RGLD - Centerra Gold Q2 Results: This Is Troubling

2023-08-01 17:27:31 ET

Summary

• Centerra Gold Inc. is a mid-tier gold and copper producer with multiple operations.
• The company just reported its Q2 2023 financial results.
• What happened in the quarter, and should investors buy the dip?

Centerra Gold: This Is Troubling

This is an update on Centerra Gold Inc. ( CGAU ), a mid-tier gold and copper miner with operations in Canada and Turkey. The company operates two flagship mines, the Mount Milligan mine located 155 km northwest of Prince George, British Columbia, and the Öksüt mine located in the Kayseri province of southcentral Turkey. Centerra is also advancing the Goldfield project in Nevada, which it bought in 2022 for $206 million, and the Kemess Underground Project in B.C.

Centerra has been a sector underperformer, with its stock declining by -2.88% over the past year, trailing the VanEck Gold Miners Index ( GDX ) and the junior miners index (GDXJ), which have returned 15% and 7.9%, respectively.

I've long considered Centerra Gold shares a BUY due to the stock's extreme undervaluation compared to other mid-tier miners, and Centerra's pristine balance sheet . But Centerra recently reported worse-than-expected Q2 2023 financial results , and things are getting a bit concerning at its flagship Mt. Milligan mine.

Therefore, I've decided to downgrade Centerra Gold Inc. stock to a HOLD, as I expand on my thinking below.

Centerra Gold: What Happened in Q2?

In Q2 2023 , Centerra Gold's Mount Milligan mine produced 41,119 ounces of gold, a 24% increase from the previous quarter, and 13.8 million pounds of copper. However, production during this period was hurt by lower-than-expected metal recoveries.

Gold production costs in the second quarter 2023 were $1,255/oz, and AISC came in at $1,711/oz. Centerra said that the higher costs were largely driven by higher mining costs and a decrease in gold ounces sold. Full-year AISC are now expected to fall between $1,125-$1,175/oz, up from the previous estimate of $1,075-$1,125/oz.

The company also had a partial month of production from the newly-restarted Öksüt Mine in Turkey. It contributed 20,503 ounces of gold production after the mine was re-started following approval of an amended Environmental Impact Assessment ("EIA"), issued by the Turkish government.

At Öksüt, full-year gold production guidance is expected to fall within the range of 180,000 to 190,000 ounces, despite having just re-started its operations. The production levels at Öksüt are projected to keep rising in the latter half of 2023, with roughly 45% and 55% of its gold production expected in Q3 and Q4.

However, despite the positive developments at Öksüt, this was a really weak quarter due to the underperformance of Mt. Milligan, and Centerra's worsened cash cost guidance.

The company reported a net loss of nearly $40 million, or -$.18 per share, and it only produced $33.4 million of cash flow, even with elevated commodity prices.

Centerra: Why Investors Should Be Concerned

The biggest issue I have with the company here is the performance of its Mt. Milligan operations and its continued decline.

While this is still a profitable operation, things appear to be getting worse at the mine. Copper recoveries, for example, have declined for four straight quarters, while gold recoveries have declined from 68.8% to 65.5%.

For 2023, guidance now calls for production to decline to 160-170,000oz of gold and between 60-70,000Mlb of copper, down from 189,000oz of gold and 74Mlb of copper in the prior year.

Although production guidance is unchanged, Centerra noted that it now expects Mt. Milligan production to fall on the lower end of this guidance for 2023.

Investors should be aware of the Mount Milligan Mine's obligation to sell 35% of its gold and 18.75% of its copper production to Royal Gold (RGLD). In return, Centerra receives $435 per ounce of gold and 15% of the spot copper price, which can affect the mine's bottom line. While this stream provided Centerra with an upfront cash infusion, it's definitely impacting the mine's profitability.

Centerra Gold: The Bottom Line

Currently, Centerra Gold's strongest asset is its robust balance sheet . The company has a substantial cash reserve of $401 million, along with an additional $398 million available from its credit facility. And it has no outstanding debt.

Nevertheless, Centerra's operational performance presents a considerable risk for investors. Specifically, the Mount Milligan operations are consistently underperforming, and there are no immediate indications of improvement.

While the Öksüt mine has resumed production, and Centerra has the potential to gain revenue from its molybdenum business, I believe the company's shares still carry significant risk.

Furthermore, Centerra's financial obligations - including its dividend payouts, share repurchase program, and the advancement of its Goldfield project - suggest potential future capital constraints. It's possible we'll see Centerra's $400 million cash balance dwindle over the next year as a result.

So, I recommend Centerra Gold Inc. shares as a HOLD , and I will revisit the stock next quarter.

For further details see: