......habe einen grossartigen Artikel in Stockhouse gesichtet. Ich denke, dass es viele finstere Gesichter geben wird und feuchte Haende....
The Stans Energy Ruling Could Affect Centerra Gold Jul. 25, 2014 8:19 AM ET | About: Centerra Gold Inc. (CAGDF) Subscribers to SA PRO had an early look at this article. Learn more about PRO » Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...) Summary
Centerra Gold operates the Kumtor mine in Kyrgyzstan. Operations have been hindered by various manifestations of country risk. A recent ruling on an un-related expropriation case might derail ongoing efforts to resolve the relationship with the Kyrgyz government. (Editor's Note: Investors should be mindful of the risks of transacting in illiquid securities such as CAGDF. Centerra's listing in Toronto, CG.TO, offers stronger liquidity.)
Centerra Gold (OTCPK:CAGDF) has succeeded where others have failed: this company is operating a gold mine in Kyrgyzstan. The history of this operation has been riddled with twists and turns, and expropriation has been a threat since operations started in 1997, and Centerra acquired a controlling interest of this asset from Cameco (NYSE:CCJ) in 2009; but so far Centerra Gold has managed to negotiate a way through the shifting sands of politics in this Central Asian country.
The latest chapter in this saga involves claims of environmental liabilities and socio-economical issues. Extrapolating from history we would assume that Centerra Gold will somehow succeed in finalizing the compromise outlined in a non-binding heads of agreement, or HOA, signed late in 2013 between the company and the Kyrgyz government. However, external factors have arisen that might represent a serious obstacle rendering the awkward compromise outlined in this HOA impossible.
In this article we would like to provide a brief overview of Centerra Gold and its assets, summarize the current stand-off between the company and the Kyrgyz government and explain the external factors that have come up alluded to above.
Kyrgyzstan
On paper Kyrgyzstan is a democracy, but the country has seen its fair share of colored revolutions and uprisings since it attained independence after the fall of the Soviet Union in 1991. Rampant corruption and changing political alliances make it hard to strike lasting agreements and Kyrgyzstan is widely considered to be a country of extreme country risk for foreign investors.
Transparency International considers Kyrgyzstan as one of the most corrupt countries. The country is ranked 150th out of 177 in the Corruption Perceptions Index. In terms of Judicial Independence the country ranks 135th out of 142.
The latest Survey of Mining Companies by the Canadian Fraser Institute ranks Kyrgyzstan 112th in its Policy Perception Index, or PPI, of mining jurisdictions. And that's out of 112 entries. The PPI combines ratings of various mining-related topics into one overall ranking, and Kyrgyzstan brings up the rear in many of the topical sub-rankings including "Legal System", "Socioeconomic agreements" and "Political Stability".
This Asian country is potentially extremely mineral-rich, but notorious in creating conditions that make it near-impossible for Western companies to explore for or develop mines. If any recent proof of this claim is required then we point to Kentor Gold (OTC:KGOLF) walking away from its promising Andash project; or to the years of effort Manas Resources (ASX:MSR) have already put into pursuing a mining permit for its Shambesai gold project. Or consider the sorry case of Stans Energy (OTCQX:HREEF) who has lost its rare earth project to expropriation (but more on that story later).
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Centerra Gold - A Summary
Centerra Gold has interests in a number of development projects spread throughout a number of countries including Mongolia, Turkey and Russia. However, the flagship asset which also determines this company's value is the Kumtor mine in Kyrgyzstan.
The Kumtor mine is one of the largest gold mines in Central Asia producing 600,000 ounces of gold in 2013 at all-in sustaining costs of $818/oz. Reserves of 8.5M ounces indicate a mine life of at least 14 years, probably more if resources can be converted.
This mine is situated in an environmentally precarious location next to a glacier as can be seen in the picture above taken from the gallery on the company's website. Proposed future expansions would require removal of further large portions of this glacier and this has attracted considerable criticism from environmental organizations. A new glacier law has passed parliament in April pertaining to the impact of mines on glaciers in general, and of course to the Kumtor mine in particular. The company believes that the original agreement with Kyrgyz authorities trumps any new laws, but further conflict on this topic seems guaranteed.
Centerra Gold has remained mostly profitable throughout the correction in gold price in recent years, with the exception of a couple of quarters in 2013. The company has been paying a meaningful dividend since 2010 yielding 2.6% based on the share price of $5.82 at the time of writing. Among other benefits a large portion of this dividend goes to the Kyrgyz government since the country owns 32.7% of the company's share (again, more on that later).
