SOURCE: Centerra Gold Inc.

Centerra Gold Inc.

July 26, 2016 19:26 ET

Centerra Gold Favourably Revises 2016 Guidance and Reports Second Quarter Results

TORONTO, ON--(Marketwired - July 26, 2016) -

This news release contains forward-looking information that is subject to the risk factors and assumptions set out on page 26 and in the Cautionary Note Regarding Forward-looking Information on page 31. It should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements and notes for the three and six months ended June 30, 2016 and the associated Management's Discussion and Analysis. The condensed interim consolidated financial statements of Centerra are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. All figures are in United States dollars unless otherwise stated.

To view Management's Discussion and Analysis and the Unaudited Interim Consolidated Financial Statements and Notes for the three and six months ended June 30, 2016, please visit the following link: http://media3.marketwire.com/docs/cg726-mdafs.pdf

Centerra Gold Inc. (TSX: CG) today reported net earnings of $2.9 million or $0.01 per common share (basic) in the second quarter of 2016, compared to a net earnings of $21.9 million or $0.09 per common share (basic) for the same period in 2015, reflecting the processing and sale in the second quarter of 2016 of lower grade material from stockpiles and ore from the initial benches of cut-back 17 at Kumtor, partially offset by higher average realized gold prices and lower share-based compensation expense.

For the first six months of 2016, the Company recorded net earnings of $21.0 million or $0.09 per common share (basic), compared to a net earnings of $62.6 million or $0.26 per common share (basic) in the comparative period of 2015, reflecting a 36% decrease in gold ounces sold in the first half of 2016.

2016 Second Quarter Highlights

  • Favourably revised gold production guidance range to 500,000 to 530,000 ounces and lowered all-in sustaining cost1 guidance for Kumtor to $717 - $759 per ounce and Company-wide to $776 - $824 per ounce.
  • Received the maximum allowable emissions ("MAE") and the maximum allowable discharge ("MAD") permits at Kumtor for 2016, followed by the environmental expertise (approval) of Kumtor's 2016 mine plan which was received on June 27, 2016. With the issuance of the MAE and MAD permits and the receipt of the environmental expertise, Kumtor has the necessary permits and approvals in place for continuous operations throughout the second half of 2016.
  • Produced 97,724 ounces of gold at Kumtor at all-in sustaining costs1 of $768 per ounce sold, gold production was in line with the Company's forecast, while all-in sustaining costs1 (AISC) were lower than forecast.
  • Sold 127,909 ounces of gold in the quarter, which includes sales of 33,165 ounces of accumulated gold doré inventory at Kumtor as a result of delays in shipping doré in the first quarter of 2016.
  • Company-wide all-in sustaining costs per ounce sold1 for the second quarter were $822 due in part to more ounces sold.
  • Continued discussions with the Mongolian Government regarding finalizing definitive agreements relating to the Gatsuurt Project. Discussions are expected to continue in the third quarter of 2016.
  • Following the quarter-end, the Company announced on July 5, 2016 that it had entered into a definitive arrangement agreement with Thompson Creek Metals Company Inc. ("TCM") to acquire all of the issued and outstanding common shares of TCM and redeem all of TCM's secured and unsecured notes at their call price plus accrued and unpaid interest in accordance with their terms. The total transaction value is approximately $1.1 billion. Centerra has also entered into a binding commitment letter with Royal Gold Inc. ("Royal Gold") whereby, upon the closing of the Arrangement, Royal Gold's 52.25% gold streaming interest at Mount Milligan will be amended to a 35.00% gold stream and 18.75% copper stream. Centerra expects to finance the acquisition through a combination of a new US$325 million senior secured revolver and term loan facility provided by The Bank of Nova Scotia and a recently completed bought deal offering of subscription receipts of C$170 million (total gross proceeds of C$195.5 million including underwriters fully-exercised over-allotment; net proceeds after fees of C$185.7 million). Refer to the Company's July 20, 2016 news release for further details. The acquisition is subject to the approval of TCM shareholders and other applicable regulatory approvals, and satisfaction of other customary conditions. If approved, the transaction is expected to close in the fall of 2016.

Centerra's cash, cash equivalents and short-term investments at the end of the second quarter of 2016 increased $25.6 million to $527.4 million compared to the March 31, 2016. During the second quarter of 2016, the Company drew $24 million from its $150 million corporate revolving credit facility provided by the European Bank for Reconstruction and Development to bring its current principal amount outstanding to $100 million at June 30, 2016. The funds are available to be re-drawn on a semi-annual basis and at the Company's discretion repayment of the loaned funds may be extended until 2021.

CEO Commentary

Scott Perry CEO of Centerra Gold stated, "Kumtor delivered strong gold production in the quarter producing 97,724 ounces which was in line with our expectations and plans. Kumtor's all-in sustaining costs were a competitive $768 per ounce sold1 well below our original guidance for the year. With mining activities at Kumtor slightly ahead of plan and the business improvement opportunities achieved so far this year combined with the favourable diesel fuel costs and currency exchange rate environment, we have decided to favourably revise our guidance for gold production, AISC1 and capital expenditures."

"With our second quarter released today, the Company favourably revised its guidance for the year, narrowing expected gold production to 500,000 - 530,000 ounces, lowered our expected all-in sustaining costs1 by 14% at Kumtor to $738 per ounce sold and 14% Company-wide to $800 per ounce sold, based on the mid-point of the ranges, and lowered our overall expected capital expenditures for the year to $140 million a 48% decrease, excluding capitalized stripping. We are well positioned to achieve our revised gold production and cost guidance for the year, since mining at Kumtor recently intersected the higher grade ore in the SB Zone in cut-back 17."

"Following the quarter end, we announced a transformational $1.1 billion business combination of Centerra and Thompson Creek that diversifies Centerra's operating platform and adds low risk production and cash flow from a very high quality, long-lived asset in Mount Milligan. This business combination is complementary in nature, combining Centerra's robust balance sheet with Thompson Creek's high quality asset base. We expect the transaction to close in the fall of 2016 and will create a geographically and operationally diversified gold producer with a high quality producing platform and a strong fully-funded growth pipeline."

Consolidated Financial and Operating Summary

Unaudited ($ millions, except as noted) Three months ended June 30,(7)  Six months ended June 30,(7)  
Financial Highlights 2016   2015   % Change  2016   2015  % Change  
Revenue $161.6   $146.8   10 %$234.8   $359.4  (35 %)
Cost of sales  118.0    81.0   46 % 149.5    195.0  (23 %)
Standby costs  (0.6 )  1.1   (155 %) (0.7 )  3.8  (118 %)
Regional office administration  3.7    5.0   (26 %) 7.0    10.3  (32 %)
Earnings from mine operations  40.5    59.7   (32 %) 79.0    150.3  (47 %)
Revenue-based taxes  22.6    19.8   14 % 32.9    48.5  (32 %)
Other operating expenses  0.7    0.8   (13 %) 1.3    0.6  117 %
Pre-development project costs  4.0    4.9   (18 %) 5.3    8.2  (35 %)
Exploration and business development (1)  5.1    2.1   143 % 7.2    4.9  47 %
Corporate administration  6.8    10.8   (37 %) 12.5    20.2  (38 %)
Earnings from operations  1.3    21.3   (94 %) 19.8    67.9  (71 %)
Other (income) and expenses  (0.4 )  (1.7 ) (76 %) (1.7 )  2.6  (165 %)
Finance costs  1.4    1.1   27 % 2.7    2.2  23 %
Earnings before income taxes  0.3    21.8   (99 %) 18.9    63.2  (70 %)
Income tax expense (benefit)  (2.6 )  (0.1 ) 2500 % (2.1 )  0.6  (450 %)
Net earnings  2.9    21.9   (87 %) 21.0    62.6  (66 %)
                           
Earnings per common share - $ basic (2) $0.01   $0.09   (89 %)$0.09   $0.26  (65 %)
Earnings per common share - $ diluted (2) $-   $0.09   (100 %)$0.08   $0.26  (69 %)
Cash provided by operations  57.2    114.6   (50 %) 66.7    245.0  (73 %)
Average gold spot price - $/oz (3)  1,260    1,192   6 % 1,223    1,206  1 %
Average realized gold price - $/oz(4)  1,264    1,192   4 % 1,238    1,205  1 %
Capital expenditures (5)  53.6    86.7   (38 %) 100.7    242.2  (58 %)
                           
Operating Highlights                          
Gold produced - ounces  97,724    125,088   (22 %) 185,316    295,771  (37 %)
Gold sold - ounces  127,909    123,079   4 % 189,653    298,311  (36 %)
                           
Operating costs (on a sales basis) (6)  61.6    36.0   71 % 80.7    79.5  1 %
Adjusted operating costs (4)  65.5    42.7   53 % 88.5    94.5  (6 %)
All-in Sustaining Costs(4)  105.2    115.3   (9 %) 167.9    241.2  (30 %)
All-in Costs, excluding development projects(4)  114.4    121.3   (6 %) 185.1    256.4  (28 %)
All-in Costs, excluding development projects (including revenue-based taxes and tax) (4)  137.2    141.2   (3 %) 218.2    305.1  (28 %)
                           
Unit Costs                          
Cost of sales - $/oz sold(4)  923    658   40 % 788    654  21 %
Adjusted operating costs - $/oz sold (4)  512    347   48 % 467    317  47 %
All-in sustaining costs - $/oz sold(4)  822    937   (12 %) 885    808  10 %
All-in costs, excluding development projects - $/oz sold (4)  894    986   (9 %) 976    859  14 %
All-in costs, excluding development projects (including revenue-based taxes and income tax) - $/oz sold (4)  1,072    1,147   (7 %) 1,151    1,022  13 %
                           
  1. Includes business development of $2.1 million for the three and six months ended June 30, 2016 ($0.8 million and $1.9 million for the three and six months ended June 30, 2015, respectively).
  2. As at June 30, 2016, the Company had 242,164,285 common shares issued and outstanding.
  3. Average for the period as reported by the London Bullion Market Association (US dollar Gold P.M. Fix Rate).
  4. Adjusted operating costs, all-in sustaining costs, all-in costs, excluding development projects and all-in costs, excluding development projects (including taxes) ($ millions and per ounce sold) as well as average realized gold price per ounce and cost of sales per ounce sold are non-GAAP measures and are discussed under "Non-GAAP Measures".
  5. Includes capitalized stripping of $25.6 million and $39.7 million in the three and six months ended June 30, 2016, respectively ($66 million and $133.5 million of capitalized stripping in the three and six months ended June 30, 2015, respectively).
  6. Operating costs (on a sales basis) are comprised of mine operating costs such as mining, processing, regional office administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes reclamation costs and depreciation, depletion and amortization. Operating costs (on a sales basis) represents the cash component of cost of sales associated with the ounces sold in the period.
  7. Results may not add due to rounding.

