash
cost(3) -
$/oz 370 180 190 106% 362 182 180 99%
----------------------------------------------------------------------------
Total
production
cost(3)-
$/oz 472 252 220 87% 459 252 207 82%
----------------------------------------------------------------------------
Capital
expenditures
- $ millions 10.7 9.6 1.1 11% 18.6 17.1 1.5 9%
----------------------------------------------------------------------------
(1) Cost of sales for 2008 and its comparative years exclude regional office
administration.
(2) g/t means grams gold per tonne.
(3) Total cash cost and total production cost are non-GAAP Measures and are
discussed under "Non-GAAP Measures".
Second Quarter 2008 vs. Second Quarter 2007
Revenue and Gold Production
Revenue in the second quarter of 2008 decreased to $39.9 million from
$44.1 million in the second quarter of 2007 due to lower sales volumes
(44,999 ounces in the second quarter of 2008 compared to 66,662 ounces in
the same period of 2007) partially offset by higher gold price. Gold
production at Boroo was 47,139 ounces in the second quarter of 2008 which
was 23,046 less than the ounces of gold reported in the second quarter of
2007 primarily resulting from lower grade ores and lower recovery. During
the second quarter of 2008, the mill ore grade averaged 2.92 g/t with a
recovery of 83.5% compared to mill ore grade of 3.76 g/t and recovery of
85.5% in the same quarter of 2007.
During the second quarter, Boroo received a temporary 6-month permit to
start heap leach pilot production. Approval of the final operating
permits is dependent on government commissions first approving Boroo's
increased reserves followed by another commission approving the Heap
Leach feasibility study. The heap leach facility commenced temporary
operations on June 18, 2008 after specially formed government commissions
accepted the constructed facilities as per design. The first heap leached
gold is expected to be poured in July 2008.
The realized gold price in the second quarter of 2008 was $888 per ounce
compared to $662 per ounce in the same period in 2007 due to the higher
gold spot prices.
Cost of Sales
Cost of sales at Boroo for the second quarter of 2008 was $10.4 million
compared to $6.8 million in the second quarter of 2007. The increase was
due primarily to higher operating costs.
Operating costs at Boroo increased approximately $5.3 million primarily
due to the higher costs of major consumables including diesel ($3.2
million vs. $1.5 million) and explosives ($1.1 million vs. $0.5 million),
increased rental costs ($1.4 million vs. $0.1 million), higher national
salaries ($2.3 million vs. $1.6 million) increased royalties ($2.2
million vs. $1.1 million). Major mine consumables costs increased
primarily due to higher prices and higher consumption resulting from the
increased material movement. Increased rental costs are a result of a
requirement to increase the material mined by 9% to address the Pit 3
geotechnical challenges and substitute rental trucks for those being
rebuilt. The salaries of national hourly mine employees have increased as
a result of the new collective agreement (See "Other Corporate
Developments - Boroo"). Royalties paid in respect of the Boroo operation
increased as a result of amendments in the third quarter of 2007 to the
Stability Agreement with the Mongolian Government which increased the
royalty rate from 2.5% to 5% effective August 3, 2007. The ultimate
impact of these cost changes on the reported results is dependent on the
relative levels of capital and operating activities and the buildup or
drawdown of inventories during the periods presented.
Cost of sales per ounce sold increased to $232 from $103 for the second
quarter of 2007. This reflects an increase in the operating costs as
described above, associated with ounces produced and sold in 2008.
Total cash costs per ounce increased to $370 in the second quarter of
2008 from $180 in the second quarter of 2007 as the result of higher mine
costs ($59 per ounce), higher mill costs ($24 per ounce) increased
royalties ($24 per ounce) and a reduction in ounces produced ($88 per
ounce). Partially offsetting these costs was a reduction in
administration and other costs ($5 per ounce).
Exploration
Exploration expenditures in Mongolia totaled $0.7 million in the second
quarter of 2008 compared with $0.3 million in 2007. The expenditures
relate primarily to a more focused exploration program near the Boroo
mine area and other areas with known mineralization.
Capital Expenditures
Capital expenditures in the second quarter of 2008 of $10.7 million
included $3.9 million of sustaining capital and $6.8 million invested in
growth capital primarily related to completing the construction of the
heap leach facility ($2.4 million) and $4.6 million in capitalized
pre-stripping of pit 3.
First Six Months of 2008 vs. First Six Months of 2007
Revenue and Gold Production
Revenue year to date in 2008 increased to $91.1 million from $89.2
million during 2007 due to higher realized gold prices ($895 compared to
$654 in the same period of 2007) partially offset by lower sales volumes
(101,858 ounces in the first half of 2008 compared to 136,470 ounces in
the same period of 2007). Gold production at Boroo was 92,805 ounces in
2008 which was 44,178 fewer ounces of gold than reported in 2007
primarily resulting from lower ore grades and recoveries.
During the first six months of 2008, the mill ore grade averaged 2.83 g/t
with a recovery of 84.4% compared to 3.83 g/t and a recovery of 86.9% in
the same period in 2007.
Realized gold price in 2008 was $895 per ounce compared to $654 per ounce
in the same period in 2007 due to the higher gold spot prices. The
realized gold price is less than the average spot gold price as a
significant shipment of gold (approximately 14,000 ounces) at the end of
2007 was priced at $815 per ounce and was recognized as revenue in 2008
due to the Company's policy on revenue recognition.
Cost of Sales
Cost of sales at Boroo for 2008 was $26.8 million compared to $17.2
million in 2007. The increase was primarily due to an increase in
operating costs.
Operating costs at Boroo increased approximately $9.9 million primarily
due to the higher diesel costs ($5.6 million vs. $3.2 million), and
blasting materials ($2.3 million vs. $1.0 million), increased rental
costs ($2.5 million vs. $0.2 million), higher national salaries ($4.5
million vs. $2.9 million) and increased royalties ($4.8 million vs. $2.3
million). Major mine consumables costs increased primarily due to higher
prices and higher consumption resulting from increased material movement.
Increased rental costs are a result of a requirement to increase mine
production by 9% for geotechnical reasons and substitute rental trucks
for those being rebuilt. The salaries of national hourly mine employees
have increased as a result of the new collective agreement. Royalties
paid in respect of the Boroo operation increased as a result of
amendments in the third quarter of 2007 to the Stability Agreement with
the Mongolian Government which increased the royalty rate from 2.5% to 5%
effective August 3, 2007. The ultimate impact of these cost changes on
the reported results is dependent on the relative levels of capital and
operating activities and the buildup or drawdown of inventories during
the periods presented.
The cost of sales per ounce sold increased to $263 compared to $126 for
the same period in 2007. This reflects an increase in the operating
costs, as described above, associated with ounces produced and sold in
the first six months.
Total cash costs per ounce increased to $362 in 2008 from $182 in 2007
primarily as the result of higher mining costs ($57 per ounce), higher
milling costs ($15 per ounce), increased royalties ($27 per ounce) and a
reduction in ounces produced ($86 per ounce) partially offset by a
reduction in administration and other costs ($5 per ounce).
Exploration
Exploration expenditures in Mongolia totaled $1.0 million in 2008
compared with $0.8 million in 2007. The expenditures relate primarily to
a more focused exploration program near the Boroo mine area and other
areas with known mineralization.
Capital Expenditures
Capital expenditures in 2008 of $18.6 million included $5.7 million
sustaining capital and $12.9 million invested in growth capital primarily
related to completing the construction of the heap leach facility ($5.6
million) and $7.5 million in capitalized pre-stripping of pit 3.
Other Financial Information - Related Party Transactions Cameco
Corporation
Centerra is 52.7% owned by Cameco Corporation ("Cameco").
Kyrgyzaltyn and the Government of the Kyrgyz Republic
Revenues from the Kumtor mine are subject to a management fee of $1.50
per ounce based on sales volumes, payable to State-owned Kyrgyzaltyn JSC
("Kyrgyzaltyn"), which holds approximately 15.7% of the outstanding
common shares of Centerra.
The table below summarizes the management fees and concession payments
paid by Kumtor Gold Company ("KGC"), a subsidiary of the Company, to
Kyrgyzaltyn or the Government of the Kyrgyz Republic, and the amounts
paid by Kyrgyzaltyn to KGC according to the terms of the Gold and Silver
Sales Agreement between Kumtor Operating Company ("KOC", a subsidiary of
the Company), Kyrgyzaltyn and the Kyrgyz Republic.
----------------------------------------------------------------------------
Three months Six months
($ thousands) ended June 30 ended June 30
----------------------------------------------------------------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Management fees paid by KGC to Kyrgyzaltyn 173 133 274 220
----------------------------------------------------------------------------
Concession payments paid by KGC to Kyrgyz
Republic 462 356 730 587
----------------------------------------------------------------------------
Total 635 489 1,004 807
----------------------------------------------------------------------------
Gross gold and silver sales from KGC to
Kyrgyzaltyn 103,121 59,919 164,955 97,504
----------------------------------------------------------------------------
Deduct: refinery and financing charges (530) (348) (855) (595)
----------------------------------------------------------------------------
Net sales revenue received by KGC from
Kyrgyzaltyn 102,591 59,571 164,100 96,909
----------------------------------------------------------------------------
Gold produced by the Kumtor mine is purchased at the mine site by
Kyrgyzaltyn for processing at its refinery in the Kyrgyz Republic
pursuant to a Gold and Silver Sale Agreement entered into between KOC,
Kyrgyzaltyn and the Government of the Kyrgyz Republic. Under these
arrangements, Kyrgyzaltyn is required to prepay for all gold delivered to
it, based on the London PM fixed price of gold on the London Bullion
Market on the same day on which KOC provides notice that a consignment is
available for purchase. Pursuant to an amendment to the Gold and Silver
Sale Agreement, effective from December 22, 2005, as amended from time to
time since then, Kyrgyzaltyn is permitted, until December 31, 2008, to
defer payments for gold for up to 12 calendar days. Kyrgyzaltyn is
required to pay interest on deferred amounts equal to one-half LIBOR plus
0.125% . The obligations of Kyrgyzaltyn are partially secured by a pledge
of a portion of the Centerra shares owned by Kyrgyzaltyn, the value of
which fluctuates with the market price. As at June 30, 2008, a receivable
of $19.7 million was outstanding under these arrangements (December 31,
2007 - $14.1 million).
Other
The Company paid and accrued Cdn$237,500 in the second quarter of 2008
and Cdn$287,800 in the six months ended June 30, 2008 (Cdn$103,700 and
Cdn$280,000 for the corresponding periods in 2007, respectively) to Ms.
Marina Stephens, a lawyer and the spouse of the former President and
Chief Executive Officer of the Company, Mr. Leonard Homeniuk. Ms.
Stephens provided independent legal and business advisory services
related to the Company's international operations under the terms of a
consulting contract, which came to an end on June 16, 2008.
Quarterly Results - Last Eight Quarters
Over the last eight quarters, Centerra's results reflect the positive
impact of rising gold prices, offset by rising cash costs and reduced
production at Kumtor due to the pitwall movement in July 2006 and
subsequent change in the mine plan in 2006 and 2007.
