Centerra Gold Stock: Kumtor drama nears favorable conclusion (NYSE: CGAU)
In September, I wrote an article that summarized the evolution of the dispute between Centerra Gold (NYSE: CGAU) and the Kyrgyz government, when the government technically nationalized the mine. But even without the Kumtor mine, Centerra Gold with its Canadian subsidiary and Turkish assets and a huge pile of cash were dumped. Several months passed, the share price did not move much, but the situation regarding the Kumtor mine was developing positively, with many rumors of advanced negotiations between the company and representatives of the Kyrgyz government. Accordingly, I introduced Centerra as “December”idea of the month“for members of the”Royalty and Streaming Corner“. The positive results of the negotiations were later confirmed by both parties, which helped drive Centerra’s share price up nearly 40%. However, recent weakness in the stock market and gold , along with some issues with Centerra’s Turkish operations, have pushed the stock price back to where it was a year ago. site and the recently acquired Goldfield District project, Centerra offers significant short- and long-term benefits.
To summarize the main points. On May 16, 2021, the Kyrgyz parliament has instructed the government to install external management at the Kumtor mine. This technically meant that the mine was nationalized. Centerra immediately initiated arbitration against the Kyrgyz government and restrictions were imposed on the 26% stake in Centerra held by a Kyrgyz-controlled company named Kyrgzaltyn. Both parties subsequently initiated legal proceedings against each other and their representatives.
But the drama is coming to an end. On July 25, a special meeting of Centerra shareholders will be held. Shareholders are expected to approve the dispute resolution proposal therein. The management information circular containing details of the resolution can be found here. But to sum up:
- Kyrgyzaltyn will transfer its 26% stake in Centerra to Centerra for cancellation.
- Kyrgyzaltyn will receive a 100% stake in Kumtor Gold Company and Kumtor Operating Company, acquiring 100% control of the Kumtor mine, plus a cash payment of C$46 million
- Centerra will pay $50 million to Kumtor Gold Company
- Kumtor reclamation trust funds will be transferred to a Kyrgyzstan-based reclamation account held by Kumtor Gold Company
- Kyrgyzaltyn and the Kyrgyz Republic will assume all responsibility for the Kumtor mine, including all reclamation and environmental obligations
- All legal proceedings involving both parties in all jurisdictions will be terminated, without any admission of liability
So the main outcome for Centerra is that it will cut its ties with Kumtor, Kyrgyzaltyn and the Kyrgyz government, it will get rid of all past, current and future liabilities for the mine, it will pay almost $90 million, and in an exchange for all this, his number of shares will be reduced by 26%. Of course, under normal circumstances, retaining the stake in the Kumtor mine and collecting the cash flow generated by this world-class asset would have been the best outcome. However, given the situation, the deal looks good for Centerra and its shareholders. The most important point is that Centerra is about to get rid of the Kyrgyz burden that has weighed on the company for years. This should pave the way for higher valuation multiples.
The problems in Turkey
Another issue that has plagued Centerra lately is mercury at Turkey’s Oksut mine. On March 18, Centerra announced that it had temporarily suspended gold ore production at Oksut because mercury was detected in the gold room of the adsorption-desorption recovery plant. Fortunately, although dore production was stopped, mining activities, ore processing and concentrate production continued. During the first quarter earnings call, the CEO mentioned that Centerra was working on upgrading the recovery plant, while considering processing gold to carbon concentrate at some third-party facilities as a short-term solution. term. However, no further information has been provided since the May 4 conference call.
In this case, the worst-case scenario is that Centerra will have to sell its gold in concentrate form, which would mean lower revenue per ounce sold, or leave it to be processed at a third-party facility, which would mean higher production. costs. Fortunately, in both cases, the impact on the profitability of the Oksut mine should be relatively small. However, it seems likely that the majority (if not all) of Oksut Q2 production will be counted as increased inventory. As a result, the second quarter financial results may look quite gloomy. On the other hand, the production not realized in Q2 will boost the financial results of the following quarters. Just a reminder, mine Oksut is expected produce 210,000 to 240,000 toz of gold this year.
The acquisition of the Goldfield district
Another important event that has happened in the last few months is that of Centerra acquisition of the Goldfield District project. Centerra has agreed to pay $175 million, plus milestone payments of $31.5 million for the shovel-ready Nevadan project. The location of the project in a safe and mining-friendly jurisdiction is an important factor that should further diminish the jurisdictional risks traditionally associated with Centerra.
The Goldfield District project contains three known deposits, Gemfield, McMahon Ridge and Goldfield Main, and numerous exploration targets. Unfortunately, Centerra did not provide more detailed information regarding the resources or the intended form of the proposed mining. Centerra only said it identified many similarities with Oksut, not only the proposed mining process for Goldfield, but also the expected capital intensity and future production costs.
Only Maverix Metals (MMX) Web page states that Goldfield (Maverix lists the project under its original name Gemfield) should produce around 125,000 toz of gold per year. Maverix provides this information because it holds a 5% NSR royalty on the project.
Unfortunately, for some more precise numbers we will have to wait another year. Centerra expects to release a new resource estimate in the first half of 2023, followed by an updated feasibility study. Construction could begin in mid-2024, with production starting in late 2026.
Since early May, Centerra’s share price has fallen nearly 35%. Last week, the stock price tested the long-term support at the $6.6 area. For now, it held. However, the downtrend line also held. In the next few days, either the support or the resistance should be broken. If the stock price breaks the resistance, the next should be in the $8.5 and after that in the $10.5 area.
Centerra’s market capitalization is $2.12 billion. At the end of the first quarter, Centerra held cash of $768 million and had no debt. This leads to an enterprise value of $1.35 billion. The pro forma market capitalization which takes into account the cancellation of shares currently held by Kyrgyzaltyn is $1.57 billion. As part of the deal, Centerra will pay approximately $86 million, therefore the pro forma enterprise value is approximately $887 million. This is a very low price paid for a company with two operating gold mines (Mount Milligan and Oksut) which are expected to produce 380,000-430,000 toz of gold and 90-100 million pounds of copper this year, at an AISC of only $450-500/toz of gold. on a by-product basis. At the current price of gold, cash flow from operations is expected to exceed the $500 million level (assuming Centerra succeeds in selling all gold produced to Oksut, whether as gold or concentrate) ). This leads to a pro forma operating cash flow of just 3.1, which is well below the current industry median of 7.64. Additionally, Centerra also owns the Kemess Project, the Goldfield District Project and the idle molybdenum operations.
That means there’s a good chance Centerra’s stock price will double over the next few months (assuming there’s no major stock market or gold crash). And longer term, the upside is even bigger, depending on the progress of Goldfield, and potentially also Kemess and molybdenum assets.