Second Quarter 2016 compared to Second Quarter 2015

  • Gold production for the second quarter of 2016 totaled 97,724 ounces compared to 125,088 ounces in the comparative quarter of 2015. The 22% decrease in ounces poured at Kumtor reflects processing of lower grade ore mined from the upper benches of cut-back 17, blended with low-grade stockpiled ore, as well as lower recoveries. In contrast, in the comparative quarter of 2015 Kumtor mined and processed the final benches from cut-back 16 that contained higher grade ore.
  • Operating costs (on a sales basis) increased 71% to $61.6 million in the second quarter of 2016 from $36.0 million in the same period of 2015 and reflect more ounces sold and higher unit costs in the second quarter of 2016. The increase in costs in the second quarter of 2016 was due to processing ounces at Kumtor from cut-back 17 which is a larger cut-back, requiring more waste to be moved and resulting in higher mining unit costs as compared to cut-back 16. Capitalization of mining costs in cut-back 17 ceased when ore was uncovered in September 2015. In the comparative period of 2015, the mining costs were capitalized as mining was focused on the initial development of cut-back 17 before accessing ore.
  • All-in sustaining costs per ounce sold(1) for the second quarter decreased to $822 from $937 in the comparative period of 2015. The decrease in the second quarter of 2016 results primarily from more ounces sold and less spending on capitalized stripping.
  • All-in costs per ounce sold1, (excluding development project costs), were $894 compared to $986 in the comparative quarter of 2015 and includes all cash costs related to gold production, excluding revenue-based taxes and income tax. The decrease reflects the additional ounces sold, partially offset by additional spending in the second quarter of 2016 for exploration and business development.
  • Revenue in the second quarter of 2016 increased 10% to $161.6 million, as a result of 4% more ounces sold (127,909 ounces compared to 123,079 ounces in the second quarter of 2015), as well as a 4% higher average realized gold price1 ($1,240 per ounce compared to $1,192 per ounce in the same quarter of 2015). The build-up of gold bullion inventory at Kumtor at the end of March 2016 of 33,165 ounces was sold in April 2016 once Kyrgyzaltyn completed contractual negotiations with its off-take bank.
  • In the second quarter of 2016, 4% more ounces were sold while cost of sales increased by 46% to $118 million compared to the same period of 2015. This reflects higher costs for mining and stripping in both the stockpiled ore and in the lower grade ore mined and processed at Kumtor from cut-back 17 in the second quarter of 2016. The cost of sales in the second quarter of 2015 benefited from the processing of ore from the final benches of cut-back 16 which contained higher grades and higher recoveries, resulting in lower unit operating costs, and reduced waste stripping as compared to cut-back 17 ore that was processed in the second quarter of 2016. Depreciation, depletion and amortization ("DD&A") associated with production was $57.1 million in the second quarter of 2016 as compared to $46.5 million in the same quarter of 2015, reflecting more ounces sold in 2016 and higher equipment charges for the longer mining campaign of cut-back 17.
  • Regional office administration costs in the second quarter of 2016 decreased by 26% to $3.7 million, reflecting lower labour costs at Kumtor from favourable currency movements of the Kyrgyz Som and lower staffing levels in Mongolia.
  • In the second quarter of 2016, pre-development projects costs decreased by $0.9 million to $4.0 million, compared to the same quarter in 2015. The decrease was due to the Company starting to capitalize development costs at the Öksüt Project following the approval of the feasibility study in July 2015, partially offset by higher spending at the Greenstone Property.
  • Exploration expenditures in the second quarter totaled $3.0 million compared to $1.3 million in the same period of 2015. The increase in the second quarter of 2016 reflects higher exploration activity at the Company's various projects including the Gatsuurt property.
  • Corporate administration costs decreased to $6.8 million in the second quarter of 2016 from $10.8 million in the same period of 2015. The decrease was primarily due to lower share-based compensation, the impact of currency movements and lower general spending. Share-based compensation expense in the second quarter of 2016 was $0.1 million compared to $5.1 million in the same period of 2015, reflecting the relative performance of the Company's share price as compared to the S&P/TSX Global Gold Index.
  • Cash provided by operations decreased by $57.4 million to $57.2 million in the second quarter of 2016 mainly from the sale of the higher cost ounces from the initial benches of cut-back 17 and higher working capital levels for amounts receivable due to the timing of gold shipments in the second quarter of 2016.
  • Total capital expenditures in the second quarter of 2016 were $53.7 million, which included sustaining capital1 of $13.7 million, growth capital1 of $8.4 million, $1.6 million of Öksüt Project development costs, $4.4 million of Greenstone Gold Property capital and $25.6 million of capitalized stripping costs ($18.9 million cash). Capital expenditures were 38% lower in the second quarter of 2016 as a result of lower capitalized stripping at Kumtor (a decrease of 61%), partially offset by increased sustaining capital1 (an increase of 14%), increased growth capital1 (an increase of 91%) and 2% more Greenstone Gold Property costs. Capital expenditures in the same quarter of 2015 were $86.7 million, which included $12.0 million for sustaining capital1, $4.4 million for growth capital1, $4.3 million of Greenstone Gold Property capital and capitalized stripping of $66.0 million ($49.5 million cash).

First Half 2016 compared to First Half 2015

  • Gold production for the first six months of 2016 totaled 185,316 ounces compared to 292,176 ounces in the comparative period of 2015. The decrease in production is primarily due to lower average mill head grades processed and lower recoveries at Kumtor.
  • Operating costs (on a sales basis)1 increased by $1.2 million to $80.7 million in the first six months of 2016 compared to the same period in 2015, mainly as a result of higher per unit operating costs for the ounces from cut-back 17 processed and sold in the first six months of 2016.
  • All-in sustaining costs per ounce sold1 for the first six months of 2016, was $885 compared to $808 in the same period of 2015. The increase in the first six months of 2016 reflects the higher per unit cost for the cut-back 17 ounces sold in the first six months of 2016 and higher sustaining capital1.
  • All-in costs per ounce sold1, (excluding development project costs) which excludes revenue-based taxes at Kumtor and income tax, for the first six months of 2016 were $976, compared to $859 per ounce sold in the first six months of 2015. The increase reflects the higher all-in sustaining costs described above and higher exploration costs.
  • Revenue in the first six months of 2016 decreased 35% to $234.8 million, as a result of 36% fewer ounces sold (189,653 ounces compared to 298,311 ounces in the first six months of 2015), partially offset by higher average realized gold price1 ($1,217 per ounce compared to $1,205 per ounce in the first six months of 2015).
  • In the first six months of 2016, cost of sales decreased by 23% to $149.5 million due primarily to fewer ounces sold in the first six months of 2016. DD&A associated with production decreased to $68.8 million in the first six months of 2016 from $115.6 million in the comparative period of 2015, reflecting fewer ounces sold, partially offset by higher per unit capitalized stripping charges for the cut-back 17 ore that was processed in the first six months of 2016.
  • The idled operation at Boroo incurred minimal net costs in the first six months of 2016 as care and maintenance costs were offset by the sale of residual gold coming from the rinsing of the heap leach pad. During the first six months of 2015 Boroo incurred standby costs to place and maintain the mill and operation on care and maintenance totaling $3.8 million, which included spending mainly for cleaning circuits and to maintain equipment in a ready state, as well as fixed costs for administration.
  • In the first six month of 2016, pre-development projects costs decreased by $2.9 million to $5.3 million, compared to the same period in 2015, mainly reflecting the start of capitalization of development costs at the Öksüt Project following the approval of the feasibility study in July 2015.
  • Exploration expenditures in the first six months totalled $5.1 million compared to $3 million in the same period of 2015. The increase in the first six months of 2016 reflects higher exploration spending at Gatsuurt and on the Company's other projects around the world.
  • Business development spending in the first six months of 2016 totaled $2.1 million compared to $1.9 million.
  • Corporate administration costs in the first half of 2016 decreased to $12.5 million from $20.2 million in the first six months of 2015 due primarily to a lower charge for share-based compensation. The share-based compensation charge in the first six months of 2016 was $1.0 million, compared to $7.4 million in the same period in 2015.
  • Cash provided by operating activities decreased to $66.7 million in the first six months of 2016 mainly from lower sales and higher working capital levels for gold inventory and amounts receivable due to the timing of gold shipments.
  • Total capital expenditures in the first six months of 2016 were $100.6 million, which included sustaining capital1 of $36.9 million, growth capital1 of $13.6 million, $5.2 million of Greenstone Gold Property capital costs and $39.7 million of capitalized stripping costs ($29.3 million cash) at Kumtor. ). Total capital expenditures were 58% lower for the first six months of 2016 as a result of 70% lower capitalized stripping costs at Kumtor, partially offset by higher sustaining capital1 (an increase of 49%) and a 26% increase in growth capital1. Capital expenditures in the same period of 2015 were $242.3 million, which included $24.7 million for sustaining capital1, $10.8 million for growth capital1, capitalized stripping of $133.5 million ($101.2 million cash) and $67.4 million of acquisition costs for the Greenstone Partnership.

Second Quarter Operations Update

Kumtor Mine

Kumtor Operating Results Three months ended June 30, Six months ended June 30,
Unaudited ($ millions, except as noted) 2016 2015 % Change 2016 2015 % Change
             
Tonnes mined - 000s 34,744 40,434 (14%) 74,018 82,165 (10%)
Tonnes ore mined - 000s 2,891 168 1621% 4,717 1,506 213%
Average mining grade - g/t 1.84 1.50 23% 1.64 3.10 (47%)
Tonnes milled - 000s 1,609 1,554 4% 3,151 2,729 15%
Average mill head grade - g/t 2.63 3.26 (19%) 2.46 4.06 (39%)
Recovery - % 71.90% 77.50% (7%) 73.30% 79.40% (8%)
Mining costs - total ($/t mined material) 1.36 1.27 7% 1.28 1.30 (2%)
Milling costs ($/t milled material) 9.80 10.50 (7%) 9.91 11.86 (16%)
             
Gold produced - ounces 97,724 122,111 (20%) 184,168 286,383 (36%)
Gold sold - ounces 127,909 118,789 8% 189,653 287,974 (34%)
Average realized gold price - $/oz(1) 1,264 1,192 6% 1,238 1,204 3%
             
Capital expenditures (sustaining)(1) 13.6 11.8 15% 36.6 24.3 51%
Capital expenditures (growth)(1) 5.4 3.9 38% 10.1 10.4 (3%)
Capital expenditures (stripping) 25.6 66.0 (61%) 39.7 133.5 (70%)
Capital expenditures (total) 44.6 81.7 (45%) 86.4 168.2 (49%)
             
Operating costs (on a sales basis) (2) 61.6 32.7 88% 80.7 70.8 14%
Adjusted operating costs(1) 65.4 37.6 74% 88.3 80.6 10%
All-in Sustaining Costs (1) 98.1 99.1 (1%) 154.7 206.6 (25%)
All-in Costs(1) 103.5 103.0 0% 164.8 216.9 (24%)
All-in Costs - including revenue-based taxes(1) 126.1 122.8 3% 197.7 265.4 (26%)
             
Adjusted operating costs - $/oz sold (1) 511 317 61% 466 280 66%
All-in sustaining costs - $/oz sold (1) 768 835 (8%) 816 717 14%
All-in costs - $/oz sold (1) 810 867 (7%) 869 753 15%
All-in costs (including revenue-based taxes)-$/oz sold(1) 987 1,034 (5%) 1,043 922 13%
             
  1. Adjusted operating costs, all-in sustaining costs, all-in costs and all-in costs - including revenue-based taxes (in $ millions and per ounce sold), as well as average realized gold price per ounce sold, cost of sales per ounce sold and capital expenditures (sustaining and growth) are non-GAAP measures and are discussed under "Non-GAAP Measures".
  2. Operating costs (on a sales basis) is comprised of mine operating costs such as mining, processing, regional office administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes reclamation costs and depreciation, depletion and amortization.

At the Kumtor mine in the Kyrgyz Republic, mining activities in the second quarter of 2016 focused on the development and mining of cut-back 17. During the quarter increasingly greater quantities of lower grade ore were obtained from the upper benches of cut-back 17 and Kumtor continued to process ore from cut-back 17 and ore stockpiled from the previous year. The Company has recently intersected the higher grade ore from the SB Zone from cut-back 17 which is anticipated to provide the majority of the ounces processed during the remainder of the current year.

Cut-back 17 is unlike past cut-backs at Kumtor since it is significantly larger in size and mining of the ore is spread over a longer period of time. The typical profile of mining a cut-back at Kumtor, starts with waste removal (capitalized stripping), followed by a short period of mining in significantly higher grade ore. Cut-back 16 followed the typical profile, with the completion of mining higher grade ore in early 2015. In contrast, cut-back 17 required a longer stripping period to uncover low grade ore in September 2015 (date when capitalization of stripping stopped), followed by an extended period of mining lower grade ore until the recent intersection of higher grade ore at the end of the second quarter of 2016. Due to the extended mining period, the result has been more mining costs being absorbed by the lower grade ore mined in cut-back 17 from September 2015 until now.

Total waste and ore mined in the second quarter of 2016 decreased 14% to 34.7 million tonnes compared to 40.4 million tonnes in the comparative period of 2015. The decrease was mainly due to 14.6% increased average haulage distance compared to the same period of 2015 (4.3 kilometres compared to 3.7 kilometres), as mining in the second quarter of 2016 was at greater depth and longer hauls were required to the Lysii Valley northern dumps as set forth in the life-of-mine plan. During the second quarter of 2016, Kumtor mined approximately 2.9 million tonnes of ore at an average grade of 1.84 g/t, compared to 0.2 million tonnes of ore mined at an average grade of 1.50 g/t in the second quarter of 2015.