---------------------------------------------------------------------------
$ millions, except per share
data 2008 2007 2006
---------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
---------------------------------------------------------------------------
Revenue 143 113 89 98 104 82 88 76
---------------------------------------------------------------------------
Earnings before unusual items 14 24 10 5 19 6 2 12
---------------------------------------------------------------------------
Net earnings (loss) 56 19 (27) (90) 19 6 2 12
---------------------------------------------------------------------------
Earnings per share before
unusual items (basic
and diluted) 0.06 0.11 0.03 0.02 0.09 0.03 0.01 0.05
---------------------------------------------------------------------------
Earnings (loss) per share
(basic and diluted) 0.26 0.09 (0.12) (0.42) 0.09 0.03 0.01 0.05
---------------------------------------------------------------------------
Other Corporate Developments
Kyrgyz Republic
On June 2, 2008, the Company reported that the previously announced
framework agreements entered into between the Company, Cameco Corporation
and the Government of the Kyrgyz Republic on August 30, 2007 had not been
ratified by the Parliament of the Kyrgyz Republic within the time frame
agreed by the parties and had therefore expired.
In the circumstances and in response to court proceedings described
below, on June 4, 2008, the Company resumed international arbitration
previously initiated by the Company in accordance with its Investment
Agreement, which provides that all disputes with respect to the project
are subject to international arbitration.
Centerra is continuing to hold discussions with the Government working
group responsible for Kumtor. To allow for such discussions the parties
have agreed to a limited postponement of the arbitration proceeding to
September 29, 2008.
As previously disclosed, a Vice-Speaker of the Parliament, K.S. Isabekov,
has filed two lawsuits against the Government of the Kyrgyz Republic
seeking to invalidate the licenses and agreements pursuant to which the
Kumtor mine is operated. Although the Company and its subsidiary Kumtor
Gold Company (KGC), the owner of the project, were not parties to those
lawsuits, and despite their objections to the court's jurisdiction on the
basis of the Investment Agreement's arbitration clause and the on-going
international arbitration, they have since been ordered to appear as
third parties by the Kyrgyz court.
The Vice-Speaker's lawsuits seek to annul: the Government's decree
approving the December 31, 2003 agreements implementing the restructuring
of the project; the 2003 agreements giving effect to the restructuring,
including the Investment Agreement and the Concession Agreement providing
for Kumtor's right to explore and develop the main Kumtor deposit within
the Kumtor concession; the exploration license covering all of the Kumtor
deposits; the mining license covering the Southwest Zone; the mining
license covering the Sarytor area; the Government's decree approving the
1993 Concession Agreement (superceded by the 2003 Concession Agreement)
and the 1993 Concession Agreement itself. The Vice-Speaker argues that
the 2003 agreements and 1993 Concession Agreement required Parliamentary
approval to be effective and that as no such approval was obtained, such
agreements are void. He also argues that the licenses are invalid because
they were granted without a competition having been held and pursuant to
agreements that are themselves invalid for lack of Parliamentary
ratification.
As previously reported, on May 12, 2008, the Supreme Court of the Kyrgyz
Republic, pending resolutions of the claims before the lower courts,
issued an order suspending: the 2003 decree; the 2003 Concession
Agreement; and the mining and exploration licenses. Acting on the order,
the State Agency on Geology and Mineral Resources Management notified
Kumtor that as issues relating to the 2003 decree and the Concession
Agreement are regulated by "international legislation", operations within
the concession area as well as work on the underground decline (to
further develop the SB zone) should be continued but that operations on
the licenses should be stopped. In response to the notice, Kumtor halted
activity on the mining and exploration licenses and suspended development
of the Sarytor deposit. All Kumtor mining operations are taking place in
the concession area and continue uninterrupted.
On June 17, 2008, as has previously been reported, the Bishkek Inter
District Court issued an order invalidating the Southwest and Sarytor
mining and Kumtor exploration licenses. The court has not yet ruled on
the validity of the decrees and agreements (including the 2003 Investment
Agreement and Concession Agreement).
Having been joined involuntarily as third parties, KGC and the Company
are now defending the validity of the agreements, licenses and decrees in
the Kyrgyz court actions on procedural and substantive grounds. At the
same time, KGC and the Company are maintaining their position that the
Investment Agreement's arbitration clause confers exclusive jurisdiction
over questions surrounding the validity of the agreements and licensees
on the international arbitration tribunal. With respect to the relevant
agreements and decrees, the Kyrgyz Ministry of Justice issued various
legal opinions repeatedly affirming that the Government had the legal
capacity to enter into and perform the agreements.
After reactivating the international arbitration proceedings on June 2,
2008, Centerra and KGC, on June 13, 2008, added claims based on the
Vice-Speaker's lawsuits and their consequences. At the initial conference
on June 23, 2008, Centerra filed an application for interim relief in the
arbitration, requesting that all parties to the arbitration be directed
to maintain the status quo and treat the licenses, agreements and decrees
at issue in the Kyrgyz Republic as valid and enforceable. The Kyrgyz
Republic has taken the position in its response to such application that,
among other things, the 2003 Investment Agreement required but did not
receive Parliamentary approval and therefore is not in effect. A hearing
on the application will be held on September 29, 2008. Since February of
2008, Kumtor has been made the subject of several new tax assessments and
other proceedings in the Kyrgyz Republic. These include an investigation
by the Kyrgyz Republic financial police into alleged tax evasion in
relation to the grant of tax exemptions pursuant to the Investment
Agreement governing the Kumtor project and an audit by the state tax
inspectorate to determine the amount of taxes that Kumtor would have owed
for the years 2005 to 2008 had the Investment Agreement and the
Concession Agreement relating to the project not been in effect. The
financial police have requested, and have been provided by Kumtor with,
information and documents relating to the project and have interviewed
senior Kumtor personnel. Kumtor has also received assessments from tax
authorities relating to value-added taxes, land taxes and customs duties
alleged to be owed by Kumtor. Kumtor is cooperating with the relevant
authorities and continues to pay all taxes in accordance with applicable
laws and the Investment Agreement and believes that there is no basis for
these investigations or assessments.
Mongolia
On June 29, 2008 Mongolia held parliamentary elections. According to the
General Election Commission the Mongolian People's Revolutionary Party
(MPRP), who held a slight majority in the prior parliament, obtained 39
out of 76 seats and the Mongolian Democratic Party obtained 25 seats. The
results for 10 seats are in dispute and are to be recounted.
The Company expects a new government will be formed shortly. Centerra is
hopeful that the new government will resume negotiations with respect to
an investment agreement for the Gatsuurt Project.
The World Bank is providing $9.3 million from International Development
Association funds for a Mining Sector Technical Assistance Project (MTSA)
in Mongolia, aimed at improving the nation's ability to regulate and
financially benefit from its burgeoning mining industry, while reducing
government corruption.
The World Bank estimated that mining accounted for about 20% of real GDP,
56% of gross industrial output, 69% of exports, and 36% of revenue for
Mongolia in 2007.
For information on forward-looking information see "Caution Regarding
Forward-Looking Information".
Management Changes
During the second quarter of 2008, Stephen A. Lang was promoted to
President and Chief Executive Officer and appointed to Centerra's board
of directors to replace Leonard A. Homeniuk upon his retirement. Jeffrey
S. Parr, Vice President Finance was promoted to Chief Financial Officer
to replace David M. Petroff, who resigned to pursue other interests.
Additionally, the board appointed Bruce Walter as Vice Chair, to assist
in leading the growth of the Company.
On July 30, 2008, Ron Colquhoun was appointed Vice President and Chief
Operating Officer.
Critical Accounting Estimates
Centerra prepares its consolidated financial statements in accordance
with Canadian generally accepted accounting principles ("GAAP"). In doing
so, management is required to make various estimates and judgments in
determining the reported amounts of assets and liabilities, revenues and
expenses for each year presented and in the disclosure of commitments and
contingencies. Management bases its estimates and judgments on its own
experience, guidelines established by the Canadian Institute of Mining,
Metallurgy and Petroleum and various other factors believed to be
reasonable under the circumstances. Management believes the critical
accounting estimates as described in its annual management's discussion
and analysis and audited annual consolidated financial statements for the
year ended December 31, 2007 reflect its more significant estimates and
judgments used in the preparation of the consolidated financial
statements.
Depreciation and depletion of property, plant and equipment directly
involved in mining and milling operations is primarily calculated using
the "unit of production" method. This method allocates the cost of an
asset to each period based on current period production as a portion of
total lifetime production or a portion of estimated recoverable ore
reserves. Estimates of lifetime production and amounts of recoverable
reserves are subject to judgment and could change significantly over
time. If actual reserves prove to be significantly different than the
estimates, there would be a material impact on the amounts of
depreciation and depletion charged to earnings.
Mobile equipment and other administrative assets are depreciated
according to the straight-line method, based on an estimate of their
useful lives.
Significant decommissioning and reclamation activities are often not
undertaken until substantial completion of the useful lives of productive
assets. Regulatory requirements and alternatives with respect to these
activities are subject to change over time. A significant change to
either the estimated costs or recoverable reserves would result in a
material change in the amount charged to earnings. The quantum of any
such change in the amount charged cannot be estimated at this time.
If it is determined that carrying values of property, plant and equipment
cannot be recovered, then the asset is written down to fair value.
Similarly, Centerra tests goodwill annually for impairment to ensure that
the fair value remains greater than or equal to book value. Any excess of
book value over fair value is charged to income in the period in which
the impairment is determined. Recoverability and fair value assessments
are dependent upon assumptions and judgments regarding future prices,
costs of production, sustaining capital requirements and economically
recoverable ore reserves and resources. A material change in assumptions
may significantly impact the potential impairment of these assets.
During the first six months of 2008, the following events occurred which
may have an impact on critical accounting estimates of the Company as
described in its 2007 management's discussion and analysis:
- A new life of mine estimate and mine plan was finalized at Kumtor.
- A new closure study was completed at Boroo which increased the cost
estimate of reclamation activity required at the site and adjusted the
timing of such activity. See "Asset Retirement Obligations".
- The ten million treasury common shares contingently issuable has been
adjusted to the May 30, 2008 share price. Following the non-ratification
of the agreement with the Kyrgyz Government, the Company reclassified the
amount recorded as contingent shares issuable from shareholders' equity
to long-term liabilities. The ultimate amount of this liability will
depend on negotiation of a settlement and the terms thereof agreed
between all parties. See "Unusual Items".
Changes in Accounting Policies(1)
Centerra's unaudited interim consolidated financial statements for the
three and six months ended June 30, 2008 were prepared following
accounting policies consistent with Centerra's audited annual
consolidated financial statements and notes thereto for the year ended
December 31, 2007, except for the following changes in accounting
policies.
Inventories:
Effective January 1, 2008, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants ("CICA") Handbook Section
3031, Inventories. This standard provides guidance on the determination
of inventory cost and its subsequent recognition as an expense, including
any write-downs to net realizable value. It also provides guidance on the
cost formulas that are used to assign costs to inventories and requires
the reversal of write-downs, if applicable, on inventory.
