"We are upgrading CG back to speculative buy (from Hold) following a strong set of Q1 results, the 27% decline in the share price since the announcement of recent developments in Kyrgyzstan and the 31% implied return to our unchanged C$11.50/sh target price," analyst Dalton Baretto said.
Centerra fell on Friday following details of a new law which could allow the government to take control of Kumtor, a US$3.1 billion fine for environmental violations, a $170 million tax bill and further plans to undermine Kumtor's 2009 investment agreement.
The company believes that the actions of the Kyrgyz Republic authorities "are a concerted effort to coerce Centerra to give up economic value or ownership of the Kumtor mine or to falsely justify a nationalisation of the Kumtor mine".
"The company remains committed to trying to work with Kyrgyz Republic authorities to resolve these issues in accordance with the 2009 restated project agreements applicable to the Kumtor mine, if the authorities are willing to do so," president and CEO Scott Perry said yesterday.
"However, the company will also use all legal avenues to defend itself against baseless environmental and tax cases in the Kyrgyz Republic as well against legislative changes that not only violate but fundamentally undermine the terms of the 2009 restated project agreements."
Baretto believed Centerra's possible legal options "will be of limited efficacy" given prolonged timelines and president Sadyr Japarov's preference to align more closely with Russia and China.
Perry warned Centerra's three-year outlook and 2021 guidance of 740,000-820,000 ounces should be viewed with caution.
"We remain on track to achieve 2021 production and cost guidance at our Mount Milligan and Oksut mines and the company is expected to generate $160 million (guidance midpoint) in free cashflow, excluding the Kumtor mine," he said.
Centerra produced 160,346oz of gold in the March quarter, down from 190,474oz a year earlier.
Kumtor's output was down 41% to 90,169oz due to anticipated lower grades and recoveries.
Mount Milligan's gold output in British Columbia was up 26% to 42,576oz, and Oksut in Turkey which began commercial production less than a year ago produced 27,601oz.
Lower copper grades meant Mount Milligan's copper production was 18.6 million pounds, down from 20.1Mlb.
Higher earnings
Net earnings of $167.4 million compared with $20 million in the previous corresponding period, boosted by 9% and 29% higher gold and copper prices respectively and a $72.3 million gain from the sale of its 50% stake in Greenstone Gold Mines.
Adjusted earnings per share of 28c were above the consensus estimate of 21c, Bloomberg said.
Centerra ended the quarter with $823.2 million in cash and declared a quarterly dividend of C5c per share.
Canaccord's Baretto noted frequent cash sweeps meant less than US$10 million remained in Kyrgyz at one time.
"The Kyrgyz situation has overshadowed the attributes that we continue to like CG for: strong underlying operating performance and cash flow generation, a pristine and cash-rich balance sheet, substantial pending growth from Oksut, strong FCF yield and reasonable valuation," he said.
"In our view, Kumtor is now essentially an option in CG's share price, one that we believe is almost certain to deliver value beyond what is currently priced in."
Centerra had added a New York Stock Exchange listing in April.
Its Toronto-quoted shares (TSX: CG) gained 12.48% yesterday to C$9.28 but are down 37% year-to-date.
The company is capitalised about $2.7 billion (US$2.2 billion).