During the second quarter of 2016, Kumtor continued to process ore from cut-back 17 and ore stockpiled from the previous year. Gold production for the second quarter of 2016 was 97,724 ounces of gold compared to 122,111 ounces of gold in the comparative period of 2015. The decrease in ounces poured is due processing lower grade ore from stockpiles and from cut-back 17. In contrast, during the comparative quarter of 2015, the Company processed higher grade stockpiled ore mined from the lower benches of cut-back 16.

During the quarter, Kumtor processed 1.6 million tonnes, 4% more than the second quarter of 2015. Kumtor's average mill head grade was 2.63 g/t with a recovery of 71.9% in the second quarter of 2016, compared to 3.26 g/t with a recovery of 77.5% for the same period of 2015. The mill achieved increased throughput in the second quarter of 2016 averaging 17,700 tonnes per day compared to 17,100 tonnes per day in the comparative quarter. Actions taken to increase the throughput have included blending harder and softer ore, opening screens in the SAG mill and increasing the grinding media sizes in the SAG and ball mills.

Operating costs (on a sales basis), increased by $28.9 million predominantly due to increased sales, and processing ounces in the second quarter of 2016 with greater mining costs as cut-back 17 ounces require more waste tonnes to be moved. In the comparative period of 2015, the mining costs were capitalized as they were focused on the initial development stages of cut-back 17, before accessing ore.

Mining costs, before capitalization of stripping activity, totalled $47.1 million in 2016, which was $4.1 million lower than the comparative period. Decreased costs for the second quarter of 2016 include lower diesel costs ($4.2 million) due to lower fuel price, and lower blasting costs ($0.7 million). This was partially offset by higher costs for tires ($0.9 million) due to the timing of tire replacements during the quarter.

Milling costs of $15.7 million in the second quarter of 2016 compared to $16.4 million in the comparative quarter of 2015. Milling costs in 2016 were lower than the comparative period due mainly to the lower cost of cyanide ($0.3 million)

Site support costs in the second quarter of 2016 totalled $10.9 million compared to $11.9 million in the second quarter of 2015. The decrease is primarily attributable to lower insurance costs resulting from lower premiums, and lower labour costs due to a reduction in manpower.

DD&A associated with sales, increased to $56.4 million in the second quarter of 2016, from $43.5 million in the comparative quarter of 2015. The increase in DD&A is mainly due to the increased depreciation charges relating to the ounces processed from cut-back 17 compared to the ounces processed in the comparative period and the higher ounces sold in the second quarter of 2016.

All-in sustaining costs per ounce sold1, which excludes revenue-based taxes, for the second quarter of 2016 decreased 8% to $768 compared to $835 in the comparative period of 2015. The decrease results primarily from the higher ounces sold, as the Company sold the 33,165 ounces that were delayed at the end of March 2016 due to the contractual negotiations between Kyrgyzaltyn and its off-take bank.

All-in costs per ounce sold1, which excludes revenue-based taxes, for the second quarter of 2016 was $810 compared to $867 in the comparative period of 2015, representing a decrease of 7%. The decrease is a result of lower all-in sustaining costs1, as explained above.

Capital expenditures in the second quarter of 2016 totaled $44.6 million which includes $13.6 million of sustaining capital1 mainly on equipment rebuilds and overhauls, $5.4 million invested in growth capital1 and $25.6 million for capitalized stripping ($18.9 million cash). Capital expenditures the comparative quarter of 2015 totaled $81.7 million, consisting of $11.8 million for sustaining capital1, $3.9 million for growth capital1 and $66.0 million of capitalized stripping ($49.5 million cash).

Development Projects

Öksüt Project

At the Öksüt Project in Turkey, the Company spent $1.6 million and $5.2 million during the three and six months ended June 30, 2016 respectively ($1.8 million and $3.6 million in the three and six months ended June 30, 2015) on development activities to progress the ESIA, access and site preparation and detailed engineering works. With the approval of the feasibility study in July 2015, development costs at the Öksüt Project are now being capitalized.

Following approval of the business opening permit from local authorities in December 2015, applications were submitted for the land usage permits (Forestry and Pastureland). On July 14, 2016, the Company's wholly-owned Turkish subsidiary Öksüt Madencilik Sanayi ve Ticaret A.S. ("OMAS") received the Forestry Usage Permit for the project. The Pastureland permit is currently outstanding and the Company is working with the relevant agencies to obtain the permit, which is expected shortly. There are no assurances that the approval of the Pastureland permit or other permits will be obtained by the Company in the anticipated time frame, or at all.

The Company now expects to commence development of the Öksüt Project in the fourth quarter of 2016 due to delays in receiving operating permits, with first gold production anticipated in mid-2018. On September 3, 2015 a Technical Report for the Öksüt Project was filed on SEDAR.

On April 5, 2016, OMAS entered into a $150 million credit facility agreement with UniCredit Bank AG to assist in financing the construction of the Company's Öksüt Project. The interest rate on the Öksüt Facility is LIBOR plus 2.65% to 2.95% (dependent on project completion status). It is secured by Öksüt assets and is non-recourse to the Company. Availability of the Öksüt Facility is subject to customary conditions precedent, including receipt of all necessary approvals.

The Company's operations in Turkey have not been affected by recent political developments; however no assurances can be provided in this regard.

Gatsuurt Project

The Company continued to engage in discussions with the Mongolian Government regarding the definitive agreements relating to the Gatsuurt Project, during the quarter. The Company is currently drilling on the property and is carrying out resource definition, metallurgical, exploration, geo-technical and hydrogeological drilling in support of eventual project development. See "Other Corporate Developments - Mongolia".

Greenstone Gold Property

In the second quarter of 2016, the Company funded $7.3 million ($10.9 million in the first six months of 2016) on project development activities ($28.2 million, cumulative to date) at Greenstone Gold Mine Limited Partnership ("GGM"). During the second quarter, work continued on advancing the feasibility study for the Hardrock Project, including completing peer reviews with third party engineers, with results to be incorporated into the final bankable feasibility study. GGM has decided to optimize certain aspects of the study to improve the economics and has delayed the completion of the feasibility study to the end of October 2016. During the second quarter of 2016, GGM exercised purchase options totaling $5.4 million to acquire houses and land surrounding the project area.

GGM submitted a draft Environmental Impact Study/Environmental Assessment ("EIS/EA") in February 2016 and received comments from the various provincial and federal regulatory agencies, as well as from all other stakeholders. GGM, along with their consultants, have been reviewing and evaluating these comments, consulted with the regulators, and amendments will be addressed in the final EIS/EA submission, which is expected to occur a few months after the completion of the bankable feasibility study.

GGM continues to engage and consult with local communities of interest regarding mutually beneficial impact benefit agreements.

Non-GAAP Measures

This news release contains the following non-GAAP financial measures: all-in sustaining costs, all-in costs, and all-in costs (excluding development projects), all three measures with and without revenue-based taxes and income taxes. In addition, non-GAAP financial measures include adjusted operating costs in dollars (millions) and per ounce sold, as well as cost of sales per ounce sold, capital expenditures (sustaining), capital expenditures (growth) and average realized gold price. These financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers, even as compared to other issuers who may be applying the World Gold Council ("WGC") guidelines, which can be found at http://www.gold.org.

Management believes that the use of these non-GAAP measures will assist analysts, investors and other stakeholders of the Company in understanding the costs associated with producing gold, understanding the economics of gold mining, assessing our operating performance, our ability to generate free cash flow from current operations and to generate free cash flow on an overall Company basis, and for planning and forecasting of future periods. However, the measures do have limitations as analytical tools as they may be influenced by the point in the life cycle of a specific mine and the level of additional exploration or expenditures a company has to make to fully develop its properties. Accordingly, these non-GAAP measures should not be considered in isolation, or as a substitute for, analysis of our results as reported under GAAP.

Definitions

The following is a description of the non-GAAP measures used in this news release. The definitions are similar to the WGC's Guidance Note on these non-GAAP measures:

  • Production costs represent operating costs associated with the mining, milling and site administration activities at the Company's operating sites, excluding costs unrelated to production such as mine standby and community costs related to current operations.
  • Operating costs (on a sales basis) include mine operating costs such as mining, processing, site support, royalties and operating taxes (except at Kumtor where revenue-based taxes are excluded), but exclude depreciation, depletion and amortization (DD&A), reclamation costs, financing costs, capital development and exploration.
  • Adjusted operating costs per ounce sold include operating costs (on a sales basis), regional office administration, mine standby costs, community costs related to current operations, refining fees and by-product credits.
  • Capital expenditure (Sustaining) is a capital expenditure necessary to maintain existing levels of production. The sustaining capital expenditures maintain the existing mine fleet, mill and other facilities so that they function at levels consistent from year to year.
  • All-in sustaining costs per ounce sold include adjusted operating costs, the cash component of capitalized stripping costs, corporate general and administrative expenses, accretion expenses, and sustaining capital. The measure incorporates costs related to sustaining production.
  • Capital expenditure (Growth) is capital expended to expand the business or operations by increasing productive capacity beyond current levels of performance.
  • All-in costs per ounce sold include all-in sustaining costs and additional costs for growth capital, global exploration expenses, business development costs and social development costs not related to current operations.
  • All-in cost per ounce sold exclude the following:
    • Working capital (except for adjustments to inventory on a sales basis).
    • All financing charges (including capitalized interest).
    • Costs related to business combinations, asset acquisitions and asset disposals.
    • Other non-operating income and expenses, including interest income, bank charges, and foreign exchange gains and losses.
  • All-in costs per ounce sold (excluding development project costs) measure comprises all-in costs per ounce sold as described above and excludes the Company's development projects.
  • Development projects are defined as projects that are beyond the exploration stage but are pre-operational. For 2016, development projects include all spending at Öksüt, Gatsuurt and the Greenstone Gold Property.
  • Development projects costs represent spending on development projects whether expensed as pre-development costs or capitalized as development costs.
  • All-in costs including taxes per ounce sold measure includes revenue-based taxes at Kumtor and income taxes in Mongolia.
  • Cost of sales per ounce sold is calculated by dividing cost of sales by gold ounces sold.
  • Average realized gold price is calculated by dividing revenue derived from gold sales by the number of ounces sold.