Upon adoption of this standard at January 1, 2008, $10.4 million of
previously unvalued heap leach inventory at Boroo and $10.0 million of
waste material now reclassified as low-grade ore inventory following the
lowering of the cut-off grade at Kumtor ($16.6 million net of tax in
total) was fully recorded as inventory with a corresponding recognition
in Retained Earnings and no prior period restatements as provided by the
new standard.
Financial Instruments:
Effective January 1, 2008, the Company adopted the new recommendations of
CICA Handbook Section 3862, Financial Instruments - Disclosures; Section
3863, Financial Instruments - Presentation.
Section 3862 on financial instrument disclosures provides guidance on
necessary disclosures in the financial statements. The new Section
simplifies the disclosures relating to concentrations of risk, credit
risk, liquidity risk and price risk currently found in Section 3861.
Section 3863 establishes standards for the presentation of financial
instruments and non-financial derivatives. It deals with the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equity, the classification of related
interest, dividends, losses and gains, and the circumstances in which
financial assets and financial liabilities are offset.
Capital Disclosures:
Effective January 1, 2008, the Company adopted the new recommendations of
CICA Handbook Section 1535 - Capital Disclosures. Section 1535 specifies
the disclosure of (i) an entity's objectives, policies and processes for
managing capital; (ii) quantitative data about what the entity regards as
capital, (iii) whether the entity has complied with any capital
requirements; and (iv) if it has not complied, the consequences of such
non-compliance.
Financial Instruments Presentation:
Effective January 1, 2008, the Company adopted the new recommendations of
CICA amended Handbook Section 1400 - General Standards of Financial
Statements Presentation. The section provides revised guidance related to
management's responsibility to assess and disclose the ability of an
entity to continue as a going concern.
New Pronouncements:
On February 1, 2008 the CICA issued section 3064, Goodwill and Intangible
assets. This Section establishes revised standards for recognition,
measurement, presentation and disclosure of goodwill and intangible
assets. Concurrent with the introduction of this standard, the CICA
withdrew EIC 27, Revenues and Expenses during the pre-operating period
which removes the ability for companies to defer costs and revenues
incurred prior to commercial production at new mine operations. The
changes are effective for interim and annual financial statements
beginning January 1, 2009. The impact of this new standard is being
assessed and cannot be determined at this time. International Financial
Reporting Standards ("IFRS"):
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly affect financial reporting
requirements for Canadian companies. The AcSB strategic plan outlines the
convergence of Canadian generally accepted accounting principles ("GAAP")
with IFRS over an expected five-year transitional period. In February
2008 the AcSB announced that 2011 is the changeover date for public
accountable companies to use IFRS, replacing Canada's own GAAP. The
transition date is for interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2011. The transition
date of January 1, 2011 will require the restatement for comparative
purposes of amounts reported by the Company for the year ended December
31, 2010. While the Company has begun assessing the adoption of IFRS for
2011, the financial reporting impact of the transition to IFRS cannot be
reasonably estimated at this time.
(1) See note 2 to Centerra's quarterly financial statements for the three
and six months ended June 30, 2008 for a more detailed discussion of the
changes in accounting policies.
Outlook
Centerra expects consolidated gold production in 2008 of 770,000 to
830,000 ounces, which is unchanged from prior guidance. Total cash cost
is expected to be $409 to $449 per ounce in 2008. (This includes
revenue-based taxes and royalties incurred in the Kyrgyz Republic under
its existing (2003) Investment Agreement of approximately 7.5% of
revenue.) The Company's prior total cash cost guidance for 2008 of $360
to $400 per ounce (re-confirmed in the first quarter) assumed that a new
agreement for the Kumtor project would be implemented and be retroactive
to January 1, 2008. The revenue-based tax under the proposed new
agreement was excluded from total cash cost in our prior guidance because
such new tax was not considered a royalty or production tax. The impact
of including the revenue-based taxes and royalties under the existing
Investment Agreement (7.5%) for all of 2008 results in an increase of
approximately $49 per ounce on total cash cost. In addition, the Company
has experienced rising costs at both sites. However, the Company is only
changing its guidance for total cash cost relative to the adjustment for
the inclusion of revenue-based taxes and royalties as described above.
Total cash cost is a non-GAAP measure and is discussed under "Non-GAAP
Measures".
Gold production for the full year 2008 at the Kumtor mine is expected to
be between 580,000 and 620,000 ounces, unchanged from prior guidance.
Greater than 70% of the ounce production at Kumtor is planned for the
second half of 2008. Total cash cost for 2008 is expected to be $416 to
$456 per ounce reflecting the impact of approximately $66 per ounce
relative to the adjustment for the inclusion of revenue-based taxes and
royalties as described above.
At Boroo, the Company expects gold production of 190,000 to 210,000
ounces in 2008. Total cash cost is expected to be $380 to $420 per ounce
in 2008. These numbers are unchanged from the prior guidance.
Centerra's revenues, earnings and cash flows are sensitive to changes in
the gold price. The Company estimates that a $25 per ounce change in the
spot gold price for the last six months of 2008 would change aggregate
revenues, net earnings and cash from operations by approximately $13.5
million, $11.6 million (or $0.05 per share) and $11.8 million,
respectively.
A 10% change in the cost of diesel fuel would result in a $6 per ounce
impact on Centerra's total cash cost per ounce.
Centerra's production and unit costs are forecast as follows:
---------------------------------------------------------------------------
Production (100%) First Six Months 2008 2007
Ounces of gold of 2008 Forecast Actual
Actual
---------------------------------------------------------------------------
Kumtor 185,894 580,000 - 620,000 300,862
---------------------------------------------------------------------------
Boroo 92,804 190,000 - 210,000 254,548
---------------------------------------------------------------------------
Total 278,698 770,000 - 830,000 555,410
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total Cash Cost(1) First Six Months 2008 2007
$ per ounce of 2008 Forecast Actual
Actual
---------------------------------------------------------------------------
Kumtor 685 416 - 456(2) 610
---------------------------------------------------------------------------
Boroo 362 380 - 420 244
---------------------------------------------------------------------------
Consolidated 577 409 - 449 (2) 442
---------------------------------------------------------------------------
(1) Total cash cost is a non-GAAP measure. See "Non-GAAP Measures below.
(2) Unit costs reflect changes described above.
The production and cost forecasts for 2008 are forward-looking
information and are based on key assumptions and subject to material risk
factors that could cause actual results to differ materially and which
are discussed under the heading "Caution Regarding Forward-Looking
Information".
In particular, material assumptions or factors used to forecast
production and costs include the following:
- a gold price of $900 per ounce,
- exchange rates:
-- $1USD:$1CAD
-- $1USD:34.5 Kyrgyz Som
-- $1USD:1,127 Mongolian Tugrik
-- $1USD:0.6398 Euro
- prices for fuel oil, reagents and other consumables remaining
consistent with current levels,
- mine production at the Kumtor pit being maintained at current levels
and ensuring continued access to the SB Zone as planned,
- no delays in or interruption of scheduled production from our mines,
including due to natural phenomena, labour disputes or other development
and operation risks,
- the Company's schedule for final permitting and approvals for the Boroo
heap leach are obtained as planned,
- in respect of total cash cost guidance, the existing (2003) Investment
Agreement for Kumtor will be effective through 2008, and
- all necessary permits, licences and approvals are received in a timely
manner.
For further discussion of the factors that could cause actual results to
differ materially, please refer to "Risk Factors" in Centerra's Annual
Management's Discussion and Analysis and to Centerra's 2007 Annual
Information Form including the section titled "Risk Factors", available
on SEDAR at www.sedar.com. For information on forward-looking information
see "Caution Regarding Forward-Looking Information".
Exploration and Business Development
One of Centerra's priorities is to continue to add to its reserves and
resources base through its exploration program.
The 2008 exploration program will continue the aggressive exploration at
the Kumtor mine, target generation programs at the Boroo mine and on the
Company's land holdings in Mongolia. Target generation programs will
continue in Central Asia, Russia and China. The Company forecasts $25
million of spending on its program for the year. The forecast includes
$15 million for exploration at Kumtor.
Activities at Kumtor, Boroo and REN are planned as follows:
Kumtor
- Additional drilling programs in the vicinity of the main Kumtor pit to
test the northeasterly strike extension of the deposit and down dip
extensions of the stockwork zone.
- Exploration work will continue on other target areas such as Northeast
prospect, Bordoo and Akbel once the work suspension related to the
challenge of the exploration license is lifted.
Boroo
- Programs will focus on generating and testing targets for additional
mineralization around the mine.
Mongolia
- Exploration programs will continue to evaluate Centerra's land position.
REN
- Barrick Gold holds a 37% joint-venture interest in the REN property.
Barrick Gold elected not to participate in further exploration on the REN
property in 2007. The Company is considering its options for the property
which include selling or joint venturing its interest in the REN project.
The business development program is forecast at $5 million for 2008 to
support merger and acquisition initiatives of the Company for the year.
For information on forward-looking information see "Caution Regarding
Forward-Looking Information".
Administration
Annual corporate and administration expenses without unusual items are
expected to amount to approximately $40 million in 2008.
Corporate Income Taxes
The corporate income tax rate for Boroo for 2008, and subsequent years,
pursuant to an amendment to its Stability Agreement entered into in the
third quarter of 2007, is 25% for income in excess of 3 billion tugriks
(about $2.5 million at current exchange rates) and 10% for income up to
that amount.
The corporate income tax rate for Kumtor, as provided in its Investment
Agreement, is 10%. In addition, the agreement requires Kumtor to pay 2%
of net income to the Issyk Kul Social Fund. Kumtor continues to record
and pay taxes based on its existing Investment Agreement.
Capital Expenditures
The capital requirement in 2008 is estimated to be $88 million, including
$45 million of sustaining capital. Growth capital is forecast at $43
million, which includes $24 million for Kumtor (the largest expenditures
would be $13 million for the development of the SB Zone underground
decline in 2008, $4 million for two additional haul trucks, $2 million
for replacement of the ball mill ring gear and $3 million for additional
de-watering equipment) and $19 million for Boroo (the largest
expenditures would be $12 million for the pre-stripping of Pit 3 and $5
million to complete the heap leach facility). The development of the SB
Zone underground decline at Kumtor, pre-stripping of Pit 3 at Boroo and
the heap leach facility construction will be capitalized and amortized
based on units of production consistent with the Company's accounting
policies. The estimated capital requirement of $88 million has increased
from the Company's prior guidance for 2008 of $78 million. Sustaining
capital has increased $5.0 million and growth capital is up $5.0 million.
Non-GAAP Measures
This Management's Discussion and Analysis presents information about
total cash cost of production of an ounce of gold and total production
cost per ounce for the operating properties of Centerra. Except as
otherwise noted, total cash cost per ounce is calculated by dividing
total cash costs by gold ounces produced for the relevant period. Total
production cost per ounce includes total cash cost plus depreciation,
depletion and amortization divided by gold ounces produced for the
relevant period. Total cash cost and total production cost per ounce are
non-GAAP measures.
