Market Overview

Centerra Gold's CEO Talks Gold, Mining Outlook in 2012

After Friday's Centerra Gold (TSX: CG) Q4 2011 earnings release, President and CEO Stephen Lang spoke with Benzinga on forward outlook, the price of gold, and company guidance.

Centerra Gold reported Q4 2011 earnings of $79.4 million or $0.34 per common share on revenues of $248 million, compared to earnings of $150.8 million or $0.64 per common share of revenues of $322.3 million in Q4 2010. Lower gold sales in the period were cited as a reason.

Highlights of the release include a $1 billion revenue milestone achievement in 2011 and 8.1 million ounces of contained gold in proven and provable gold reserves for the company.

Centerra Gold expects 2012 consolidated gold production in the range of 635,000 to 685,000 ounces, relatively flat to 2011 production numbers of 642,380 ounces in 2011 and 674,941 ounces in 2010. The company expects cash costs of $465-$500 per ounce in 2012, compared to 2011 cash costs of $502 per ounce and $440 per ounce in 2010.

"We tend to be fairly conservative in our own outlook," Lang said to Benzinga. "One thing we've done [in the] last two years on guidance, we've moved any permitting risk from production estimation. We clearly have the opportunity in Mongolia if we can get the final permits, bringing the Gatsuurt project online."

Centerra Gold has two operational mines, the Kumtor mine in Central Asia, and the Boroo mine in Mongolia. The company's Gatsuurt mine preparation is complete and as aforementioned once approval is received it will commence mining operations.

"Most of what is needed at Gatsuurt into production is already built and in place," Lang said. "After about three years of operation it's another $80 million to handle different types of ore."

The rising price of gold has been kind to Centerra Gold.

"I think on the short term, it is certainly the price of gold," Lang said. "I think if we go a little further into next year first [with permits] in Mongolia, we have another project there that is looking to get into operation that should give us a very quick burst of growth with no real added capital."

Where does Lang see the price of gold going, in terms of currencies and trading weakness in currency pairs?

"I don't know that I would call gold a 'safe haven,'" Lang said, "but the fact that you have so many currencies that look extremely weak and bounce against each other. . . The price of gold may in fact dip from that, but longer term [currencies look] weak compared to the hard commodities."

In regards to current and future exploration opportunities for Centerra Gold, Lang said to Benzinga that the company may move its focus into Asia if opportunities are of value.

"Couple of different levels – [regarding] exploration opportunities with other companies as joint ventures, I think we entered four additional agreements last year including our first in China; one in Russia, one in Turkey, [and] one in the U.S.," Lang said. "I think we're moving more of our focus away from the U.S. and into Asia.

"We continue to look," Lang said, "We wouldn't rule it out, [but] sometimes the opportunities don't look all that attractive compared to what we already have."

The Oksut project in Turkey, Centerra Gold's joint venture with Stratex International, was cited by Lang as promise not highlighted heavily by media.

"The drill results are very interesting," Lang said, pointing to the project's pure grade gold findings.

"Just as a pure grade, two grams is a very attractive grade right now," Lang said. "[You] see a lot of projects built at or below one. . . [We] have a number of holes, 200 meters, [with ~two gram gold] starting at the surface. This is a good run of highly oxidized material, very amenable."

Recent analyst recommendations for Centerra Gold range, but both appear to have a positive spin on company outlook.

In a research note from February 13, BMO Capital Markets states that, "The company has consistently demonstrated successful containment of capital and operating cost pressures, leaving it poised to benefit from solid margins and free cash flow through 2012. Aggressive exploration programs target advancing organic growth prospects while a strengthening balance sheet may allow for consideration of other opportunities or increased dividends."

Bank of America Merrill Lynch has an Underperform rating on Centerra Gold, but appears optimistic for 2012 stating in a research report published February 24 that, "We consider 2012 to be a year of transition for Centerra as it ramps up capital spending at Kumtor to develop future sources of higher grade production both in the open pit and underground."

Investors may also be wary of Centerra Gold's Kumtor mine strike, a ten-day ordeal stemming from the company's "refusal to pay" Turkey's social fund, similar to the U.S.' Social Security program. Workers also reportedly demanded compensation for the family of a miner who died in a workplace accident. The strike, called "illegal" by Centerra Gold, ended in the workers' favor with an approximate cost settlement of $4 million.

Gold is definitely a point of contention in 2012's market, with famous faces on both sides of the spectrum. Warren Buffett, in his annual letter to shareholders, warned investors against investing in gold and bonds, stating that "if you own one ounce of gold for an eternity, you will still own one ounce at its end."

In the letter, Buffett also warned against investing with one's fear, and that the commodity's "bandwagon" investors may create a bubble with the metal.

Regardless of a potential bubble, mining ETFs and collectively, the mining stocks, have underperformed the price of gold. A trader could look to the SPDR Gold Trust (NYSE: GLD) as an option.

Centerra Gold was trading at $20.55 at the time of posting, down 4.11% from Friday's market close. Shares of Centerra Gold are up 14.39% year-to-date and up 11.66% in the past year.


ACTION ITEMS:

Bullish:
Traders who believe that Warren Buffett may be overstating gold's risks might want to consider the following trades:
  • Centerra's chart has experienced upward movement for over a decade and a position may prove profitable.
  • Stateside, gold companies such as Aurizon Mines (NYSE: AZK), Richmont Mines (NYSE: RIC), and NovaGold Resources (NYSE: NG) may be worth a look.
  • The Market Vectors Gold Miners (NYSE: GDX) and the SPDR Gold Trust could both increase in price if Buffett is wrong.
Bearish:
Traders wishing to avoid this potential bubble may consider alternative positions:
  • The PowerShares DB Gold Double Short ETN (NYSE: DZZ) could offer significant upside.
  • A potential hedge against weakness in gold could be the U.S. Dollar. A trader may look to the PowerShares DB US Dollar Index Bullish (NYSE: UUP).
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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