Adjusted Operating Cost, All-in Sustaining Costs and All-in Costs, excluding development project costs (including and excluding revenue-based taxes and income taxes) are non-GAAP measures used in this news release and can be reconciled as follows:

1) By operation

Kumtor

             
(unaudited)  Three months ended June 30,(1)  Six months ended June 30,(1)
($ millions, unless otherwise specified)  2016  2015  2016  2015
             
Cost of sales, as reported  $118.0  $76.2  $149.5  $183.1
 Less: Non-cash component   56.4   43.5   68.8   112.3
Cost of sales, cash component  $61.6  $32.7  $80.7  $70.8
Adjust for:                
 Regional office administration   3.7   4.1   7.0   8.4
 Refining fees   1.0   0.7   1.4   1.7
 By-product credits   (1.2)   (0.5)   (1.6)   (1.5)
 Community costs related to current operations   0.3   0.6   0.8   1.2
Adjusted Operating Costs  $65.4  $37.6  $88.3  $80.6
 Accretion expense   0.2   0.2   0.5   0.5
 Capitalized stripping and ice unload   18.9   49.5   29.3   101.2
 Capital expenditures (sustaining)   13.6   11.8   36.6   24.3
All-in Sustaining Costs  $98.1  $99.1  $154.7  $206.6
 Capital expenditures (growth)   5.4   3.9   10.1   10.3
All-in Costs  $103.5  $103.0  $164.8  $216.9
 Revenue-based taxes   22.6   19.8   32.9   48.5
All-in Costs (including revenue-based taxes)  $126.1  $122.8  $197.7  $265.4
                 
Ounces sold (000)   128   119   190   288
Adjusted Operating Costs - $ / oz sold  $512  $317  $466  $280
All-in Sustaining Costs - $ / oz sold  $768  $835  $816  $717
All-in Costs - $ / oz sold  $810  $868  $869  $753
All-in Costs (including revenue-based taxes) - $ /oz sold  $986  $1,035  $1,043  $922
             
(1) Results may not add due to rounding
 

2) Consolidated

Centerra

             
(unaudited)  Three months ended June 30,(1)  Six months ended June 30,(1)
($ millions, unless otherwise specified)  2016  2015  2016  2015
             
Cost of sales, as reported  $118.0  $81.0  $149.5  $195.0
 Less: Non-cash component   56.4   45.0   68.8   115.6
Cost of sales, cash component   61.6  $36.0   80.7  $79.4
Adjust for:                
 Regional office administration   3.7   5.0   7.0   10.3
 Mine stand-by costs   -   0.8   -   3.1
 Refining fees   1.0   0.7   1.4   1.8
 By-product credits   (1.2)   (0.6)   (1.6)   (1.5)
 Community costs related to current operations   0.4   0.7   0.9   1.4
Adjusted Operating Costs   65.5  $42.7   88.4  $94.5
 Corporate general administrative costs   6.7   10.7   12.4   20.0
 Accretion expense   0.4   0.4   0.8   0.8
 Capitalized stripping and ice unload   18.9   49.5   29.3   101.2
 Capital expenditures (sustaining)   13.7   12.0   36.9   24.7
All-in Sustaining Costs   105.2  $115.3   167.9  $241.3
 Capital expenditures (growth)   5.4   3.9   10.1   10.3
 Boroo closure costs   (1.3)   -   (0.2)   -
 Exploration and business development   5.1   2.1   7.2   4.9
All-in Costs, excluding development project costs   114.4   121.3   185.1   256.5
 Revenue-based taxes   22.6   19.8   32.9   48.5
 Income taxes   0.2   0.1   0.2   0.2
All-in Costs, excluding development project costs (including revenue-based taxes and income taxes)  $137.2  $141.2  $218.0  $305.1
                 
Ounces sold (000)   127.9   123.1   189.7   298.3
Adjusted Operating Costs - $ / oz sold  $512  $347  $467  $317
All-in Sustaining Costs - $ / oz sold  $822  $937  $886  $808
All-in Costs, excluding development project costs - $ / oz sold  $894  $986  $976  $859
All-in Costs, excluding development project costs (including revenue-based taxes and income taxes) - $ / oz sold  $1,072  $1,147  $1,151  $1,022
                 
(1) Results may not add due to rounding
 

Sustaining capital, growth capital and capitalized stripping presented in the All-in measures can be reconciled as follows:

Three months ended June 30, Kumtor  Boroo  Turkey  All other  Consolidated
($ millions) (Unaudited)              
2016              
Capitalized stripping -cash 18.9  -  -  -  18.9
Sustaining capital - cash 13.6  -  -  0.1  13.7
Growth capital - cash 5.4  -  -  3.0  8.4
Greenstone Gold Property pre-development costs - cash -  -  -  4.4  4.4
Öksüt project development capital - cash -  -  1.6  -  1.6
Net increase in accruals included in additions to PP&E (2.0)  -  -  -  (2.0)
Total - Additions to PP&E 35.9  -  1.6  7.5  45.0 (1)
2015              
Capitalized stripping - cash 49.5  -  -  -  49.5
Sustaining capital - cash 11.8  -  -  0.2  12
Growth capital - cash 3.9  -  -  0.4  4.3
Greenstone Gold Property pre-development costs - cash -  -  -  4.3  4.3
Net decrease in accruals included in additions to PP&E 0.3  -  -  -  0.3
Total - Additions to PP&E 65.5  -  -  4.9  70.4 (1)
               
Six months ended June 30, Kumtor  Boroo  Turkey  All other  Consolidated
($ millions)(Unaudited)              
2016              
Capitalized stripping -cash 29.3  -  -  -  29.3
Sustaining capital - cash 36.6  -  -  0.3  36.9
Growth capital - cash 10.1  -  -  3.5  13.6
Greenstone Gold Property pre-development costs - cash -  -  -  5.0  5.0
Öksüt project development capital - cash -  -  5.2  -  5.2
Net increase in accruals included in additions to PP&E (9.6)  -  -  -  (9.6)
Total - Additions to PP&E 66.4  -  5.2  8.8  80.4 (1)
2015              
Capitalized stripping - cash 101.2  -  -  -  101.2
Sustaining capital - cash 24.3  0.1  -  0.3  24.7
Growth capital - cash 10.3  -  -  0.5  10.8
Greenstone Gold Property pre-development costs - cash -  -  -  5.8  5.8
Net decrease in accruals included in additions to PP&E 0.1  -  -  -  0.1
Total - Additions to PP&E 135.9  0.1  -  6.6  142.6 (1)
 
(1) As reported in the Company's Consolidated Statement of Cash Flows as "Investing Activities - Additions to property, plant & equipment".
 

Second Quarter Exploration Update

During the second quarter of 2016, exploration expenditures totalled $2.8 million, compared to expenditures of $1.1 million in the second quarter of 2015. Exploration activities during the quarter included: drilling, trenching, geological mapping, soil/chip and channel sampling, and ground geophysics.

Mongolia

Gatsuurt

During the quarter, significant drilling activities resumed at the Gatsuurt Project including:

  • Infill drilling - 32 drill holes for 3,763 metres, sampling and assaying completed,
  • Metallurgical drilling - 13 drill holes for 1,628 metres, sampling, assaying and compositing completed and shipment permitting process initiated,
  • Geotechnical drilling - 12 drill holes for 2,256 metres with most of the lab tests completed,
  • Exploration drilling - 17 drill holes for 2,648 metres, sampling and assaying completed.

The infill drill program mostly returned the expected geological interpretations and mineralized intervals. The metallurgical drill program, designed to "twin" previously drilled holes, again returned the expected assay results.

Exploration drilling was conducted in the NE extension of the Central Zone, South Slope and SW Main Zones.

Best results from the drilling at the NE extension of the Central Zone include:

  • GT-549: 3.09 g/t Au over 11.5 metres (13 - 24.5 metres)
  • 1.98 g/t Au over 11.7 metres (124.8 - 136.55 metres)
  • 1.31 g/t Au over 14.9 metres (154.9 - 169.8 metres)
  • GT-551: 1.31 g/t Au over 12.2 metres (146.6 - 158.8 metres)
  • GT-552: 26.70 g/t Au over 1.5 metres (148.1 - 149.6 metres)
  • 2.27 g/t Au over 24.3metres (197 - 221.35 metres)
  • GT-554: 1.60 g/t Au over 8.75 metres (166.15 - 174.9 metres)

Drilling at the South Slope southeast extension with the best result being:

  • GT-563: 2.73 g/t Au over 11.9 metres (71.9 - 83.8 metres)

The results from drilling in the Main Zone southwest extension, indicate that high-grade and new mineralization occurs almost 500 metres southwest of the Main Zone and 500 metres northeast of the 49 Zone. Best results:

  • GT-567: 15.63 g/t Au over 4.3 metres (110.7 - 115 metres)

Exploration drilling will continue during the third quarter of 2016 with evaluation of new targets at NE extension of the Central Zone, South Slope, SW Main Zone and 49 Zones.

The above mineralized intercepts were calculated using a cut-off grade of 1 g/t Au and a maximum internal dilution interval of 4.0 metres. Drill collar locations and associated graphics are available at the following link: http://media3.marketwire.com/docs/cg726-exp.pdf.

A listing of the drill results, drill hole locations and plan map for the Gatsuurt Project have been filed on the System for Electronic Document Analysis and Retrieval ('SEDAR') at www.sedar.com and are available at the Company's web site.

Other Projects

Centerra continues to advance other projects in Armenia, Canada, Mexico, Nicaragua, Portugal and Turkey.

Qualified Person & QA/QC

Exploration information and related scientific and technical information in this news release regarding the Gatsuurt Project were prepared in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and NI 43-101 - Standards of Disclosure for Mineral Projects ("NI 43-101") and were prepared, reviewed, verified and compiled by Centerra's geological and mining staff under the supervision of Boris Kotlyar, a Certified Professional Geologist, Centerra's Director, Exploration, North America and Central America, who is the qualified person for the purpose of NI 43-101. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the exploration drilling programs are done consistent with industry standards and independent certified assay labs are used.

All production information and other scientific and technical information in this news release were prepared in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and NI 43-101 and were prepared, reviewed, verified and compiled by Centerra's geological and mining staff under the supervision of Gordon Reid, Professional Engineer and Centerra's Vice-President and Chief Operating Officer, who is the qualified person for the purpose of NI 43-101. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the exploration drilling programs are done consistent with industry standards and independent certified assay labs.

Other Corporate Developments

The following is a summary of corporate developments with respect to matters affecting the Company and its subsidiaries. Readers are cautioned that there are a number of legal and regulatory matters that are currently affecting the Company and that the following is only a brief summary of such matters. For a more complete discussion of these matters, see the Company's most recently filed Annual Information Form available on SEDAR at www.sedar.com. The following summary also contains forward-looking statements and readers are referred to "Caution Regarding Forward-looking Information".

Kyrgyz Republic

Notice of Arbitration

On May 30, 2016, Centerra delivered a notice of arbitration to the Kyrgyz Republic government and Kyrgyzaltyn in connection with certain ongoing disputes relating to the Kumtor Project. These include, among other things: (i) each of the environmental claims brought by the Kyrgyz Republic State Inspectorate for Environment and Technical Safety ("SIETS") and the Kyrgyz Republic State Agency for Environment Protection and Forestry ("SAEPF") and the decisions of the Kyrgyz Republic courts related thereto; and (ii) the previously announced claims of the Kyrgyz Republic General Prosecutor's Office ("GPO") seeking to unwind a US$200 million inter-corporate dividend paid by KGC to Centerra in December 2013 and the related search of KGC's Bishkek office conducted on April 28, 2016. On July 12, 2016, the Company delivered an amended notice of arbitration to the Kyrgyz Republic Government and Kyrgyzaltyn to include, among other things, subsequent decisions of the Kyrgyz Republic courts in relation to the claims of SIETS and SAEPF and actions by Kyrgyz Republic instrumentalities, including the GPO, which interfere with KGC's operations. Under Centerra's Restated Investment Agreement with the Kyrgyz Republic dated as of June 6, 2009 (the "2009 Restated Investment Agreement"), the arbitration will be determined by a single arbitrator. After failing to agree on the name of an arbitrator Centerra has applied to the Permanent Court of Arbitration in The Hague, the Netherlands to appoint an arbitrator. The arbitration will be conducted under UNCITRAL Arbitration Rules in Stockholm, Sweden, and disputes arising out of the 2009 Restated Investment Agreement will be governed by the law of the State of New York, USA and the conduct and operations of the parties will be governed by the 2009 Restated Investment Agreement, the 2009 Restated Concession Agreement and the laws of the Kyrgyz Republic.

Even if the Company is successful in convincing the arbitrator to reduce the amounts claimed or overturn the claims brought by SIETS, SAEPF or other matters which the Company believes are subject to the notice of arbitration, there are no assurances that such an arbitration award would be recognized and enforced by courts in the Kyrgyz Republic, as the courts of the Kyrgyz Republic have held that certain environmental claims brought by SIETS and SAEPF are not within the scope of the arbitration provision of the 2009 Restated Investment Agreement. Accordingly, the Company may be obligated to pay part of or the full amounts of, among others, the SIETS and SAEPF claims regardless of the action taken by the arbitrator. The Company may not have sufficient insurance to cover these costs and there are no litigation reserves for such amounts. If the Company were obligated to pay these amounts, it would have a material adverse impact on the Company's future cash flows, earnings, results of operations and financial condition.

Kyrgyz Permitting and Regulatory Matters

On June 23, 2016, the Company received its 2016 maximum allowable emissions permit for its Kumtor Project from SAEPF, which permit is valid until December 31, 2016. In addition, Kumtor Project also received approval from SAEPF for its 2016 maximum allowable discharge permit which allows for discharge of treated effluent. On June 27, 2016, SAEPF issued its official environmental expertise (approval) on the 2016 mine plan for the Kumtor Project. Centerra now has all the necessary permits and approvals in place for continuous operations at the Kumtor Project throughout the second half of 2016.