Total cash costs, as defined in the Gold Institute Standard, include mine
operating costs such as mining, processing, administration, royalties and
production taxes, but exclude amortization, reclamation costs, financing
costs and capital, development and exploration. Certain amounts of
stock-based compensation have been excluded as well. Total production
costs includes total cash cost plus depreciation, depletion and
amortization. Total cash cost per ounce and total production cost per
ounce have been included because certain investors use this information
to assess performance and also to determine the ability of Centerra to
generate cash flow for use in investing and other activities. The
inclusion of total cash cost per ounce and total production cost per
ounce may enable investors to better understand year-over-year changes in
production costs, which in turn affect profitability and cash flow.
Total Cash Cost per Ounce and Total Production Cost per ounce can be
reconciled as follows:
Centerra Gold Inc.
TOTAL CASH COST & TOTAL
PRODUCTION COST
RECONCILIATION (unaudited) Three months ended Six months ended
($ millions, unless otherwise June 30, June 30,
specified) 2008 2007 2008 2007
------------------------------------------
Centerra:
---------
Cost of sales, as reported $ 84.8 $ 47.9 $ 135.3 $ 93.7
Adjust for:
Refining fees & by-product
credits (0.1) (0.2) (0.4) (0.2)
Regional Office administration 7.4 7.4 14.6 13.0
Non-operating costs (0.5) 0.9 0.1 2.9
Inventory movement (4.1) (2.5) 11.3 (1.3)
------------------------------------------
Total cash cost - 100% $ 87.5 $ 53.5 $ 160.9 $ 108.1
Depreciation, Depletion,
Amortization and Accretion 17.2 12.2 27.9 22.2
Inventory movement - non-cash (1.2) - 1.4 0.8
------------------------------------------
Total production cost - 100% $ 103.5 $ 65.7 $ 190.2 $ 131.1
Ounces poured - 100% (000) 158.3 153.4 278.7 286.4
Total cash cost per ounce $ 553 $ 349 $ 577 $ 377
Total production cost per ounce $ 653 $ 412 $ 682 $ 455
Kumtor:
-------
Cost of sales, as reported $ 74.4 $ 41.1 $ 108.5 $ 76.5
Adjust for:
Refining fees & by-product
credits (0.4) (0.1) (0.7) (0.1)
Regional Office administration 4.9 4.5 9.9 8.0
Non-operating costs (0.7) 0.3 (0.2) 2.3
Inventory movement - cash (8.1) (4.9) 9.9 (3.5)
------------------------------------------
Total cash cost - 100% $ 70.1 $ 40.9 $ 127.4 $ 83.2
Depreciation, Depletion,
Amortization and Accretion $ 13.3 $ 7.7 $ 19.9 $ 13.4
Inventory movement - non-cash $ (2.1) $ (0.5) $ 0.4 $ -
------------------------------------------
Total production cost - 100% $ 81.3 $ 48.1 $ 147.7 $ 96.6
Ounces poured - 100% (000) 111.2 83.2 185.9 149.4
Total cash cost per ounce $ 631 $ 491 $ 685 $ 556
Total production cost per ounce $ 730 $ 583 $ 794 $ 646
Boroo:
------
Cost of sales, as reported $ 10.4 $ 6.8 $ 26.8 $ 17.2
Adjust for:
Refining fees & by-product
credits 0.3 (0.1) 0.3 (0.1)
Regional Office administration 2.5 2.9 4.7 5.0
Non-operating costs 0.2 0.6 0.3 0.6
Inventory movement 4.0 2.4 1.4 2.2
------------------------------------------
Total cash cost - 100% $ 17.4 $ 12.6 $ 33.5 $ 24.9
Depreciation, Depletion,
Amortization and Accretion 3.9 4.5 8.0 8.8
Inventory movement - non-cash 0.9 0.5 1.0 0.8
------------------------------------------
Total production cost - 100% $ 22.2 $ 17.6 $ 42.5 $ 34.5
Ounces poured - 100% (000) 47.1 70.2 92.8 137
Total cash cost per ounce $ 370 $ 180 $ 362 $ 182
Total production cost per ounce $ 472 $ 252 $ 459 $ 252
Qualified Person
The scientific and technical information in this document was prepared in
accordance with National Instrument 43-101 - Standards of Disclosure for
Mineral Projects ("NI 43-101") and was reviewed, verified and compiled by
Centerra's geological and mining staff under the supervision of Ian
Atkinson, Certified Professional Geologist, Centerra's Vice-President,
Exploration, who is the qualified person for the purpose of NI 43-101.
Caution Regarding Forward-Looking Information
This Management's Discussion and Analysis and the documents incorporated
by reference herein, contain statements which are not current statements
or historical facts and are "forward-looking information" within the
meaning of applicable Canadian securities laws. All statements, other
than statements of historical fact, contained or incorporated by
reference in this Management's Discussion and Analysis constitute
forward-looking information. Wherever possible, words such as "plans",
"expects" or "does not expect", "budget", "forecasts", "projections",
"anticipate" or "does not anticipate", "believe", "intent", "potential",
"strategy", "schedule", "estimates" and similar expressions or statements
that certain actions, events or results "may", "could", "would", "might"
or "will" be taken, occur or be achieved and other similar expressions
have been used to identify forward-looking information. These
forward-looking statements relate to, among other things Centerra's
expectations regarding, future growth, results of operations (including,
without limitation, future production and sales, and operating and
capital expenditures), performance (both operational and financial),
business and political environment and business prospects (including the
timing and development of new deposits and the success of exploration
activities) and opportunities.
Although the forward-looking information in this Management's Discussion
and Analysis reflects Centerra's current beliefs on the date of this
Management's Discussion and Analysis based upon information currently
available to management and based upon what management believes to be
reasonable assumptions, Centerra cannot be certain that actual results,
performance, achievements, prospects and opportunities, either expressed
or implied, will be consistent with such forward-looking information. By
its very nature, forward-looking information necessarily involves
significant known and unknown risks, assumptions, uncertainties and
contingencies that may cause Centerra's actual results, assumptions,
performance, achievements, prospects and opportunities in future periods
to differ materially from those expressed or implied by such
forward-looking information. These risks and uncertainties include, among
other things, risks relating to the outcome of litigation commenced in
the Kyrgyz Republic by Vice Speaker Isabekov and of the international
arbitration commenced by Centerra, both of which are described above
under the heading "Other Corporate Developments - Kyrgyz Republic", gold
prices, replacement of reserves, reduction in reserves related to
geotechnical risks, ground movements, political risk, nationalization
risk, changes in laws and regulations, civil unrest, labour unrest, legal
compliance costs, reserve and resource estimates, production estimates,
exploration and development activities, competition, operational risks,
environmental, heath and safety risks, costs associated with reclamation
and decommissioning, defects in title, seismic activity, cost and
availability of labour, material and supplies, increases in production
and capital costs, permitting and construction to raise the tailings dam
height and increase the capacity of the existing Kumtor tailing dam,
illegal mining, enforcement of legal rights, decommissioning and
reclamation cost estimates, future financing and personnel. There may be
other factors that cause results, assumptions, performance, achievements,
prospects or opportunities in future periods not to be as anticipated,
estimated or intended. See "Risk Factors" in the Company's 2007 Annual
Information Form and Annual Management's Discussion and Analysis
available on SEDAR at www.sedar.com.
There can be no assurances that forward-looking information and
statements will prove to be accurate, as many factors and future events,
both known and unknown could cause actual results, performance or
achievements to vary or differ materially, from the results, performance
or achievements that are or may be expressed or implied by such
forward-looking information and statements contained in this Management's
Discussion and Analysis. Accordingly, all such factors should be
considered carefully when making decisions with respect to Centerra, and
prospective investors should not place undue reliance on forward-looking
information. Forward-looking information is as of July 30, 2008. Centerra
assumes no obligation to update or revise forward-looking information to
reflect changes in assumptions, changes in circumstances or any other
events affecting such forward-looking information, except as required by
applicable law.
Centerra Gold Inc.
Consolidated Financial Statements
For the Six Months and Quarter Ended June 30, 2008
(Unaudited)
(Expressed in United States Dollars)
Centerra Gold Inc.
Consolidated Balance Sheets
(Expressed In Thousands of United States Dollars)
June 30, December 31,
2008 2007
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 107,983 $ 105,482
Amounts receivable 28,865 18,021
Inventories (note 3) 151,194 115,062
Prepaid expenses 21,686 21,230
-----------------------------
309,728 259,795
Property, plant and equipment 383,311 373,841
Goodwill 148,540 148,540
Long-term receivables and other 6,699 6,632
Long-term inventories (note 3) 17,440 9,093
Future income tax asset 9,248 16,467
-----------------------------
565,238 554,573
-----------------------------
Total assets $ 874,966 $ 814,368
-----------------------------
-----------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 40,123 $ 42,482
Taxes payable 6,042 -
Short term debt 10,000 10,000
-----------------------------
56,165 52,482
Provision for reclamation (note 4) 22,303 20,868
Contingent common shares issuable (note 7) 89,084 -
Shareholders' equity (note 8)
Share capital 523,107 523,107
Contingent common shares issuable (note 7) - 126,794
Contributed surplus 32,080 30,767
Retained earnings 152,227 60,350
-----------------------------
707,414 741,018
-----------------------------
Total liabilities and shareholders' equity $ 874,966 $ 814,368
-----------------------------
-----------------------------
Commitments and Contingencies (note 10)
The accompanying notes form an integral part of these consolidated financial
statements.
Centerra Gold Inc.
Consolidated Statements of Earnings and Comprehensive Income
(Unaudited)
(Expressed In Thousands of United States Dollars)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue from Gold Sales $ 142,562 $ 103,714 $ 255,238 $ 186,041
-------------------------------------------------
Expenses
Cost of sales (excluding
depreciation, depletion
and amortization expenses) 84,792 47,864 135,319 93,687
Regional office
administration 7,391 7,371 14,632 13,000
Depreciation, depletion
and amortization 17,012 11,705 27,500 21,435
Accretion and reclamation
expense (note 4) 408 745 753 1,216
Exploration and business
development (note 5) 5,185 4,481 10,119 10,889
Other (income) and
expenses 254 (2,277) 459 (4,140)
Corporate administration
(note 6) 7,463 6,014 13,947 10,337
-------------------------------------------------
122,505 75,903 202,729 146,424
-------------------------------------------------
Earnings before unusual
items, income taxes
and non controlling
interest 20,057 27,811 52,509 39,617
Unusual items (note 7) (42,178) - (37,710) -
-------------------------------------------------
-------------------------------------------------
Earnings before income
taxes and
non-controlling interest 62,235 27,811 90,219 39,617
Income tax expense
(note 9) 6,242 8,250 14,954 12,733
Non-controlling interest - 947 - 2,326
-------------------------------------------------
-------------------------------------------------
Net earnings and
comprehensive income $ 55,993 $ 18,614 75,265 24,558
-------------------------------------------------
-------------------------------------------------
Basic and diluted earnings
per common share (note 8) $ 0.26 $ 0.09 $ 0.35 $ 0.11
-------------------------------------------------
-------------------------------------------------
See accompanying notes to the consolidated financial statements.
