CENTERRA
Cameco owns 52.7% of Centerra, which is listed and publicly traded on the TSX. Centerra began trading on the TSX under the symbol CG in June 2004. We transferred substantially all of our gold assets to Centerra as part of our strategy to unlock the value contained in these gold properties.
The geographic focus of Centerra's exploration, development, and acquisition efforts is in Central Asia, the former Soviet Union, and other emerging markets. Centerra owns 100% of the Kumtor mine in the Kyrgyz Republic and a 95% interest in the Boroo mine in Mongolia. The company is the operator of both mines. Centerra also has interests in exploration properties, including a 100% interest in the Gatsuurt property in Mongolia, 35 kilometres from the Boroo mine, and a 62% joint-venture interest in the REN property in Nevada.
Centerra's growth strategy is to increase its reserve base and expand its current portfolio of gold mining operations by:
- developing new reserves at existing mines from in-pit, adjacent and regional exploration,
- advancing late stage exploration properties by additional drill programs, and feasibility studies as warranted, and
- actively pursuing selective acquisitions or mergers, with a disciplined focus on mid- to advanced-stage exploration and development properties primarily in Central Asia, the former Soviet Union and other emerging markets.
Centerra recently issued updated estimates on the reserves and resources at its operating mines. Reserves of 2.3 million ounces of gold have been added at Kumtor before accounting for the production of 614,000 ounces of contained gold in 2005. The average reserve grade has also increased from 3.3 grams per tonne (g/t) gold to 3.8 g/t. At Boroo, reserves of 349,000 ounces of gold have been added which replace reserves mined in 2005. Additionally, 2.5 million ounces of measured and indicated resources have been added to Centerra's resource base.
As of December 31, 2005, on a 100% project basis, Centerra's proven and probable reserves totalled 6.2 million ounces of contained gold (Cameco's share is 3.2 million ounces). Based on these estimates, the additional reserves will extend the Kumtor mine life by almost three years and the Boroo mine life by approximately one year. For more information, including a caution on the risks associated with the mine life extension and reserve estimates, see Cameco's and Centerra's news releases dated January 23, 2006.
The technical information provided for Centerra's reserves and resources noted above was prepared under the supervision of Robert S. Chapman, M.Sc., P.Geo., and Centerra's director, mergers and acquisitions, a qualified person for the purpose of National Instrument 43-101.
Centerra is building its exploration program to further expand its reserve and resource base and is actively seeking acquisitions. Cameco believes that Centerra will be successful in its growth strategy and ultimately add more value to our investment in Centerra.
In the longer term, Cameco will look for the right opportunity to reduce and ultimately fully divest of its gold investment. It is not our intention to sell quickly, but rather to encourage Centerra to grow and gain value for Cameco's shareholders. The decision whether to divest will also depend on the need to fund other investment opportunities in the nuclear energy business.
For further information on Centerra, refer to its annual report and annual information form for 2005.
GOLD OPERATING RESULTS
The operating results of Kumtor have been fully consolidated as of June 22, 2004. Prior to that, Cameco proportionately consolidated its interest in Kumtor. Cameco also fully consolidates the results of Boroo, Centerra's gold mine in Mongolia. Cameco adjusts for a 47% minority interest in Centerra, which reflects that share of earnings attributable to shareholders other than Cameco.
GOLD FINANCIAL RESULTS
In 2005, revenue from our gold business rose by $89 million to $412 million compared to 2004. This increase was due largely to the full consolidation of Kumtor's results, a full year of production at Boroo and higher realized gold prices. The realized price for gold sales increased to $433 (US) in 2005 compared to $397 (US) per ounce in 2004.
Gold revenue included proceeds from the sale of gold in the current period as well as the amortization of deferred charges related to previously closed gold hedge contracts in 2004. The recognition of the deferred charges causes the realized gold price to vary relative to the average spot price for the period. In 2005, the deferred charges amounted to $7.00 (US) per ounce compared to $11.00 (US) per ounce in 2004.
Gold production at Kumtor was 501,000 ounces in 2005, a decline of 24% over 2004 levels due mainly to a lower mill head grade that averaged 3.4 g/t compared to 4.4 g/t last year.
Boroo gold production in 2005 was 286,000 ounces compared to 218,000 ounces in 2004 due to a full year of production following the start of operations in 2004. The average head grade of ore fed to the mill was 4.2 g/t compared to 4.5 g/t last year.
The gross profit margin for gold declined to 26% in 2005 compared to 34% in 2004 due to lower grades, and the higher cost of labour taxes and consumables.
GOLD OUTLOOK FOR 2006
Based on Centerra's current operations, total production for the year is forecast at 729,000 ounces, a decline of about 7% from 2005 primarily as a result of lower grades at both mines and lower recovery at Kumtor.
At Kumtor, production in 2006 is expected to decline to 461,000 ounces from 501,000 ounces in 2005, due to a lower mill head grade that is expected to average 3.3 g/t compared to 3.4 g/t in 2005 and lower recovery.
| Fully consolidated financial highlights including the minority interest. | |||
| 2005 | 2004 | % change | |
|---|---|---|---|
| Revenue ($ millions) | 412 | 323 | 28 |
| Gross profit ($ millions) | 107 | 108 | (1) |
| Gross profit (%) | 26 | 34 | (24) |
| Selling price ($US/ounce) | 433 | 397 | 9 |
| Sales volumes (ounces)1 | 781,000 | 619,000 | 26 |
| Production (ounces)2 | 787,000 | 641,000 | 23 |
| 1 Comprising 100% of Boroo and one-third of Kumtor to June 22, 2004 and 100% thereafter. | |||
| 2 Represents 100% of production from the Kumtor and Boroo mines. | |||
For Boroo, the outlook for 2006 calls for production to decline to 268,000 ounces from 286,000 ounces in 2005, due to a lower mill head grade that is expected to average 3.9 g/t compared to 4.2 g/t in 2005.
Total unit cash cost for 2006 is expected to rise reflecting the lower projected production.
Centerra expects the current gold industry's strong fundamentals to continue to exert upward pressure on price. As such, Centerra currently plans to leave its gold production unhedged.
GOLD PRICE SENSITIVITY ANALYSIS
For 2006, a $25.00 (US) per ounce change in the gold spot price would change Cameco revenue by about $21 million (Cdn), cash flow by about $20 million (Cdn) and net earnings by about $9 million (Cdn).