However, KGC notes that on July 11, 2016, SAEPF again expressed concerns to KGC about approving Kumtor's Ecological Passport due to the application of the 2005 Kyrgyz Republic Water Code and would not provide the renewed Ecological Passport. As previously noted, the Ecological Passport identifies some of the permits and approvals required by Kumtor for its operations. KGC continues to be in discussions with SAEPF; however the Company does not believe that the absence of the Ecological Passport will have a material effect on the Kumtor Project operations.

While KGC management will continue to work closely with SAEPF and the Kyrgyz State Agency for Geology and Mineral Resources to obtain all necessary permits and approvals for continued operation of the Kumtor Project beyond December 31, 2016, Centerra can provide no assurance that such permits and approvals will be granted in a timely fashion or at all. Failure to obtain the necessary permits and approvals in a timely fashion could lead to suspension of Kumtor Project operations until such permits and approvals are obtained.

KGC continues to operate fully in compliance with permits as granted. The Company understands that the delay in obtaining the necessary approvals and permits related to, among other things, concerns regarding the mining of ice at Kumtor. With regard to the mining of ice, regulatory authorities referenced the 2005 Water Code of the Kyrgyz Republic (Water Code) and its prohibition regarding the mining of ice. Centerra has repeatedly disputed the interpretation of the Water Code by the regulatory agencies based on the rights provided to Centerra and KGC under the Kumtor Project Agreements.

Should Kumtor be prohibited from moving ice (as a result of the purported application of the Water Code) or if any required permits are withdrawn or not renewed, the entire December 31, 2015 mineral reserves at Kumtor, and Kumtor's current life-of-mine plan would be at risk, leading to an early closure of the operation. Centerra believes that any disagreements with respect to the foregoing would be subject to international arbitration under the Kumtor Project Agreements.

Draft Bill on Nationalization

On June 28, 2016, the Kyrgyz Republic Parliament posted a draft bill, for public comment, of the "Law on Nationalization of Kumtor Gold Company CJSC's Property," (the "Draft Nationalization Bill"), which was proposed by deputies of the Ata-Meken political party, a ruling coalition party in the Kyrgyz Republic parliament. The Draft Nationalization Bill proposes the nationalization of all assets of KGC, and the suspension of the effect of the 2009 Restated Investment Agreement, among other laws and agreements relating to the Kumtor Project.

As previously disclosed, the Kumtor Project has in recent years been threatened with proposed Parliamentary decrees and draft laws that would have the effect of nationalization. While the Company believes that it is unlikely that the Draft Nationalization Bill will be adopted, it cannot predict with certainty the likelihood of adoption. If the Draft Nationalization Bill were passed, it would have a material adverse impact on the Company's interest in the Kumtor Project, future cash flows, earnings, results of operations and financial condition.

SIETS and SAEPF Claims

As previously disclosed, the Kumtor Project is subject to a number of claims made by, among others, Kyrgyz Republic state environmental agencies. The Company believes that such claims are, in substance, an attempt by the Kyrgyz Republic to impose additional taxes and payments on the Kumtor Project which are prohibited by the terms of the 2009 Restated Investment Agreement and are not based on improper environmental practices or conduct.

On May 25, 2016, the Bishkek Inter-District Court in the Kyrgyz Republic ruled against Kumtor Operating Company ("KOC"), Centerra's wholly-owned subsidiary, on two claims made by SIETS in relation to the placement of waste rock at the Kumtor waste dumps and unrecorded wastes from Kumtor's effluent and sewage treatment plants. The Inter-District Court awarded damages of 6,698,878,290 Kyrgyz soms (approximately US$99.4 million, based on an exchange rate of 67.4 Kyrgyz soms per US$1.00) and 663,839 Kyrgyz soms (approximately US$10,000), respectively. On June 1, 2016, the Inter-District Court ruled against KOC on two other claims made by SIETS in relation to alleged land damage and failure to pay for water use. The Inter-District Court awarded damages of 161,840,109 Kyrgyz soms (approximately US$2.4 million) and 188,533,730 Kyrgyz soms (approximately US$2.8 million), respectively. Centerra and KOC strongly dispute the SIETS claims and have appealed the decisions to the Bishkek City Court and will, if necessary, appeal to the Kyrgyz Republic Supreme Court.

On June 3, 2016, the Inter-District Court held a hearing in respect of the claim made by SAEPF alleging that Kumtor owes additional environmental pollution fees in the amount of approximately US$220 million. The court did not issue a decision on the merits of the claim itself. However, at the request of SAEPF, the court granted an interim order against KGC, to secure SAEPF's claim. The interim order prohibits KGC from taking any actions relating to certain financial transactions including, transferring property or assets, declaring or paying dividends or making loans. The injunction was effective immediately. KGC's appeal of the Inter-District Court's order to Bishkek City Court was dismissed on July 19, 2016 and the Company intends to appeal that decision to the Kyrgyz Republic Supreme Court. As a result of the appeal by KGC, the proceedings on the merits of the SAEPF claim at the Bishkek Inter-District Court to be held on June 21, 2016 were suspended pending resolution of the appeal.

As a result, cash generated from the Kumtor Project must continue to be held in KGC and is not available for distribution to Centerra. As at June 30, 2016, KGC's cash balance is $15.6 million.

Criminal Proceedings Against Unnamed KGC Managers

On May 30, 3016, a new criminal case was opened by the GPO against unnamed KGC managers alleging that such managers engaged in transactions that deprived KGC of its assets or otherwise abused their authority, causing damage to the Kyrgyz Republic. Specifically, the case appears to be focused on the commercial reasonableness of certain of KGC's commercial transactions and in particular, the purchase of goods and supplies in the normal course of its business operations and the expenses relating to the relocation of the Kumtor Project's camp in 2014 and 2015. Further to such investigation, the GPO has carried out searches of KGC's offices and seized documents and records. The Company and KGC strongly dispute the allegation that any such commercial transactions or the actions of KGC managers were in any way improper. The Company and KGC will challenge the actions of the GPO in the courts of the Kyrgyz Republic as well as in international arbitration.

2013 KGC Dividend Civil and Criminal Proceeding

On June 3, 2016, the Inter-District Court also renewed a claim previously commenced by the GPO seeking to unwind the $200 million dividend paid by KGC to Centerra in December 2013 (the "2013 Dividend"). The Company also understands that the GPO has initiated a criminal proceeding against executives of the Company and KGC in respect of the 2013 Dividend and that Kyrgyz Republic State National Security Committee is investigating in relation to that proceeding.

KGC Employee Movement Restrictions

In connection with the foregoing criminal investigations, restrictions have been imposed on certain KGC managers and employees, which prohibit them from leaving the Kyrgyz Republic.

GPO Review of Kumtor Project Agreements

On June 14, 2016, according to reports in the Kyrgyz Republic, the Kyrgyz Republic President instructed the GPO to investigate the legality of the agreements relating to the Kumtor Project which were entered into in 2003, 2004 and 2009. The 2009 Restated Investment Agreement governing the Kumtor Project which was entered into in 2009 superceded entirely the 2003 and 2004 agreements. The 2009 Restated Investment Agreement was negotiated with the Kyrgyz Republic government, Kyrgyzaltyn JSC and their international advisers, and approved by all relevant Kyrgyz Republic state authorities, including the Kyrgyz Republic Parliament and any disputes under the 2009 Restated Investment Agreement are subject to resolution by international arbitration.

Criminal Charges Regarding 2016 Casualty at Kumtor Mill

On June 16, 2016, the Investigator of the Jety-Oguz District Department of Interior Affairs initiated criminal proceedings against two KGC managers in relation to the previously disclosed death of a KGC employee due to an industrial accident which occurred in January 2016.

Management Assessment of Claims

The Company remains committed to working with Kyrgyz Republic authorities to resolve these issues in accordance with the agreements governing the Kumtor Project ("Kumtor Project Agreements"), which provide for all disputes to be resolved by international arbitration, if necessary. Although the Company has reviewed the various claims discussed above and believes that all disputes related to the 2009 Restated Investment Agreement should be determined in arbitration, there is a risk that the arbitrator may reject the Company's claims. There are also risks that an arbitrator will determine it does not have jurisdiction and/or may stay the arbitration pending determination of certain issues by the Kyrgyz Republic courts. These claims include, but are not limited to, (i) the validity or enforceability of the 2009 Restated Investment Agreement itself, (ii) criminal claims and (iii) any claims that a non-party to the 2009 Restated Investment Agreement has brought in Kyrgyz Republic courts. There is also risk that a Kyrgyz Republic court would not confirm and/or enforce an arbitration award issued by the arbitrator. There are also no assurances that: (i) the Company will be able to successfully resolve any or all of the outstanding matters affecting the Kumtor Project; (ii) any discussions between the Kyrgyz Republic government and Centerra will result in a mutually acceptable solution regarding the Kumtor Project Agreements; (iii) Centerra will receive the necessary legal and regulatory approvals under Kyrgyz law and/or Canadian law; or (iv) the Kyrgyz Republic government and/or Parliament will not take actions that are inconsistent with the government's obligations under the Kumtor Project Agreements, including adopting a law "denouncing" or purporting to cancel or invalidate the Kumtor Project Agreements or laws enacted in relation thereto, including the Draft Nationalization Bill. The inability to successfully resolve all such matters could lead to suspension of operations of the Kumtor Project and would have a material adverse impact on the Company's future cash flows, earnings, results of operations and financial condition.

Mongolia

Gatsuurt - Development

Throughout the first half of 2016, the Company held discussions with the Mongolian Government to implement the previously disclosed 3% special royalty in lieu of the Government's 34% direct interest in the Gatsuurt project. Various working groups have been established by the Mongolian Government to negotiate with Centerra and its wholly owned subsidiary, Centerra Gold Mongolia ("CGM"), the definitive agreements relating to the Gatsuurt Project.

Concurrent with the negotiations of such agreements, the Company is undertaking economic and technical studies to update the existing studies on the project, which were initially completed and published in May 2006. As part of such work, the Company is conducting a program of exploration drilling, and geotechnical, metallurgical and additional hydrogeological drilling.

There are no assurances that Centerra will be able to negotiate definitive agreements with the Mongolian Government (in a timely fashion or at all) or that such economic and technical studies and drilling programs will have positive results. The inability to successfully resolve all such matters could have a material impact on the Company's future cash flows, earnings, results of operations and financial condition.

Gatsuurt - Illegal Mining

CGM and Centerra continue to work with appropriate Mongolian federal and aimag (local) governments, relevant state bodies and police to clear the Gatsuurt site from artisanal miners and to restrict their access to the site. Centerra does not support any violence or excessive use of force in encounters between Mongolian authorities and artisanal miners and has made this explicitly clear to the Mongolian authorities. In early April 2016, the Company resumed limited drilling activity at the Gatsuurt site. The presence of artisanal miners on the Gatsuurt site has decreased significantly since drilling activity resumed.

Claim Against the Mongolian Mineral Resources Authority to Revoke Gatsuurt Mining Licenses

In the first quarter of 2016, a non-governmental organization called "Movement to Save Mt. Noyon" filed a claim against the Mongolian Mineral Resources Authority (MRAM) requesting that MRAM revoke the two principle mining licenses underlying the Gatsuurt Project. CGM, the holder of these two mining licenses, is involved in the claim as a third party. The Company and CGM will continue to monitor the proceedings.

Corporate

Ontario Court Proceedings Involving the Kyrgyz Republic and Kyrgyzaltyn

Since 2011, there have been four applications commenced in the Ontario courts by different applicants against the Kyrgyz Republic and Kyrgyzaltyn JSC, each seeking to enforce in Ontario international arbitral awards against the Kyrgyz Republic. None of these disputes relate directly to Centerra or the Kumtor Project. In each of these cases, the applicants have argued that the Kyrgyz Republic has an interest in the Common Shares held by Kyrgyzaltyn JSC, a state controlled entity, and therefore that such applicant(s) are entitled to seize such number of Common Shares and/or such amount of dividends as necessary to satisfy their respective arbitral awards against the Kyrgyz Republic. On July 11, 2016, the Ontario Superior Court of Justice released a decision on the common issue in these four applications as to whether the Kyrgyz Republic has an exigible ownership interest in the Common Shares held by Kyrgyzaltyn JSC. The Ontario Superior Court of Justice held that the Kyrgyz Republic does not have any equitable or other right, property, interest or equity of redemption in the Common Shares held by Kyrgyzaltyn JSC. As a result, on July 20, 2016, the Ontario Superior Court of Justice set aside previous injunctions which prevented Centerra from, among other things, paying any dividends to Kyrgyzaltyn. Accordingly, Centerra has now released to Kyrgyzaltyn approximately C$18.9 million which was previously held in trust for the benefit of two Ontario court proceedings.