Centerra Gold Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed In Thousands of United States Dollars)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2007 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating activities
Net earnings 55,993 18,614 $ 75,265 24,558
Items not involving cash:
Depreciation, depletion and
amortization 17,012 11,705 27,500 21,435
Accretion and reclamation
expense 408 745 753 1,216
Deferred charges recognized - - - 557
Contingent common shares
issuable (note 7) (42,178) - (37,710) -
Future income tax expense 454 16 3,418 (1,127)
Long-term inventory 2,598 - 2,050 -
Non-controlling interest - 947 - 2,326
Other operating items 1,369 (592) 1,067 312
-------------------------------------------
35,656 31,435 72,343 49,277
Increase in working capital (25,046) (23,993) (33,731) (34,045)
-------------------------------------------
Cash provided (used) by
operations 10,610 7,442 38,612 15,232
-------------------------------------------
Investing activities
Additions to property, plant
and equipment (18,726) (29,134) (36,111) (73,200)
-------------------------------------------
Cash used in investing (18,726) (29,134) (36,111) (73,200)
-------------------------------------------
Financing activities
Proceeds from short term
debt - 10,000 - 10,000
Issuance of common shares
for cash - 53 - 53
-------------------------------------------
Cash provided by financing - 10,053 - 10,053
-------------------------------------------
(Decrease) Increase in cash
during the period (8,116) (11,639) 2,501 (47,915)
Cash and cash equivalents at
beginning of the period 116,099 149,883 105,482 186,159
-------------------------------------------
Cash and cash equivalents at
end of the period $ 107,983 $ 138,244 $ 107,983 $ 138,244
-------------------------------------------
-------------------------------------------
Supplemental disclosure with
respect to cash flows
Cash and cash equivalents
consist of :
Cash 57,189 45,194 57,189 45,194
Short term investments 50,794 93,050 50,794 93,050
-------------------------------------------
107,983 138,244 107,983 138,244
-------------------------------------------
-------------------------------------------
Centerra Gold Inc.
Consolidated Statements of Shareholders' Equity
(Unaudited)
(Expressed In Thousands of United States Dollars)
----------------------------------------------------------------------------
Contingent
Number of Common
Common Shares
Shares Amount Issuable
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at December 31, 2006 216,238,815 $ 522,383 $ -
Options issued to employees - - -
Recognition in net income - - -
Net earnings and comprehensive income for
the period - -
----------------------------------------------------------------------------
Balance at March 31, 2007 216,238,815 $ 522,383 $ -
Shares issued:
Options exercised by employees 11,178 96 -
Options issued to employees - - -
Net earnings and comprehensive income for
the period - - -
----------------------------------------------------------------------------
Balance at June 30, 2007 216,249,993 $ 522,479 $ -
Shares issued:
Options exercised by employees 68,195 628 -
Contingent common shares issuable
revalued (note 7) - - 90,334
Options issued to employees - - -
Net loss and comprehensive loss for the
period - - -
----------------------------------------------------------------------------
Balance at September 30, 2007 216,318,188 $ 523,107 $ 90,334
Contingent common shares issuable
revalued (note 7) - - 36,460
Options issued to employees - -
Net loss and comprehensive loss for the
period - - -
----------------------------------------------------------------------------
Balance at December 31, 2007 216,318,188 $ 523,107 $ 126,794
Contingent common shares issuable
revalued (note 7) - - 4,468
Options issued to employees - - -
Inventory adjustments, on adoption of
accounting standard, net of tax (note 2) - - -
Net earnings and comprehensive income for
the period - - -
----------------------------------------------------------------------------
Balance at March 31, 2008 216,318,188 $ 523,107 $ 131,262
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent common shares issuable
revalued (note 7) - - (42,178)
Contingent common shares issuable
reclassified (note 7) (89,084)
Options issued to employees - - -
Net earnings and comprehensive income for
the period - - -
----------------------------------------------------------------------------
Balance at June 30, 2008 216,318,188 $ 523,107 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Other
Contributed Retained Comprehensive
Surplus Earnings income Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at December
31, 2006 $ 30,257 $ 152,899 $ 557 $ 706,096
Options issued to
employees 138 - - 138
Recognition in net
income - - (557) (557)
Net earnings and
comprehensive income
for the period - 5,944 - 5,944
----------------------------------------------------------------------------
Balance at March 31,
2007 $ 30,395 $ 158,843 $ - $ 711,621
Shares issued:
Options exercised by
employees (5) - - 91
Options issued to
employees 114 - - 114
Net earnings and
comprehensive income
for the period - 18,614 18,614
----------------------------------------------------------------------------
Balance at June 30,
2007 $ 30,504 $ 177,457 $ - $ 730,440
Shares issued:
Options exercised by
employees (85) - - 543
Contingent common
shares issuable
revalued (note 7) - - - 90,334
Options issued to
employees 174 - - 174
Net loss and
comprehensive loss for
the period - (90,393) (90,393)
----------------------------------------------------------------------------
Balance at September
30, 2007 $ 30,593 $ 87,064 $ - $ 731,098
Contingent common
shares issuable
revalued (note 7) - - - 36,460
Options issued to
employees 174 - - 174
Net loss and
comprehensive loss for
the period - (26,714) - (26,714)
----------------------------------------------------------------------------
Balance at December
31, 2007 $ 30,767 $ 60,350 - $ 741,018
Contingent common
shares issuable
revalued (note 7) - - - 4,468
Options issued to
employees 187 - - 187
Inventory adjustments,
on adoption of
accounting standard,
net of tax (note 2) - 16,612 - 16,612
Net earnings and
comprehensive income
for the period - 19,272 - 19,272
----------------------------------------------------------------------------
Balance at March 31,
2008 $ 30,954 $ 96,234 $ - $ 781,557
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent common
shares issuable
revalued (note 7) - - - (42,178)
Contingent common
shares issuable
reclassified (note 7) (89,084)
Options issued to
employees 1,126 - - 1,126
Net earnings and
comprehensive income
for the period - 55,993 - 55,993
----------------------------------------------------------------------------
Balance at June 30,
2008 $ 32,080 $ 152,227 $ - $ 707,414
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Centerra Gold Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
(Expressed in thousands of United States Dollars)
1. Basis of Presentation
These unaudited interim consolidated financial statements of Centerra
Gold Inc. ("Centerra" or the "Company") have been prepared by management
in accordance with accounting principles generally accepted in Canada
("Canadian GAAP") for interim financial statements. Certain information
and note disclosures normally included in the annual consolidated
financial statements prepared in accordance with Canadian GAAP have been
condensed or excluded. As a result, these unaudited interim consolidated
financial statements do not contain all disclosures required to be
included in the annual consolidated financial statements and should be
read in conjunction with the most recent audited annual consolidated
financial statements and notes thereto for the year ended December 31,
2007.
As at June 30, 2008, Centerra held 100% interest in the Kumtor mine, the
Boroo mine, and the Gatsuurt property and held a 63% interest in the REN
deposit.
2. Significant Accounting Policies:
These unaudited interim consolidated financial statements are prepared
following accounting policies consistent with the Company's audited
annual consolidated financial statements and notes thereto for the year
ended December 31, 2007, except for the following changes in accounting
policies:
Adoption of New Accounting Standards and Developments a. Inventories:
Effective January 1, 2008, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants ("CICA") Handbook Section
3031, Inventories. This standard provides guidance on the determination
of cost and its subsequent recognition as an expense, including any
write-downs to net realizable value. It also provides guidance on the
cost formulas that are used to assign costs to inventories and requires
the reversal of write downs, if applicable, on inventory.
Upon adoption of this standard at January 1, 2008, $10.4 million of
previously written off heap leach inventory and $10.0 million of
mineralized material now reclassified as low- grade ore inventory
following the lowering of the cut-off grade (total of $20.4 million (note
3) and $16.6 million, net of tax) was recorded as inventory with a
corresponding recognition in retained earnings. Prior periods have not
been restated as permitted by the standard. There were no other changes
to the Company's accounting policies required on implementation of this
standard.
b. Financial Instruments - Disclosures
Effective January 1, 2008, the Company adopted the new recommendations of
CICA Handbook Section 3862, Financial Instruments - Disclosures; Section
3863, Financial Instruments - Presentation.
Section 3862 on financial instrument disclosures, provides guidance on
disclosures in the financial statements to enable users of the financial
statements to evaluate the significance of financial instruments to the
Company financial position and performance and about risks associated
with both recognized and unrecognized financial instruments and how these
risks are managed. The new Section removes duplicate disclosures and
simplifies the disclosures relating to concentrations of risk, credit
risk, liquidity risk and price risk currently found in Section 3861.
The purpose of Section 3863 on financial instruments - presentation is to
enhance financial statement users' understanding of the significance of
financial instruments to an entity's financial position, performance and
cash flows. This Section establishes standards for presentation of
financial instruments and non-financial derivatives. It deals with the
classification of financial instruments, from the perspective of the
issuer, between liabilities and equity, the classification of related
interest, dividends, losses and gains, and the circumstances in which
financial assets and financial liabilities are offset.
The Company has included disclosures recommended by the new section in
Notes 11 and 12 to these unaudited interim consolidated financial
statements.
c. Capital Disclosures
Effective January 1, 2008, the Company adopted the new recommendations of
CICA Handbook Section 1535- Capital Disclosures. Section 1535 specifies
the disclosure of (i) an entity's objectives, policies and processes for
managing capital; (ii) quantitative data about what the entity regards as
capital, (iii) whether the entity has complied with any capital
requirements; and (iv) if it has not complied, the consequences of such
non-compliance.
The Company has included disclosures recommended by the new section in
Note 13 to these unaudited interim consolidated financial statements
d. Financial Statements Presentation
Effective January 1, 2008, the Company adopted the new recommendations of
CICA amended Handbook Section 1400-General Standards of Financial
Statements Presentation. The section provides revised guidance related to
management's responsibility to assess and disclose the ability of an
entity to continue as a going concern.
e. New Pronouncements
On February 1, 2008 the CICA issued Handbook section 3064, Goodwill and
Intangible assets. This Section establishes revised standards for
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. Concurrent with the introduction of this standard, the
CICA withdrew EIC 27, Revenues and Expenses during the pre-operating
period. As a result of the withdrawal of EIC 27, companies will no longer
be able to defer certain costs and revenues incurred prior to commercial
production at new mine operations. The changes are effective for interim
and annual financial statements beginning January 1, 2009. The impact of
this new standard is being assessed and cannot be determined at this time.
f. International Financial Reporting Standards ("IFRS")
In 2006, the Canadian Accounting Standards Board ("AcSB") published a new
strategic plan that will significantly affect financial reporting
requirements for Canadian companies. The AcSB strategic plan outlines the
convergence of Canadian GAAP with IFRS over an expected five year
transitional period. In February 2008 the AcSB announced that 2011 is the
changeover date for public accountable companies to use IFRS, replacing
Canada's own GAAP. The transition date is for interim and annual
financial statements relating to fiscal years beginning on or after
January 1, 2011. The transition date of January 1, 2011 will require the
restatement for comparative purposes of amounts reported by the Company
for the year ended December 31, 2010. While the Company has begun
assessing the adoption of IFRS for 2011, the financial reporting impact
of the transition to IFRS cannot be reasonably estimated at this time.
