Raising the forecast for operating indicators for 2019. The Company updated its gold production forecast for the Kyrgyz Kumtor deposit, where the Company plans to produce 550-575 koz of gold (+2%). Overall, Centerra Gold plans to produce 705-750 koz of gold (+ 2%) at Kumtor and the canadian mine Mount Milligan. We note that for 1H2019 Centerra Gold produced 383 koz of gold (+ 47% y/y), of which 301 koz (+ 64% y/y) were produced at Kumtor and 82 koz (+ 8% y/y) at Mount Milligan. Also at the last 14.4 ktons of copper were produced (+ 41% y/y). The increase in gold production at Kumtor was due to the processing of ore with higher levels of grade and recovery. The growth in Mount Milligan's operating indicators is associated with an increase in the throughput capacity of the processing plant to 55 ktons of ore per day in 2Q2019 due to the spring floods. According to the results of 6M2019, the Company generated revenue of USD 674.5mn (+ 41% y/y) with an adjusted net profit of USD 83.8mln (+ 478% y/y). The all-in sustaining costs (AISC) of the Company's gold production for 1H2019 excluding taxes amounted to 693 USD/oz (-28% y/y).
Diversification of the asset portfolio due to the launch of the Oksut project in Turkey. Launch of Oksut in 2020 will increase the Company's production by an average of 110 koz of gold per year (+ 5%), and also will help to reduce the all-in sustaining costs (AISC - 490 USD/ounce), which will ensure the generation of free cash flow in the medium term and will facilitate geographical diversification. In 2019, the Company reduced capital investments in the project to 100 mln USD (-18.7%), and the total construction cost is projected at 200 mln USD before the launch of the project in 1Q2020. As of June 30, 2019 construction works were 64% complete, while gold production was planned for 1Q2020.
Promising projects for the long-term development of the Company. In January 2018, the Company acquired AuRico Metals, whose assets are represented by the Kemess Underground and Kemess East gold and copper deposits in Canada. Average annual production at the Kemess Underground project is projected at 106 koz of gold and 23.6 ktons of copper, at the Kemess East project - at 80 koz of gold and 26 ktons of copper. Duration of work is estimated at 12 years for each. The company intends to launch Kemess East after coming to the completion of the Kemess Underground project. Centerra Gold received permission from the authorities to build Kemess Underground in July 2018, however the Board of Directors of the Company has not yet decided to start construction. The Company invested about 14.2 mln USD (+ 158% y/y) at the end of 1H2019 in the development of Kemess projects.
Upside potential for gold and copper. According to statistics from the World Gold Council, in 1H2019 global demand for gold increased by 8% compared to 1H2018, which is due to an increase in gold reserves mainly by central banks in developing countries by 57% y/y. The inflow of investments in ETFs increased by 77% y/y, reaching 107.5 tons amid geopolitical uncertainty in the world, a decline in economic growth, and easing of monetary policy by leading world central banks. According to forecasts, gold price growth will continue due to volatility in the stock markets, the UK exit from the European Union and trade escalations between the US and China. In the market of industrial metals in the first 4 months of 2019 there was a shortage of refined copper in the amount of 150 ktons (International Copper Group), as well as a decrease in production (-1% y/y) due to reduced production and levels of grade of the largest producers - Chile (-3.2% y/y) and Indonesia (-50%). Demand for copper will be supported by investments in the development of new technologies, modern infrastructure, increasing consumption of environmentally friendly energy sources and the production of electric vehicles. In the long run, we expect prices to rise amid declining global supplies and increased demand from the industrial sector.
New terms of a strategic agreement with the government of Kyrgyzstan. The company agreed on new conditions, according to which it is obliged to make two one-time payments of 5 mln USD to the new Regional Development Fund after 5 working days and within the next 12 months from the date of the second agreement, monthly payments of 0.4% of the proceeds realized at Kumtor, annual payments of 1 mln USD to the Nature Development Fund, as well as financing of Kumtor exploration expenses in the amount of at least 16 mln USD for 2 years. We note the continued political risk associated with the fulfillment of the terms of the agreement between Centerra Gold and the Kyrgyzstan’s government, which could affect Kumtor’s operations.
Stable fundamental indicators. We forecast an increase in revenue from gold and copper production by an average of 3% y/y and 11% y/y, respectively, in the period 2019-2026. Given the launch of Oksut and Kemess projects, the Company will be able to increase production by 21% in gold equivalent by the end of 2026. According to the Company data, in 2019 we pledge capital investments for development in the amount of USD 175 mln, taking into account the construction of Oksut, to maintain production in the amount of USD 100 mln, as well as overburden costs in Kumtor in the amount of USD 140 mln. According to our estimates, the Company will reduce the level of net debt by the end of 2025 (Net Debt / EBITDA will be 0.15x in 2025). The predicted AISC indicators, according to our calculations, will be 779 USD/oz for Mount Milligan (+ 2% y/y) and 676 USD / oz for Kumtor (-3% y/y) respectively. After the completion of the construction of Oksut and Kemess, the Company will be able to significantly increase free cash flows and reduce its debt.