2016 Outlook

Centerra's 2016 gold production is expected to be between 500,000 to 530,000 ounces which narrows the range from the previous guidance of 480,000 to 530,000 ounces as disclosed in the Company's news release of May 3, 2016. All of Centerra's 2016 production is expected to come from the Kumtor mine and is consistent with the 2016 production outlined in the life-of-mine plan set out in the Kumtor NI 43-101 technical report dated March 20, 2015, filed on SEDAR. According to the 2016 mine plan at Kumtor more than half of the annual gold production will come in the second half of 2016.

The Boroo operation will continue with closure activities mainly focusing on reclamation work. Any revenue from Boroo gold production from the drain down of the heap leach pad will be offset against mine closure costs. The 2016 production forecast assumes no gold production from Boroo or Gatsuurt, which is unchanged from the previous guidance.

The Company has revised its 2016 forecast to reflect lower operating costs, capital expenditures and DD&A expense at Kumtor and higher exploration and development costs at the Gatsuurt property. The Company has also revised its 2016 forecast for capital costs at the Öksüt, Greenstone, and Gatsuurt development projects as discussed below. Centerra's 2016 guidance for corporate administration and community costs remains unchanged from the previous guidance disclosed in the Company's news release of May 3, 2016.

2016 All-in Unit Costs1

Centerra has updated its 2016 guidance for all-in sustaining costs per ounce sold1 and all-in costs (excluding Öksüt, Greenstone, and Gatsuurt development projects) per ounce sold1 as follows:

  2016 Revised Guidance  Previous Guidance at Q1
  Kumtor  Consolidated (5)  Kumtor  Consolidated (5)
Ounces sold forecast 500,000-530,000  500,000-530,000  480,000-530,000  480,000-530,000
US $ / gold ounces sold           
            
Operating Costs 374 - 396  374 - 396  400 - 442  400 - 442
Changes in inventories (39) - (41)  (39) - (41)  (8) - (9)  (8) - (9)
Operating Costs (on a sales basis) $335 - 355  $335 - 355  $392 - 433  $392 - 433
Regional office administration 29 - 30  29 - 30  29 - 32  29 - 32
Community costs related to current operations 4-5  4-5  4-5  4-5
Refining costs and by-product credits 1  1  1  1
Subtotal (Adjusted Operating Costs) (1) $369 - 391  $369 - 391  $426 - 471  $426 - 471
            
Corporate general & administrative costs -  56 - 62  -  56 - 62
Accretion expense 2  3  3  4
Capitalized stripping costs - cash 204 - 216  204 - 216  230 - 254  230 - 254
Capital expenditures (sustaining)(1) 142 - 150  144 - 152  158 - 174  161 - 177
All-in Sustaining Costs (1) $717 - 759  $776 - 824  $817 - 902  $877 - 968
            
Capital expenditures (growth)(1), (5) 32 - 34  32 - 34  49 - 54  49 - 54
Boroo closure costs(2) -  7-8  -  14 - 16
Other costs(3) -  36 - 37  -  25 - 28
All-in Costs (excluding development project costs)(5) $749 - 793  $851 - 903  $866 - 956  $965 - 1,066
            
Revenue-based taxes and income taxes (4) 177  177  168  168
All-in Costs (excluding development project costs and including revenue-based taxes and income taxes)(1), (5) $926 - 970  $1,028 -1,080  $1,034 - 1,124  $1,133 -1,234
            
  1. Adjusted operating costs per ounce sold, all-in sustaining costs per ounce sold, all-in costs (excluding development projects) per ounce sold, all-in costs (excluding development project costs and including revenue-based taxes and income taxes) per ounce sold, as well as capital expenditures (sustaining and growth) are non-GAAP measures and are discussed under "Non-GAAP Measures".
  2. Boroo closure costs include maintaining the Boroo mill on care and maintenance and ongoing closure costs net of gold sales.
  3. Other costs per ounce sold include global exploration expenses, business development expenses and other costs not related to current operations.
  4. Includes revenue-based taxes that reflects actual realized gold price of $1,238 per ounce sold for January - June period and a forecasted gold price assumption of $1,275 per ounce sold for July - December period ($1,200 per ounce sold for April - December period in the previous guidance).
  5. All-in costs per ounce sold (excluding development project costs) and all-in costs (excluding development project costs and including revenue-based and income taxes) per ounce sold as well as capital expenditures (sustaining and growth) measures in the above table exclude capital expenditures required to advance development of Öksüt, Gatsuurt and Greenstone development projects.

The Company has revised its 2016 forecast for operating costs and capitalized stripping costs at the Kumtor mine due to realized and forecasted cost savings from lower diesel fuel and national labour costs. Diesel fuel costs are lower than expected due to lower unit costs and national labour costs are lower than expected due to favorable exchange rates of the Kyrgyz Som to the U.S. dollar. The Company also revised its forecast for Boroo closure costs due to expected lower labour costs and expected higher offsetting credit from Boroo gold sales. Higher credit for changes in inventories reflects the updated gold production guidance range and movement between the actual gold inventory balance at the beginning of 2016 and an updated estimate for gold inventory at the end of 2016 at Kumtor. Higher forecast for other costs reflects higher exploration costs and higher business development costs due to an increased M&A activity.

2016 Exploration Expenditures

2016 planned exploration expenditures excluding exploration at Greenstone Gold property have been revised to $12.4 million, which is $1.4 million higher from the previous guidance provided in the May 3, 2016 news release primarily due to additional drilling at the Gatsuurt property.

2016 Capital Expenditures

Centerra's projected capital expenditures for 2016, excluding capitalized stripping, have been revised to $140 million ($269 million in the previous guidance), including $76 million of sustaining capital1 ($85 million in the previous guidance) and $64 million of growth capital1 ($184 million in the previous guidance). The decrease in capital expenditure forecasts are described below.

Projected capital expenditures (excluding capitalized stripping) include:

Projects 2016 Sustaining Capital1 2016 Growth Capital1
  (millions of dollars) (millions of dollars)
Kumtor $75 $22
Öksüt - 25
Greenstone Gold Property - 11*
Gatsuurt Project - $6
Other (Boroo and Corporate) $1 -
Consolidated Total $76 $64
     
  • * Excludes $13 million ($4.9 million in the previous guidance) representing capitalized amount for Premier's 50% share of the development expenditures related to the Greenstone Gold Property and funded by Centerra.

Kumtor

At Kumtor, 2016 total capital expenditures, excluding capitalized stripping, are forecast to be $97 million, which is $13 million lower from the previous guidance. The Company decreased its forecast for sustaining capital1 from $84 million in the previous guidance to $75 million due to cancelations or deferral of major overhauls and replacements of certain heavy duty mine equipment ($7 million) and mill equipment ($2 million).

2016 forecast for growth capital investment at Kumtor has been reduced to $22 million ($26 million in the previous guidance) reflecting lower cost estimates for relocation of certain infrastructure at Kumtor relating to the ongoing Kumtor pit expansion ($2 million) and other items ($2 million).

The projected cash component of capitalized stripping costs related to the development of the open pit is expected to decrease to $108 million from $122 million in the previous guidance reflecting lower labour and diesel costs. Total capitalized stripping costs, including DD&A, are forecasted at $145 million ($162 million in the previous guidance) for 2016.

Mongolia (Boroo and Gatsuurt)

At Boroo, 2016 sustaining capital1 expenditures are expected to be minimal and no growth capital1 is forecast for Boroo, which is unchanged from the previous guidance.

The Company is carrying out additional exploration drilling to expand the Gatsuurt resource base as well as geo-technical and hydrogeological drilling in support of the eventual project development. The Company has added to its 2016 forecast $6 million of additional expenditures (excluding $1.4 million for additional exploration) for further development of the Gatsuurt Project.

Öksüt Project

The Company has decreased its 2016 forecast for capital construction expenditures at the Öksüt property from $157 million in the previous guidance to $25 million in the current guidance due to delays in obtaining permits. The revised forecast assumes a receipt of required permits from the Turkish authorities in the third quarter of 2016 and a commencement of some construction activities at the Öksüt property in the fourth quarter of 2016.

Greenstone Gold Property

The Company has revised its guidance for 2016 expenditures in connection with the Greenstone Gold Property to approximately $37 million (Cdn$49 million) compared to $10.8 million (Cdn$14.5 million) in the previous guidance, which reflects the assumption of a positive feasibility study leading to Board approval of additional spending on detailed engineering and other development costs. The previous guidance included partnership costs only up to mid-year 2016, which was expected timing for completion of the feasibility study by the Greenstone Partnership. The Greenstone Partnership now expects to complete the feasibility study early in the fourth quarter of 2016.

The revised 2016 guidance includes $23 million of spending related to work on technical studies, environmental and social impact assessment, house and property acquisition, and project support ($7.6 million in the previous guidance), exploration costs of $3 million ($2.2 million in the previous guidance) as well as $11 million for capital expenditures ($1 million in the previous guidance). The forecast spending for 2016 will be fully funded by Centerra with 50% of spending accounted for as pre-development project spending or exploration and expensed through Centerra's income statement. The remaining 50% of spending will be capitalized on Centerra's balance sheet and be accounted for as an acquisition cost of the Greenstone Gold Property ($13 million compared to $4.9 million in the previous guidance) in addition to $11 million ($1 million in the previous guidance) to be spent on capital items.

2016 Depreciation, Depletion and Amortization

The forecast for consolidated depreciation, depletion and amortization expense included in costs of sales expense for 2016 has been revised to be between $180 million and $190 million at Kumtor ($194 million and $208 million in the previous guidance).

(In millions)  2016 DD&A Revised Forecast (Unaudited)  2016 DD&A Previous Forecast (Unaudited)
Kumtor      
Mine equipment  $65  $70
Less DD&A capitalized to stripping costs(1)   (37)   (40)
Capital stripping costs amortized   183 - 197   185 - 205
Other mining assets   7   7
Mill assets   10   10
Administration assets and other   14   14
Inventory adjustment (non-cash depreciation)   (62) - (66)   (52) - (58)
Subtotal for Kumtor & Consolidated Centerra  $180 - 190  $194 - 208
         
  1. Use of the Company's mining fleet for stripping activities results in a portion of the depreciation related to the mine fleet to be allocated to capitalized stripping costs.

Kumtor

The revised forecast for 2016 DD&A to be expensed as part of costs of sales is between $180 million and $190 million ($194 million to $208 million in the previous guidance). The amortization of capitalized stripping costs is the largest component of depreciation expense in 2016 forecasted to be between $183 million to $197 million ($185 million to $205 million in the previous guidance) reflecting the updated gold production guidance range and lower forecasted mining costs due to lower diesel fuel and labor costs. Capitalized stripping costs include mining operating costs such as labour, diesel and maintenance costs, as well as the depreciation expense for the mine equipment used in the stripping campaign. The capitalized stripping costs are amortized over the ounces contained in the ore body exposed by the stripping campaign.

The mine equipment assets are depreciated on a straight-line basis over their estimated useful lives. The total mine equipment depreciation for 2016 is forecasted at $65 million ($70 million in the previous guidance) due to lower forecasted depreciation on replacement of mining equipment. The depreciation related to mine equipment engaged in a stripping campaign and capitalized as stripping costs is forecasted to be $37 million ($40 million in the previous guidance) in 2016.

Forecast for credit for inventory adjustment (non-cash depreciation) has been revised to be between $62 million and $66 million ($52 million to $58 million in the previous guidance) reflecting movement between non-cash costs in the actual gold inventory balance at the beginning of 2016 and non-cash costs in an updated estimate for gold inventory at the end of 2016 at Kumtor.