3. Inventories
---------------------------------------------------------------------------
June 30, December 31,
(Thousands of US$) 2008 2007
---------------------------------------------------------------------------
Stockpiles (a) $ 55,352 $ 26,769
Gold in-circuit 7,285 6,962
Heap leach in circuit 4,141 -
Gold dore 11,436 11,118
---------------------------------------------------------------------------
78,215 44,849
Supplies 90,419 79,306
---------------------------------------------------------------------------
168,634 124,155
Less: Long-term inventory (heap leach) (a) (17,440) (9,093)
---------------------------------------------------------------------------
Total Inventories-current portion $ 151,194 $ 115,062
---------------------------------------------------------------------------
(a)-Includes recognition of heap leach stockpiles and mineralized
materials reclassified as low grade inventory of $20.4 million in
the first quarter of 2008 (see note 2(a)) as a result of the
application of the new accounting standard Section 3031- Inventories.
4. Asset Retirement Obligations
The total future asset retirement obligations were estimated by
management based on the Company ownership interest in all mines and
facilities, estimated costs to reclaim mine sites and facilities and the
estimated timing of the costs to be incurred in future periods.
The Company has estimated the total asset retirement obligations to be
$22.3 million as at June 30, 2008 (December 31, 2007 - $20.9 million).
These payments are expected to begin over the next 3 to 5 years. The
Company used an average credit adjusted risk free rate of 8% to calculate
the present value of the asset retirement obligations.
The following table reconciles the Company's asset retirement
obligations:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
(Thousands of US$) June 30/08 June 30/07 June 30/08 June 30/07
----------------------------------------------------------------------------
Balance, beginning of period $ 21,856 $ 18,739 $20,868 $16,532
Liabilities incurred /
(settled) (184) (118) (184) (147)
Revisions in estimated
timing of cash flows 223 1,314 866 3,237
Accretion expense 408 354 753 667
----------------------------------------------------------------------------
Balance, end of period $22,303 $20,289 $22,303 $20,289
An increase to the present value of the closure cost estimate at the
Boroo mine site of $0.8 million was recorded during the first half of
2008 ($3.2 million -June 30, 2007), following the completion of a
regularly scheduled closure cost update study.
5. Exploration and Business Development
----------------------------------------------------------------------------
(Thousands of US$) Three months ended Six months ended
June 30/08 June 30/07 June 30/08 June 30/07
----------------------------------------------------------------------------
Exploration costs $ 5,139 $ 4,232 $ 10,064 $ 9,552
Business development and
feasibility costs 46 249 55 1,337
----------------------------------------------------------------------------
$ 5,185 $ 4,481 $ 10,119 $ 10,889
6. Corporate Administration
On June 17, 2008, Centerra announced a re-organization of its senior
management team. As a result, corporate administration costs for the
quarter include a $5 million expense as severance payments to the former
CEO and CFO, including the forgiveness of a relocation loan to the former
CEO in the amount of $0.25 million. Partially off-setting this is a
reduction in the stock-based compensation obligation resulting from a
decrease in the share price in the quarter.
7. Unusual Items
Contingent common shares issuable
----------------------------------------------------------------------------
Three months ended Six months ended
(Thousands of US$) Jun 30/08 Jun 30/07 Jun 30/08 Jun 30/07
----------------------------------------------------------------------------
Provision, beginning of period $ 131,262 - $ 126,794 -
Change in value during the
period (42,178) - (37,710) -
----------------------------------------------------------------------------
Provision, end of the period $ 89,084 - $ 89,084 -
----------------------------------------------------------------------------
On August 30, 2007, the Company entered into an agreement (the
"Agreement on New Terms") with the Government of the Kyrgyz Republic,
pursuant to which the parties agreed on revised terms with respect to the
Kumtor Project. The Agreement on New Terms was subject to satisfaction of
certain conditions, including approvals by the Kyrgyz Parliament and
Centerra's board of directors and the completion and signing of
definitive agreements, all on or before June 1, 2008.
The Agreement on New Terms provided that Kumtor would be subject to tax
on proceeds from sold products (gross revenue) rather than on income, at
the rate of 11% in 2008, 12% in 2009 and 13% thereafter. After completion
and signing of definitive agreements, Cameco Corporation ("Cameco") would
transfer 32.3 million shares of the Company to the Kyrgyz Government,
17.3 million of which would be held in escrow to be released within 4
years subject to certain conditions. The Company entered into an
agreement with Cameco pursuant to which the Company was to issue 10
million treasury shares (the "Treasury Shares") to Cameco on completion
and signing of the definitive agreements.
On June 2, 2008 the Company reported that the Agreement on New Terms was
not ratified by the Kyrgyz Parliament within the timeframe agreed by the
parties and therefore expired. As such, the Company has reclassified the
amount recorded as contingent common shares issuable from equity to
long-term liabilities.
The Company believes that if a settlement with the Kyrgyz Government
occurs through ongoing negotiations such a settlement will include the
issuance of Treasury Shares. The ultimate value of the contingently
issuable common shares will be determined based on the company's share
price when the agreement with the Kyrgyz Government is finalized and the
number of shares to be issued is determined. While this amount cannot be
reasonably determined at this time, the Company believes that the share
price on May 30th 2008, the last day of trading prior to the expiry of
the Agreement on New Terms, reflects the minimum amount of a range of
possible values.
8. Shareholders' Equity
a. Share Capital
Centerra is authorised to issue an unlimited number of common shares,
class A non-voting shares and preference shares with no par value.
b. Earnings Per Share
Basic and diluted earnings per share is determined by dividing net
earnings by the basic and diluted weighted-average number of common
shares outstanding respectively during the year.
Three Months Ended
June 30/08 June 30/07
----------------------------------------------------------------------------
Basic weighted average number of common shares
outstanding (thousands) 216,318 216,247
Effect of stock options (thousands) 1,138 535
----------------------------------------------------------------------------
Diluted weighted average number of common shares
outstanding (thousands) 217,456 216,782
----------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.26 $ 0.09
----------------------------------------------------------------------------
Six Months Ended
June 30/08 June 30/07
----------------------------------------------------------------------------
Basic weighted average number of common shares
outstanding (thousands) 216,318 216,243
Effect of stock options (thousands) 1,281 321
----------------------------------------------------------------------------
Diluted weighted average number of common shares
outstanding (thousands) 217,599 216,564
----------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.35 $ 0.11
----------------------------------------------------------------------------
c. Stock-Based Compensation
The impact of Stock-Based Compensation is summarized as follows:
----------------------------------------------------------------------------
(Millions of US$ Expense Expense
except as indicated) Number Three months Six months
outstanding ended ended Liability
June June June June June June Dec
30/08 30/08 30/07 30/08 30/07 30/08 31/07
----------------------------------------------------------------------------
(i) Centerra stock
options 1,828,976 (0.3) - 0.1 (0.4) - 1.2
(ii) Centerra
performance
share units 624,780 (2.6) (0.2) (1.8) (0.1) - 4.0
(ii) Centerra annual
performance share
units 97,405 - 0.3 0.5 0.8 0.2 1.2
(iv) Deferred share
units 195,217 (1.2) 0.1 (1.1) (0.1) 1.0 2.5
(v) Cameco stock
options 64,800 0.5 0.7 0.1 0.8 2.2 2.3
----------------------------------------------------------------------------
(3.6) 0.9 (2.2) 1.0 3.4 11.2
----------------------------------------------------------------------------
Movements in the number of options and units' year-to-date are summarized
as follows:
----------------------------------------------------------------------------
Number Number
outstanding outstanding
Dec 31/07 Issued Exercised Forfeited June 30/08
----------------------------------------------------------------------------
(i) Centerra stock
options 962,028 866,948 - - 1,828,976
(ii) Centerra
performance share
units 595,080 254,114 - (224,414) 624,780
(iii) Centerra
annual performance
share units 122,911 125,704 (136,316) (14,894) 97,405
(iv) Deferred share
units 197,351 9,857 (11,991) - 195,217
(v) Cameco stock
options 73,200 - (8,400) - 64,800
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Centerra Stock Option Issue
During the first half of 2008, Centerra granted 866,948 stock options at
an average strike price of Cdn $8.14 per share. The fair value of the
stock options was determined using the Black-Scholes valuation model,
assuming average 4.27 -year term, 50.80% volatility and a risk-free rate
of return of 3.40%. The resulting average value per option granted was
$2.90. The estimated fair value of the options is expensed over their
respective vesting periods.
The stock options granted during the first half of 2008 partly include
589,403 options issued as a result of the management re-organization in
June 2008.
9. Income Tax Expense
The corporate income tax rate for Boroo for 2008, and subsequent years is
25% for income in excess of 3 billion tugriks (about approximately $2.5
million at current exchange rates), and 10% for income up to that amount.
The corporate income tax rate for Kumtor, as provided in its Investment
Agreement, is 10%. In addition, Kumtor is required to pay 2% of net
income to the Issyk Kul Social Fund. Until any changes to the Kumtor
Investment Agreement are fully implemented Kumtor will continue to record
and pay taxes based on the existing Investment Agreement
10. Commitments and Contingencies
Commitments
As at June 30, 2008, the Company had entered into contracts to purchase
capital equipment and operational supplies totalling $32.8 million
(Kumtor $30.4 million, Boroo $2.4 million): these are expected to be
settled over the next twelve months
Contingencies
Kyrgyz Republic
On June 2, 2008, the Company reported that the previously announced
framework agreements entered into between the Company, Cameco Corporation
and the Government of the Kyrgyz Republic on August 30, 2007 had not been
ratified by the Parliament of the Kyrgyz Republic within the time frame
agreed by the parties and had therefore expired.
In the circumstances and in response to court proceedings described
below, on June 4, 2008, the Company resumed international arbitration
previously initiated by the Company in accordance with its Investment
Agreement, which provides that all disputes with respect to the project
are subject to international arbitration.
As previously disclosed, a Vice-Speaker of the Parliament, K.S. Isabekov,
has filed two lawsuits against the Government of the Kyrgyz Republic
seeking to invalidate the licenses and agreements pursuant to which the
Kumtor mine is operated. Although the Company and its subsidiary Kumtor
Gold Company (KGC), the owner of the project, were not parties to those
lawsuits, and despite their objections to the court's jurisdiction on the
basis of the Investment Agreement's arbitration clause and the on-going
international arbitration, they have since been ordered to appear as
third parties by the Kyrgyz court. The Vice-Speaker's lawsuits seek to
annul: the Government's decree approving the December 31, 2003 agreements
implementing the restructuring of the project; the 2003 agreements giving
effect to the restructuring, including the Investment Agreement and the
Concession Agreement providing for Kumtor's right to explore and develop
the main Kumtor deposit within the Kumtor concession; the exploration
license covering all of the Kumtor deposits; the mining license covering
the Southwest Zone; the mining license covering the Sarytor area; the
Government's decree approving the 1993 Concession Agreement (superceded
by the 2003 Concession Agreement) and the 1993 Concession Agreement
itself. The Vice-Speaker argues that the 2003 agreements and 1993
Concession Agreement required Parliamentary approval to be effective and
that as no such approval was obtained, such agreements are void. He also
argues that the licenses are invalid because they were granted without a
competition having been held and pursuant to agreements that are
themselves invalid for lack of Parliamentary ratification.