At the end of March this year the company reported $512M in cash equivalents and only $76M in debt. Working capital of $761M and a current ratio of 7.6 are further indicators of an exceedingly healthy balance sheet. Centerra Gold has a market capitalization of $1.4B and an enterprise value of $928M.
In terms of valuation investors have been extremely cautious, almost certainly due to the ever-present manifestations of high country risk. Using data courtesy of RBC Capital Markets we note a EV/NAV ratio of 0.3, less than half of any peer we know of; and an estimated price to cash flow multiple per share of less than 2, again less than half of peers.
The Latest Stand-Off
Centerra Gold had been facing an escalating series of obstacles throughout 2013 including claims of environmental damages by Kyrgyz authorities and road blockages near the mine which actually led to a suspension of operations for a short period of time at the end of May.
While it is conceivable that there are serious environmental and social issues with regards to the Kumtor mine, one cannot help but suspect that most incidents and claims were at least partly orchestrated in order to put pressure on Centerra Gold to re-negotiate the original mining agreement with the government.
After months of negotiations the mentioned HOA was passed in the Kyrgyz parliament in February. However, this parliament collapsed shortly thereafter and a new government was sworn in by April - promptly calling the HOA into question and inventing the abovementioned new glacier law; and blocking the annual mine plan approval until the last minute. It is presently still unknown if the new Kyrgyz powers that be will finally agree to the HOA.
In any case: here is the summary of the HOA, taken straight from the latest company presentation:
These provisions represent significant concessions by Centerra Gold, and will transfer value from shareholders to the Kyrgyz government. It would be reasonable to expect a more stable future working relationship in exchange, and we presume that this is the intention behind this proposal. A more stable working relationship will presumably lead to a higher market valuation of the Kumtor mine, and a better outcome for all stakeholders, or so one could be led to believe.
The ongoing posturing by the new government might be aimed at achieving an even better outcome, or it might be plain face saving. In any case one cannot be blamed for observing that genuine environmental concerns would be best addressed in the structure outlined in the HOA which would give Kyrgyz representatives an equal stake to Centerra in the JV running the mine.
Potential Spanner in the Works
Time might be working against the HOA ever materializing, however. We mentioned Stans Energy earlier in this article, and Centerra Gold investors are well advised to observe events with regards to this small rare earth explorer whose flagship asset happened to be located in Kyrgyzstan also, and which was expropriated some time ago. On July 2 a final decision by an international court of arbitration awarded Stans Energy $118M to be paid by the Kyrgyz government. Stans Energy promptly invoiced its former host country.
Despite what might be originating from Kyrgyz officials in response, and what might be written by commenters on the world wide web, this ruling is final and cannot be appealed. Kyrgyzstan might not accept this fact, but others do; most notably Western courts including courts in Ontario. In the likely event of payment not eventuating from Kyrgyzstan the easiest course of action for Stans Energy would be to seize assets outside of Kyrgyzstan. And the country's 32.7% stake in Centerra Gold would be just that since it is listed on the Toronto Stock Exchange.
Stans Energy might well decide to choose this path in the near future, but it will have to concede first place in the queue to a Turkish company called Sistem who are holding out a hand for $8.5M for comparable reasons. For this purpose dividend payments have already been withheld and placed in a trust.
At today's share price Stans Energy would be entitled to 13% of Centerra Gold's equity, reducing the stake held by the Kyrgyz government to 19.7%. And such a reduction would most likely render the HOA obsolete leading to more turbulent times ahead for Centerra Gold, and its share holders.
A smaller equity stake by the Kyrgyz government would logically lead to a smaller stake in the proposed JV, a shift that would certainly be unacceptable for the new government. A return to frustrating brinkmanship, obstruction and threats of expropriation would be a likely outcome in our opinion, not a desirable development for investors at all.
Takeaway and Investment Thesis
The described ruling might lead to Stans Energy taking possession of a portion of the current stake in Centerra Gold held by the Kyrgyz government. Such a move would significantly change the power balance between Centerra Gold and Kyrgyzstan in the running of the Kumtor mine. The reaction of Kyrgyz officials to such a development is difficult to predict, but will hardly be favorable for Centerra shareholders.
Country risk is much too high for your humble scribe to consider a position in Centerra Gold. But even for investors less concerned with country risk we note that the company is facing a potential escalation. We recommend monitoring Stans Energy's moves closely and act appropriately should Stans Energy decide to have a go at the Kyrgyz equity stake before a decision on the HOA has been reached. |