Sensitivities

Centerra's revenues, earnings and cash flows for the remaining six months of 2016 are sensitive to changes in certain key inputs or currencies. The Company has estimated the impact of any such changes on revenues, net earnings and cash from operations.

   Impact on  Impact on
 Change ($ millions)  ($ per ounce sold)
  CostsRevenuesCash flowEarningsAISC(2)
Gold Price$50/oz2.0 - 2.414.5 - 17.012.5 - 14.612.5 - 14.6n/a
Diesel Fuel10%3.1-3.13.19.1 - 10.7
Kyrgyz som(1)1 som0.6-0.60.61.8 - 2.1
Canadian dollar(1)10 cents3-334.5 - 5.3
  1. Appreciation of currency against the US dollar will result in higher costs and lower cash flow and earnings, depreciation of currency against the US dollar results in decreased costs and increased cash flow and earnings.
  2. All-in sustaining costs per ounce sold ("AISC") is a non-GAAP discussed under "Non-GAAP Measures".

Material Assumptions and Risks

Material assumptions or factors used to forecast production and costs for the remaining six months of 2016 include the following:

  • a gold price of $1,275 per ounce ($1,200 per ounce in the previous guidance)
  • exchange rates:
    • $1USD : $1.31 CAD (from $1.34 CAD in the previous guidance)
    • $1USD : 71 Kyrgyz som (from 65 KGS in the previous guidance)
    • $1USD : 0.91 Euro (from 0.95 Euro in the previous guidance)
  • diesel fuel price assumption:
    • $0.43/litre at Kumtor (from $0.55/litre in the previous guidance)

The assumed diesel price of $0.43/litre at Kumtor assumes that no Russian export duty will be paid on the fuel exports from Russia to the Kyrgyz Republic. Diesel fuel is sourced from Russian suppliers and correlates only generally with world oil prices. The diesel fuel price assumptions were made when the price of oil (Brent) was approximately $47 per barrel. During the first half of 2016 diesel prices at Kumtor averaged approximately $0.39/litre, while average price of oil (Brent) was about $40 per barrel. During the same period average exchange rate of the United States dollar to the Kyrgyz som was about 71 soms per 1 U.S. dollar. The lower costs of diesel fuel and favorable exchange for the Kyrgyz som have provided some year-to-date costs savings for the Kumtor operations. Centerra's management continues to monitor the prices of diesel and exchange rates affecting the Company's operations.

Other material assumptions were used in forecasting production and costs for the second half of 2016. These material assumptions include the following:

  • That any discussions between the Government of the Kyrgyz Republic and Centerra regarding the resolution of all outstanding matters affecting the Kumtor mine are satisfactory to Centerra, fair to all of Centerra's shareholders, and that any such resolution will receive all necessary legal and regulatory approvals under Kyrgyz law and/or Canadian law.
  • All mine plans, expertises and related permits and authorizations at Kumtor receive timely approval from all relevant government agencies in the Kyrgyz Republic and are not subsequently withdrawn.
  • All construction related permits and authorizations for development of the Öksüt property are received in a timely manner.
  • The buttress constructed at the bottom of the Davidov glacier continues to function as planned.
  • The pit walls at Kumtor remain stable.
  • The resource block model at Kumtor reconciles as expected against production.
  • Any recurrence of political or civil unrest in the Kyrgyz Republic will not impact operations, including movement of people, supplies and gold shipments to and from the Kumtor mine and/or power to the mine site.
  • Any actions taken by the Kyrgyz Republic Parliament and Government do not have a material impact on operations or financial results. This includes any actions (i) being taken by the Parliament or Government to cancel the Kumtor Project Agreements, including due to the Draft Bill on Nationalization; (ii) which are not consistent with the rights of Centerra and KGC under the Kumtor Project Agreements; or (iii) that cause any disruptions to the operation and management of KGC and / or the Kumtor Project.
  • The previously disclosed environmental claims received from the Kyrgyz regulatory authorities and related Kyrgyz Republic court decision, the claims of the Kyrgyz Republic's General Prosecutor's Office purporting to invalidate land use rights and/or seize land at Kumtor and to unwind the $200 million inter-company dividend declared and paid by KGC to Centerra in December 2013, criminal and other investigations initiated by the GPO in connection with loans and dividends made by KGC and the alleged misuse of funds or other property at KGC and any further claims, whether environmental allegations or otherwise, are resolved without material impact on Centerra's operations or financial results.
  • The accession of the Kyrgyz Republic into the Eurasian Economic Union and/or any sanctions imposed on Russian entities do not have a negative effect on the costs or availability of inputs or equipment to the Kumtor Project.
  • The movement in the Central Valley Waste Dump at Kumtor, initially referred to in the Annual Information Form for the year ended December 31, 2013, does not accelerate and will be managed to ensure continued safe operations, without impact to gold production.
  • Grades and recoveries at Kumtor will remain consistent with the 2016 production plan to achieve the forecast gold production.
  • The Company is able to manage the risks associated with the increased height of the pit walls at Kumtor.
  • The dewatering program at Kumtor continues to produce the expected results and the water management system works as planned.
  • The Kumtor mill continues to operate as expected.
  • The Company continues to meet the terms of the EBRD Facility in order to further access such funds.
  • OMAS is able to meet the UniCredit Facility conditions to access the funds.
  • Exchange rates, prices of key consumables, costs of power, water usage fees, and any other cost assumptions at all operations and projects of the Company are not significantly higher than prices assumed in planning.
  • No unplanned delays in or interruption of scheduled production from our mines, including due to political or civil unrest, natural phenomena, regulatory or political disputes, equipment breakdown or other developmental and operational risks.

The Company cannot give any assurances in this regard.

Production, cost and capital forecasts for 2016 are forward-looking information and are based on key assumptions and subject to material risk factors that could cause actual results to differ materially and which are discussed herein under the headings "Material Assumptions & Risks" and "Cautionary Note Regarding Forward-Looking Information" in this news release and under the heading "Risk Factors" in the Company's Annual MD&A and in the Company's Annual Information Form for the year ended December 31, 2015.

Condensed Consolidated Interim Statements of Financial Position

(Unaudited)

  June 30,  December 31,
  2016  2015
(Expressed in Thousands of United States Dollars)       
        
        
Assets       
Current assets       
 Cash and cash equivalents $245,233  $360,613
 Short-term investments  282,149   181,613
 Amounts receivable  42,784   28,781
 Inventories  387,986   347,011
 Prepaid expenses  8,742   12,880
   966,894   930,898
Property, plant and equipment  698,444   693,016
Restricted cash  15,541   9,989
Other assets  30,918   26,681
   744,903   729,686
Total assets $1,711,797  $1,660,584
        
Liabilities and Shareholders' Equity       
Current liabilities       
 Accounts payable and accrued liabilities $70,377  $75,292
 Short-term debt  98,134   76,000
 Revenue-based taxes payable  10,752   9,152
 Taxes payable  2,201   1,286
 Current portion of provision for reclamation  906   1,062
   182,370   162,792
Dividends payable to related party  14,537   9,330
Provision for reclamation  65,843   65,087
Deferred income tax liability  180   2,524
   80,560   76,941
Total liabilities $262,930  $239,733
        
Shareholders' equity       
 Share capital  689,594   668,705
 Contributed surplus  25,167   24,153
 Accumulated other comprehensive income  1   220
 Retained earnings  734,105   727,773
   1,448,867   1,420,851
Total liabilities and Shareholders' equity $1,711,797  $1,660,584
        

Centerra Gold Inc.

Condensed Consolidated Interim Statements of Earnings and Comprehensive Income

(Unaudited)

   Three months ended   Six months ended
   June 30,   June 30,
   2016   2015   2016   2015
(Expressed in Thousands of United States Dollars, except per share amounts)                   
                    
                    
                    
Revenue from gold sales  $161,624   $146,754   $234,845   $359,392
                    
 Cost of sales   118,003    80,966    149,455    194,909
 Standby costs, net   (639 )  1,117    (696 )  3,821
 Regional office administration   3,706    5,026    7,048    10,302
Earnings from mine operations   40,554    59,645    79,038    150,360
                    
 Revenue-based taxes   22,627    19,823    32,878    48,522
 Other operating expenses   706    777    1,266    663
 Pre-development project costs   3,987    4,888    5,284    8,170
 Exploration and business development   5,149    2,105    7,190    4,869
 Corporate administration   6,785    10,790    12,612    20,155
Earnings from operations   1,300    21,262    19,808    67,981
                    
 Other (income) expenses, net   (469 )  (1,651 )  (1,736 )  2,594
 Finance costs   1,427    1,086    2,674    2,233
Earnings before income taxes   342    21,827    18,870    63,154
 Income tax (recovery) expense   (2,570 )  (95 )  (2,100 )  555
Net earnings  $2,912   $21,922   $20,970   $62,599
                    
Other Comprehensive Income                   
Items that may be subsequently reclassified to earnings:                   
 Net gain (loss) on translation of foreign operation   23    4    (219)    18
Other comprehensive (loss) income   23    4    (219)    18
Total comprehensive income  $2,935   $21,926   $20,751   $62,617
                    
Basic earnings per common share  $0.01   $0.09   $0.09   $0.26
Diluted earnings per common share  $0.00   $0.09   $0.08   $0.26
                    

Centerra Gold Inc.

Condensed Consolidated Interim Statements of Cash Flows

(Unaudited)

   Three months ended   Six months ended  
   June 30,   June 30,  
   2016   2015   2016   2015  
(Expressed in Thousands of United States Dollars)                     
                      
Operating activities                     
Net earnings  $2,912   $21,922   $20,970   $62,599  
Items not requiring (providing) cash:                     
 Depreciation, depletion and amortization   55,980    44,820    76,730    115,784  
 Finance costs   1,427    1,087    2,674    2,233  
 Loss on disposal of equipment   -    447    119    494  
 Compensation expense on stock options   722    675    1,344    1,302  
 Other share based compensation charge (reversal)   (483 )  4,472    (1,549 )  1,648  
 Inventory impairment (reversal)   1,159    -    (11,786 )  -  
 Income tax (recovery) expense   (2,570 )  (95 )  (2,100 )  555  
 Other operating items   (1,061 )  (1,289 )  (562 )  (534 )
     58,086    72,039    85,840    184,081  
 Change in operating working capital   (890 )  41,716    (19,179 )  61,799  
 Change in long-term inventory   -    494    -    349  
 Income taxes paid   51    64    13    (445 )
Cash provided by operations   57,247    114,313    66,674    245,784  
                      
Investing activities                     
 Additions to property, plant and equipment   (45,017 )  (70,461 )  (80,422 )  (142,627 )
 Purchase of short-term investments, net   (120,114 )  (53,793 )  (100,536 )  (70,041 )
 Purchase of interest in Greenstone Gold Mines LP   -    -    -    (67,423 )
 Decrease (increase) in restricted cash   20    -    (299 )  -  
 (Increase) decrease in long-term other assets   (830 )  1,023    (4,238 )  (14 )
Cash used in investing   (165,941 )  (123,231 )  (185,495 )  (280,105 )
                      
Financing activities                     
 Dividends paid - declared in period   (5,146 )  (5,209 )  (10,170 )  (10,426 )
 Dividends transferred to trust account   (2,248 )  2,352    (4,468 )  (4,704 )
 Payment of interest and borrowing costs   (3,128 )  -    (6,603 )  (1,509 )
 Increase in short term debt   24,000    -    24,000    -  
 Proceeds from common shares issued for options exercised   682    312    682    581  
Cash provided by (used in) financing   14,160    (7,249 )  3,441    (16,058  
Decrease in cash during the period   (94,534 )  (16,167 )  (115,380 )  (50,379 )
Cash and cash equivalents at beginning of the period   339,767    266,302    360,613    300,514  
Cash and cash equivalents at end of the period  $245,233   $250,135   $245,233   $250,135  
                      
Cash and cash equivalents consist of:                     
Cash  $114,776   $97,439   $114,776   $97,439  
Cash equivalents   130,457    152,696    130,457    152,696  
   $245,233   $250,135   $245,233   $250,135  
                      

Centerra Gold Inc.