As previously reported, on May 12, 2008, the Supreme Court of the Kyrgyz
Republic, pending resolutions of the claims before the lower courts,
issued an order suspending: the 2003 decree; the 2003 Concession
Agreement; and the mining and exploration licenses. Acting on the order,
the State Agency on Geology and Mineral Resources Management notified
Kumtor that as issues relating to the 2003 decree and the Concession
Agreement are regulated by "international legislation", operations within
the concession area as well as work on the underground decline (to
further develop the SB zone) should be continued but that operations on
the licenses should be stopped. In response to the notice, Kumtor halted
activity on the mining and exploration licenses and suspended development
of the Sarytor deposit. All Kumtor mining operations are taking place in
the concession area and continue uninterrupted.
On June 17, 2008, as has previously been reported, the Bishkek Inter
District Court issued an order invalidating the Southwest and Sarytor
mining and Kumtor exploration licenses. The court has not yet ruled on
the validity of the decrees and agreements (including the 2003 Investment
Agreement and Concession Agreement).
Having been joined involuntarily as third parties, KGC and the Company
are now defending the validity of the agreements, licenses and decrees in
the Kyrgyz court actions on procedural and substantive grounds. At the
same time, KGC and the Company are maintaining their position that the
Investment Agreement's arbitration clause confers exclusive jurisdiction
over questions surrounding the validity of the agreements and licensees
on to the international arbitration tribunal.
With respect to the relevant agreements and decrees, the Kyrgyz Ministry
of Justice issued various legal opinions repeatedly affirming that the
Government had the legal capacity to enter into and perform the
agreements.
After reactivating the international arbitration proceedings on June 2,
2008, Centerra and KGC, on June 13, 2008, added claims based on the
Vice-Speaker's lawsuits and their consequences. At the initial conference
on June 23, 2008, Centerra filed an application for interim relief in the
arbitration, requesting that all parties to the arbitration be directed
to maintain the status quo and treat the licenses, agreements and decrees
at issue in the Kyrgyz Republic as valid and enforceable. The Kyrgyz
Republic has taken the position in its response to such application that,
among other things, the 2003 Investment Agreement required but did not
receive Parliamentary approval and therefore is not in effect. A hearing
on the application will be held on September 29, 2008 and a decision from
the tribunal is expected shortly thereafter.
Since February of 2008, Kumtor has been made the subject of several new
tax assessments and other proceedings in the Kyrgyz Republic. These
include an investigation by the Kyrgyz Republic financial police into
alleged tax evasion in relation to the grant of tax exemptions pursuant
to the Investment Agreement governing the Kumtor project and an audit by
the state tax inspectorate to determine the amount of taxes that Kumtor
would have owed for the years 2005 to 2008 had the Investment Agreement
and the Concession Agreement relating to the project not been in effect.
The financial police have requested, and have been provided by Kumtor
with, information and documents relating to the project and have
interviewed senior Kumtor personnel. Kumtor has also received assessments
from tax authorities relating to value-added taxes, land taxes and
customs duties alleged to be owed by Kumtor. Kumtor is cooperating with
the relevant authorities and continues to pay all taxes in accordance
with applicable laws and the Investment Agreement and believes that there
is no basis for these investigations or assessments.
Mongolia
On June 29, 2008 Mongolia held parliamentary elections and a new
government is expected to be formed shortly. Centerra is hopeful
following the formation of the government to resume negotiations with
respect to an investment agreement for the Gatsuurt Project.
In March 2008 an assessment was received from State Inspectors alleging
that further tariffs were owed to the local authority for the use of
material to construct the tailings dam at the Boroo site and that these
amounts were required to be paid immediately in order for the mine to
remain in operation. The assessment was reduced in the second quarter to
approximately $1.5 million which has been provided. Discussions are
continuing.
11. Related Party Transactions
The Company paid and accrued approximately Cdn $237,500 and Cdn $287,800
during the three month and six month period ended June 30, 2008 (Cdn
$103,700 and Cdn $280,000 three month and six month period ended June 30,
2007) to Ms Marina Stephens, a lawyer and the spouse of Centerra's former
President and Chief Executive Officer, Mr Homeniuk. Ms Stephens provided
certain designated legal and business advisory services related to the
Company's international operations under the terms of a consulting
contract, which came to an end on June 16, 2008.
Kyrgyzaltyn and the Government of the Kyrgyz Republic
Revenues from the Kumtor gold mine are subject to a management fee of
$1.50 per ounce based on sales volumes, payable to Kyrgyzaltyn, a
shareholder of the Company.
The table below summarizes 100% of the management fees and concession
payments paid by Kumtor to Kyrgyzaltyn or the Government of the Kyrgyz
Republic and the amounts paid by Kyrgyzaltyn to Kumtor according to the
terms of a Gold and Silver Sales Agreement between Kumtor Operating
Company ("KOC"), Kyrgyzaltyn and the Government of the Kyrgyz Republic.
----------------------------------------------------------------------------
Three Months Ended
(Thousands of US$) June 30/08 June 30/07
----------------------------------------------------------------------------
Management fees to Kyrgyzaltyn $ 173 $ 133
Concession payments to the Kyrgyz Republic 462 356
----------------------------------------------------------------------------
$ 635 $ 489
----------------------------------------------------------------------------
Gross gold and silver sales to Kyrgyzaltyn $ 103,121 $ 59,919
Deduct: refinery and financing charges (530) (348)
----------------------------------------------------------------------------
Net sales revenue received from Kyrgyzaltyn $ 102,591 $ 59,571
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months Ended
(Thousands of US$) June 30/08 June 30/07
----------------------------------------------------------------------------
Management fees to Kyrgyzaltyn $ 274 $ 220
Concession payments to the Kyrgyz Republic 730 587
----------------------------------------------------------------------------
$ 1,004 $ 807
----------------------------------------------------------------------------
Gross gold and silver sales to Kyrgyzaltyn $ 164,955 $ 97,504
Deduct: refinery and financing charges (855) (595)
----------------------------------------------------------------------------
Net sales revenue received from Kyrgyzaltyn $ 164,100 $ 96,909
----------------------------------------------------------------------------
Gold produced by the Kumtor mine is purchased at the mine site by
Kyrgyzaltyn for processing at its refinery in the Kyrgyz Republic
pursuant to the Gold and Silver Sale Agreement entered into between KOC,
Kyrgyzaltyn and the Government of the Kyrgyz Republic. Under these
arrangements, Kyrgyzaltyn is required to prepay for all gold delivered to
it, based on the price of gold on the London Bullion Market on the same
day on which KOC provides notice that a consignment is available for
purchase. Pursuant to an amendment to the Gold and Silver Sale Agreement,
effective from December 22, 2005, as amended from time to time since
then, Kyrgyzaltyn is permitted, until December 31, 2008, to defer
payments for gold for up to 12 calendar days.
Kyrgyzaltyn is required to pay interest on deferred amounts equal to
one-half LIBOR plus 0.125% .
The obligations of Kyrgyzaltyn are secured by a pledge of a portion of
the Centerra shares owned by Kyrgyzaltyn. As at June 30, 2008, $19.7
million was outstanding under these arrangements (December 31, 2007 -
$14.1 million). On August 30, 2007, the Company entered into an agreement
with the Government of the Kyrgyz Republic, pursuant to which the parties
have agreed on revised terms with respect to the Kumtor Project.
Provisions and conditions of this agreement, including the requirement
for further ratification by the Kyrgyz Parliament are further described
in note 7.
12. Fair Value of Financial Instruments
The Company has various financial instruments comprising of cash and cash
equivalents, receivables, a Reclamation trust fund, accounts payable and
accrued liabilities and short-term debts.
Cash and cash equivalents consists of cash on hand, with financial
institutions, invested in term deposits, treasury bills, banker's
acceptances, government agency issues , and corporate direct credit with
original maturities of three months or less. Cash and cash equivalents
are designated as held-for-trading and are carried at fair value.
Fair values of the cash equivalents are determined directly by reference
to published price quotations in an active market at the reporting date.
The fair value of amount receivables is determined by the amount of cash
anticipated to be produced in the normal course of business from the
financial asset, net of any direct costs of the conversion into cash.
The carrying values of these financial instruments are as follows:
----------------------------------------------------------------------------
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
(Thousands of US$) fair value value fair value value
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Assets
Cash and cash
equivalents $ 107,983 $ 107,983 $ 105,482 $ 105,482
Accounts receivable 28,865 28,865 18,021 18,021
Reclamation trust fund 4,953 4,953 4,853 4,853
----------------------------------------------------------------------------
$ 141,801 $ 141,801 $ 128,356 $ 128,356
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
(Thousands of US$) fair value value fair value value
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Liabilities
Accounts payable and
accrued liabilities
and taxes $ 46,165 $ 46,165 $ 42,482 $ 42,482
Short-term debt 10,000 10,000 10,000 10,000
Contingent common
shares issuable 89,084 89,084 - -
----------------------------------------------------------------------------
$ 145,249 $ 145,249 $ 52,482 $ 52,482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Financial Risk Exposure and Risk Management
The Company is exposed in varying degrees to a variety of financial
instrument related risks by virtue of its activities. The overall
financial risk management program focuses on preservation of capital, and
protecting current and future Company assets and cash flows by reducing
exposure to risks posed by the uncertainties and volatilities of
financial markets.
The Board of Directors has responsibility to ensure that an adequate
financial risk management policy is established and to approve the
policy. Financial risk management is carried out by the Treasury
department under a policy approved by the Board of Directors. The
Treasury department identifies and evaluates financial risks, establishes
controls and procedures to ensure financial risks are mitigated in
accordance with the approved policy and programs, and risk management
activities comply thereto.
The Company's Audit Committee oversees management's compliance with the
Company's financial risk management policy, approves financial risk
management programs, and receives and reviews reports on management
compliance with the policy and programs. The Internal Audit department
assists the Audit Committee in undertaking its oversight of financial
risk management controls and procedures, the results of which are
reported to the Audit Committee.
The types of risk exposure and the way in which such exposures are
managed are as follows:
i) Currency Risk
As the Company operates in an international environment, some of the
Company's financial instruments and transactions are denominated in
currencies other than the United States Dollar.The results of the
Company's operations are subject to currency transaction risk and
currency translation risk. The operating results and financial position
of the Company are reported in US dollars in the Company's consolidated
financial statements.
The fluctuation of the US dollar in relation to other currencies will
consequently have an impact upon the profitability of the Company and may
also affect the value of the Company's assets and the amount of
shareholders' equity.
As required, the Company either enters into short-term forward contracts
to purchase Canadian dollars or make purchases at the prevailing spot
price to fund corporate activities. During the three months and six
months ended June 30, 2008, $1.5 million and $3.0 million of such forward
contracts were executed (Nil- Three months and six months ended June 30,
2007). There were no outstanding forward contracts at June 30, 2008 (Nil
- June 30, 2007).
The exposure of the Company's financial assets and liabilities to
currency risk as at June 30, 2008 are as follows:
----------------------------------------------------------------------------
Kyrgyz Mongolian Canadian Australia European
(Thousands of US$) Som Tugrik Dollar Dollar Euro
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents $ 283 $ 176 $ 1,232 $ - $ 65
Accounts receivables 113 2,717 241 - -
----------------------------------------------------------------------------
$ 396 $ 2,893 $ 1,473 $ - $ 65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Liabilities
Accounts payable and
accrued liabilities $ 6,198 $ 3,686 $ 4,824 $ 1,301 $ 7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ii) Interest Rate Risk
Interest rate risk is the risk borne by an interest-bearing asset or
liability as a result of fluctuations in interest rates.
Financial assets and financial liabilities with variable interest rates
expose the Company to cash flow interest rate risk. The Company's cash
and cash equivalents include highly liquid investments that earn interest
at market rates. In addition, the interest on a fully-drawn revolving
credit facility of $10 million includes a variable rate component pegged
to the London Interbank Offered Rate, or LIBOR.
The Company manages its interest rate risk by endeavouring to maximize
the interest income earned on excess funds while maintaining the
liquidity necessary to conduct operations on a day-to-day basis. The
Company's policy focuses on preservation of capital and limits the
investing of excess funds to liquid government and corporate bonds having
a single "A" rating or greater.
Fluctuations in market interest rates have not had a significant impact
on the Company's results of operations due to the short-term to maturity
of the investments held and the low U.S. interest rate environment has
resulted in lower interest payable on the $10 million facility.
iii) Concentration of Credit Risk
Credit risk is the risk of a financial loss to the Company if a gold
sales customer or counterparty to a financial instrument fails to meet
its contractual obligation. Credit risk arises principally from the
Company's receivables from customers and short-term investments.
The Company's exposure to credit risk, in respect of gold sales, is
influenced mainly by the individual characteristics of each customer. The
Company's revenues are directly attributable to sales transactions with
two customers. To mitigate the risk at Kumtor, the Company has an
agreement in place whereby Kyrgyzaltyn, the customer and a shareholder of
Centerra, has pledged a certain amount of Centerra shares as security
against a gold shipment, in the event of default on payment (Note 10).
Boroo sells its product under a refining agreement, and the value of
individual gold shipments is covered by third-party insurance as well as
contingent insurance in the event a loss of product occurs before Boroo
can receive payment therefore.
The Company manages credit risk, in respect of short-term investments, by
maintaining bank accounts with Schedule 1 banks and investing only in
highly- rated Canadian and US Governments bills and bonds, term deposits
or banker's acceptances with highly-rated financial institutions, and
government agency instruments and corporate bond issues that can be
promptly liquidated. The Company monitors exposure to credit risk on an
ongoing basis in accordance with its Financial Risk Management Policy. At
the balance sheet date there was no significant concentration of credit
risk in respect of short-term investments. The maximum exposure to credit
risk is represented by the carrying amount of each financial asset in the
balance sheet except for those assets for which the Company, through its
Kumtor subsidiary, has collateral in respect of amounts receivable for
gold sales.
iv) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due.
The Company manages its liquidity risk by ensuring that there is
sufficient capital to meet short and long term business requirements,
after taking into account cash flows from operations and the Company's
holdings of cash and cash equivalents. The Company believes that these
sources will be sufficient to cover the likely short and long term cash
requirements. Senior management is also actively involved in the review
and approval of planned expenditures by regularly monitoring cash flows
from operations and anticipated investing and financing activities.
The Company's cash and equivalents are invested in various instruments
including term deposits, banker's acceptances, government bills and bonds
and government agency issues and corporate direct credit. The Company's
financial risk management policy prohibits investment in asset-backed
commercial paper.
v) Commodity Price Risk
The value of the Company's mineral resource properties is related to the
price of gold, and the outlook for these minerals. In addition, adverse
changes in the price of certain raw materials can significantly impair
the Company's cash flows. The Company's Financial Risk Management Policy
currently prohibits gold hedging.
Gold prices historically have fluctuated widely and are affected by
numerous factors outside of the Company's control, including, but not
limited to, industrial and retail demand, central bank lending, forward
sales by producers and speculators, levels of worldwide production,
short-term changes in supply and demand because of speculative hedging
activities, and macro-economic variables, and certain other factors
related specifically to gold.
The profitability of the Company's operations is highly correlated to the
market price of gold. To the extent that the price of gold increases over
time, asset value increases and cash flows improve; conversely, declines
in the price of gold directly impact value and cash flows. A protracted
period of depressed prices could impair the Company's operations and
development opportunities, and significantly erode shareholder value.
At the balance sheet date there was no significant impact of commodity
price risk on the Company's financial statements.
14. Capital Management
The Company's capital includes cash and cash equivalents, short-term
debt, long-term debt and equity, comprising issued common shares,
contributed surplus and retained earnings.
The Company's primary objective with respect to its capital management is
to ensure that it has sufficient cash resources to maintain its ongoing
operations, to provide returns for shareholders and benefits for other
stakeholders and to pursue growth opportunities. To secure additional
capital to pursue these plans, the Company may attempt to raise
additional funds through borrowing and/or the issuance of equity, debt or
by securing strategic partners.
As at June 30, 2008, the Company is not subject to externally imposed
capital requirements and there has been no change with respect to the
overall capital risk management strategy.
15. Comparative Information
Certain prior year balances have been reclassified to conform to the
current presentation.
16. Segmented Information
Centerra has three reportable segments. The Kyrgyz Republic segment
involves the operations of the Kumtor Gold Project and local exploration
and development activities, and the Mongolian segment involves the
operations of the Boroo Gold Project, development of the Gatsuurt Project
and local exploration activities. The North American segment involves the
head office located in Toronto, loans to each of the mine operations, as
well as exploration activities on North American projects.
Geographic Segmentation of Revenue
All production from the Kumtor Gold Project was sold to the Kyrgyzaltyn
refinery in the Kyrgyz Republic while production from the Boroo Gold
Project was sold to a refinery that is located in Ontario, Canada.
Three months ended June 30, 2008
----------------------------------------------------------------------------
($ millions) Kyrgyz North
Republic Mongolia America Total
----------------------------------------------------------------------------
Revenue $ 102.6 $ 39.9 $ - $ 142.5
Expenses
Cost of sales 74.4 10.4 - 84.8
Regional office administration 4.9 2.5 - 7.4
Depreciation, depletion and
amortization 13.0 3.8 0.2 17.0
Accretion and reclamation expense 0.3 0.1 - 0.4
Exploration and business development 3.7 0.6 0.9 5.2
Interest and other 2.7 (1.3) (1.2) 0.2
Corporate administration 0.7 0.5 6.3 7.5
----------------------------------------------------------------------------
Earnings (loss) before unusual
items, income taxes and
Non-controlling interest 2.9 23.3 (6.2) 20.0
Unusual Items (42.2)
----------------------------------------------------------------------------
Earnings before income taxes and
Non-controlling interest 62.2
Income tax expense 6.2
----------------------------------------------------------------------------
Net earnings and
comprehensive income $ 56.0
----------------------------------------------------------------------------
Capital expenditures for the quarter $ 10.9 $ 11.1 $ 0.1 $ 22.1
----------------------------------------------------------------------------
Three months ended June 30, 2007
----------------------------------------------------------------------------
($ millions) Kyrgyz North
Republic Mongolia America Total
----------------------------------------------------------------------------
Revenue $ 59.6 $ 44.1 $ - $ 103.7
Expenses
Cost of sales 41.1 6.8 - 47.9
Regional office administration 4.5 2.9 - 7.4
Depreciation, depletion and
amortization 7.4 4.1 0.2 11.7
Accretion and reclamation expense 0.3 0.4 - 0.7
Exploration and business development 2.8 0.3 1.4 4.5
Interest and other 0.4 (1.8) (0.9) (2.3)
Corporate administration 0.6 0.6 4.8 6.0
----------------------------------------------------------------------------
Earnings (loss) before unusual
items, income taxes and Non-
controlling interest 2.5 30.8 (5.5) 27.8
Unusual Items - - - -
----------------------------------------------------------------------------
Earnings before income taxes and
Non-controlling interest
Income tax expense 8.2
Non-controlling interest 0.9
----------------------------------------------------------------------------
Net earnings and comprehensive
income $ 18.6
----------------------------------------------------------------------------
Capital expenditures for the quarter $ 20.5 $ 10.3 $ - $ 30.8
----------------------------------------------------------------------------
Six months ended June 30, 2008
----------------------------------------------------------------------------
($ millions) Kyrgyz North
Republic Mongolia America Total
----------------------------------------------------------------------------
Revenue $ 164.1 $ 91.1 $ - $ 255.2
Expenses
Cost of sales 108.5 26.8 - 135.3
Regional office administration 9.9 4.7 - 14.6
Depreciation, depletion and
amortization 19.4 7.7 0.4 27.5
Accretion and reclamation expense 0.5 0.3 - 0.8
Exploration and business
development 7.0 1.0 2.1 10.1
Interest and other 4.8 (2.1) (2.2) 0.5
Corporate administration 1.3 1.1 11.5 13.9
----------------------------------------------------------------------------
Earnings (loss) before unusual
items, income taxes and
Non-controlling interest 12.7 51.6 (11.8) 52.5
Unusual Items (37.7)
----------------------------------------------------------------------------
Earnings before income taxes and
Non-controlling interest 90.2
Income tax expense 15.0
----------------------------------------------------------------------------Net
earnings and comprehensive
income $ 75.2
----------------------------------------------------------------------------
Capital expenditures for the quarter $ 18.5 $ 19.1 $ 0.3 $ 37.9
----------------------------------------------------------------------------
Six months ended June 30, 2007
----------------------------------------------------------------------------
($ millions) Kyrgyz North
Republic Mongolia America Total
----------------------------------------------------------------------------
Revenue $ 96.8 $ 89.2 $ - $ 186.0
Expenses
Cost of sales 76.5 17.2 - 93.7
Regional office administration 8.0 5.0 - 13.0
Depreciation, depletion and
amortization 12.9 8.1 0.4 21.4
Accretion and reclamation expense 0.5 0.7 - 1.2
Exploration and business
development 6.7 0.8 3.4 10.9
Interest and other 0.9 (2.9) (2.1) (4.1)
Corporate administration 1.3 1.0 8.0 10.3
----------------------------------------------------------------------------
Earnings (loss) before unusual
items, income taxes and
Non-controlling interest (10.0) 59.3 (9.7) 39.6
Unusual Items - - - -
----------------------------------------------------------------------------
Earnings before income taxes and
Non-controlling interest
Income tax expense 12.7
Non-controlling interest 2.3
----------------------------------------------------------------------------
Net earnings and comprehensive
income $ 24.6
----------------------------------------------------------------------------
Capital expenditures for the quarter $ 46.0 $ 17.8 $ - $ 63.8
----------------------------------------------------------------------------
Contacts:
Centerra Gold Inc.
John W. Pearson
Director Investor Relations
(416) 204-1241
Email: john.pearson@centerragold.com
Website: www.centerragold.com
Copyright 2008, Market Wire, All rights reserved.
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