Condensed Consolidated Interim Statements of Shareholders' Equity

(Unaudited)

                  
(Expressed in Thousands of United States Dollars, except share information)
   
Number of
Common
Shares
 
Share
Capital
Amount
 

Contributed
Surplus
Accumulated
Other
Comprehensive

Income
 

Retained
Earnings
 


Total
                       
Balance at January 1, 2015  236,403,958  $660,554  $22,556 $-  $715,533  $1,398,643
                       
Share-based compensation expense  -   -   1,302  -   -   1,302
Shares issued on exercise of stock options  
143,424
  
 922
  
 (341)
 
 -
  
 -
  
 581
Shares issued on redemption of restricted share units  
6,777
  
 37
  
 -
 
 -
  
 -
  
 37
Dividends declared  -   -   -  -   (15,130)   (15,130)
Foreign currency translation             18       18
Net earnings for the period  -   -   -  -   62,599   62,599
Balance at June 30, 2015  236,554,159  $661,513  $23,517 $18  $763,002  $1,448,050
                       
Balance at January 1, 2016  237,889,274  $668,705  $24,153 $220  $727,773  $1,420,851
Share-based compensation expense  -   -   1,344  -   -   1,344
Shares issued on exercise of stock options  153,915   1,012   (330)  -   -   682
Shares issued on redemption of restricted share units  
3,976
  
 20
  
 -
 
 -
  
 -
  
 20
Shares issued to settle obligations  4,117,120   19,857   -  -   -   19,857
Dividends declared  -   -   -  -   (14,638)   (14,638)
Foreign currency translation  -   -   -  (219)   -   (219)
Net earnings for the period  -   -   -  -   20,970   20,970
Balance at June 30, 2016  242,164,285  $689,594  $25,167 $1  $734,105  $1,448,867
                       

To view the Management's Discussion and Analysis and the Financial Statements and Notes for the three and six months ended June 30, 2016, please visit the following link: http://media3.marketwire.com/docs/cg726-mdafs.pdf

The Unaudited Condensed Consolidated Interim Financial Statements and Notes for the three and six months ended June 30, 2016 and Management's Discussion and Analysis for the three and six months ended June 30, 2016 have been filed on the System for Electronic Document Analysis and Retrieval ('SEDAR') at www.sedar.com and are available at the Company's web site at: www.centerragold.com.

Caution Regarding Forward-Looking Information

Information contained in this news release which are not statements of historical facts, and the documents incorporated by reference herein, may be "forward-looking information" for the purposes of Canadian securities laws. Such forward-looking information involves risks, uncertainties and other factors that could cause actual results, performance, prospects and opportunities to differ materially from those expressed or implied by such forward looking information. The words "believe", "expect", "anticipate", "contemplate", "target", "plan", "intends", "continue", "budget", "estimate", "may", "will", "schedule" and similar expressions identify forward-looking information. These forward-looking statements relate to, among other things: expectations regarding the proposed acquisition of TCM and related regulatory approvals and conditions, further discussions with the Mongolian Government relating to definitive agreements for the development of the Gatsuurt project, higher grade ore from cut-back 17 at Kumtor; matters relating to the Öksüt Project, including as to applications for and receipt of permits, timelines for development and production; completion of a feasibility study; EIS/EA submissions and impact benefits agreements relating to the Hardrock Project; claims and investigations made by Kyrgyz Republic state agencies, including the GPO, SIETS and SAEPF and arbitration proceedings involving KGC and the Kumtor Project, related Kyrgyz Republic court orders, the potential effects of such court orders and the Company's intentions relating thereto; permitting and regulatory matters, including the Ecological Passport, relating to the Kumtor Project, the potential effect of the Draft Nationalization Bill, and the potential effect on the Kumtor Project of Kumtor being prevented from moving ice; reclamation and closure activities at Boroo; estimates relating to the Company's cash and short term investments and its 2016 business plans; expectations relating to the Company's production, capital expenditures and costs for 2016.

Forward-looking information is necessarily based upon a number of estimates and assumptions that, while considered reasonable by Centerra, are inherently subject to significant political, business, economic and competitive uncertainties and contingencies. Known and unknown factors could cause actual results to differ materially from those projected in the forward looking information. Factors that could cause actual results or events to differ materially from current expectations include, among other things: (A) strategic, legal, planning and other risks, including: political risks associated with the Company's operations in the Kyrgyz Republic, Mongolia and Turkey; resource nationalism including the management of external stakeholder expectations; the impact of changes in, or to the more aggressive enforcement of, laws, regulations and government practices in the jurisdictions in which the Company operates including any unjustified civil or criminal action against the Company, its affiliates or its current or former employees; the impact of any actions taken by the Kyrgyz Republic Government and Parliament relating to the Kumtor Project Agreements which are inconsistent with the rights of Centerra and KGC under the Kumtor Project Agreements; any impact on the purported cancellation of Kumtor's land use rights at the Kumtor Project pursuant to a court claim commenced by the Kyrgyz Republic GPO; the risks related to other outstanding litigation affecting the Company's operations in the Kyrgyz Republic and elsewhere; the impact of the delay by relevant government agencies to provide required approvals and permits, including the delay currently being experienced at the Kumtor Project over the ecological passport; the potential impact on the Kumtor Project of investigations by Kyrgyz Republic instrumentalities and movement restrictions on KGC employees and managers; the rights of the Mongolian Government to take an interest in the Gatsuurt Project as a result of the deposit being declared a strategic deposit, and the terms of any such participation, or to take a special royalty rate which has yet to be defined; the impact of changes to, the increased enforcement of, environmental laws and regulations relating to the Company's operations; the impact of any sanctions imposed by Canada, the United States or other jurisdictions against various Russian individuals and entities; the ability of the Company to negotiate a successful deposit development agreement for Gatsuurt; potential defects of title in the Company's properties that are not known as of the date hereof; the inability of the Company and its subsidiaries to enforce their legal rights in certain circumstances; the presence of a significant shareholder that is a state-owned company of the Kyrgyz Republic; risks related to anti-corruption legislation; risks related to the concentration of assets in Central Asia; Centerra's future exploration and development activities not being successful; Centerra not being able to replace mineral reserves; difficulties with Centerra's joint venture partners; and aboriginal claims and consultative issues relating to the Company's 50% interest in the Greenstone Gold Property; potential risks related to kidnapping or acts of terrorism; and the failure of the Company and/or TCM to satisfy the conditions precedent, including shareholder or regulatory approvals, to the closing of the proposed acquisition of TCM by the Company or related transactions; (B) risks relating to financial matters, including: sensitivity of the Company's business to the volatility of gold prices, the imprecision of the Company's mineral reserves and resources estimates and the assumptions they rely on, the accuracy of the Company's production and cost estimates, the impact of restrictive covenants in the Company's revolving credit facility which may, among other things, restrict the Company from pursuing certain business activities, the Company's ability to obtain future financing, the impact of global financial conditions, the impact of currency fluctuations, the effect of market conditions on the Company's short-term investments, the Company's ability to make payments including any payments of principal and interest on the Company's debt facilities depends on the cash flow of its subsidiaries; and (C) risks related to operational matters and geotechnical issues, including: movement of the Davidov Glacier and the waste and ice movement at the Kumtor Project and the Company's continued ability to successfully manage such matters, including the continued performance of the buttress; the occurrence of further ground movements at the Kumtor Project and mechanical availability; the success of the Company's future exploration and development activities, including the financial and political risks inherent in carrying out exploration activities; inherent risks associated with the use of sodium cyanide in the mining operations; the adequacy of the Company's insurance to mitigate operational risks; mechanical breakdowns; the Company's ability to obtain the necessary permits and authorizations to (among other things) raise the tailings dam at the Kumtor Project to the required height; the Company's ability to replace its mineral reserves; the occurrence of any labour unrest or disturbance and the ability of the Company to successfully re-negotiate collective agreements when required; the risk that Centerra's workforce may be exposed to widespread epidemic; seismic activity in the vicinity of the Company's operations in the Kyrgyz Republic and Mongolia; long lead times required for equipment and supplies given the remote location of some of the Company's operating properties; reliance on a limited number of suppliers for certain consumables, equipment and components; illegal mining on the Company's Mongolian properties; the Company's ability to accurately predict decommissioning and reclamation costs; the Company's ability to attract and retain qualified personnel; competition for mineral acquisition opportunities; and risks associated with the conduct of joint ventures/partnerships, including Greenstone Gold Mines LP; the Company's ability to manage its projects effectively and to mitigate the potential lack of availability of contractors, budget and timing overruns and project resources. See "Risk Factors" in the Company's 2015 Annual Information Form available on SEDAR at www.sedar.com.

Furthermore, market price fluctuations in gold, as well as increased capital or production costs or reduced recovery rates may render ore reserves containing lower grades of mineralization uneconomic and may ultimately result in a restatement of reserves. The extent to which resources may ultimately be reclassified as proven or probable reserves is dependent upon the demonstration of their profitable recovery. Economic and technological factors which may change over time always influence the evaluation of reserves or resources. Centerra has not adjusted mineral resource figures in consideration of these risks and, therefore, Centerra can give no assurances that any mineral resource estimate will ultimately be reclassified as proven and probable reserves.

Mineral resources are not mineral reserves, and do not have demonstrated economic viability, but do have reasonable prospects for economic extraction. Measured and indicated resources are sufficiently well defined to allow geological and grade continuity to be reasonably assumed and permit the application of technical and economic parameters in assessing the economic viability of the resource. Inferred resources are estimated on limited information not sufficient to verify geological and grade continuity or to allow technical and economic parameters to be applied. Inferred resources are too speculative geologically to have economic considerations applied to them to enable them to be categorized as mineral reserves. There is no certainty that mineral resources of any category can be upgraded to mineral reserves through continued exploration.

There can be no assurances that forward-looking information and statements will prove to be accurate, as many factors and future events, both known and unknown could cause actual results, performance or achievements to vary or differ materially, from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained herein or incorporated by reference. Accordingly, all such factors should be considered carefully when making decisions with respect to Centerra, and prospective investors should not place undue reliance on forward looking information. Forward-looking information is as of July 26, 2016. Centerra assumes no obligation to update or revise forward looking information to reflect changes in assumptions, changes in circumstances or any other events affecting such forward-looking information, except as required by applicable law.

About Centerra

Centerra Gold Inc. is a North-American based gold mining company focused on operating, developing, exploring and acquiring gold properties in Asia, Canada and other markets worldwide. Centerra is the largest Western-based gold producer in Central Asia. Centerra's shares trade on the Toronto Stock Exchange (TSX) under the symbol CG. The Company is based in Toronto, Ontario, Canada.

Additional information on Centerra is available on the Company's website at www.centerragold.com and at SEDAR at www.sedar.com.

Conference Call

Centerra invites you to join its 2016 second quarter conference call on Wednesday, July 27, 2016 at 11:00AM Eastern Time. The call is open to all investors and the media. To join the call, please dial Toll-Free in North America (800) 708-3128 or International callers dial +1 (303) 223-2691. The conference call will also be broadcast live by Thomson Reuters and can be accessed at Centerra Gold's website at www.centerragold.com. A slide presentation of the second quarter results will also be accessible on Centerra Gold's website at www.centerragold.com. Alternatively, audio recording of the call will be available approximately two hours after the call via telephone until midnight Eastern Time on Wednesday, August 3, 2016. The recording can be accessed by calling (416) 626-4100 or (800) 558-5253 and using the passcode 21812781. In addition the webcast will be archived on Centerra Gold's website www.centerragold.com.

Additional information on Centerra is available on the Company's web site at www.centerragold.com and at SEDAR at www.sedar.com.

1 Non-GAAP measure, see discussion under "Non-GAAP Measures".

Attachment Available: http://www.marketwire.com/library/MwGo/2016/7/26/11G108019/25-Q2-2016-NR-Jul26-v4-FINAL-64f61c3893ec9c489f7a32eb450041ed.pdf

Contact Information

  • For more information:
    John W. Pearson
    Vice President, Investor Relations
    Centerra Gold Inc.
    (416) 204-1953
    Email contact