Centerra Gold Inc (CGAU) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold conference call and webcast of 2008 fourth-quarter and year-end results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Friday, February 6, 2009. I would now like to turn the conference over to Mr. John Pearson, Director, Investor Relations. Please go ahead, sir.

Thank you, Mohammed. Welcome, everyone, to Centerra Gold's fourth-quarter and year-end conference call. Today, Steve Lang, Chief Executive Officer; Jeff Parr, Chief Financial Officer; and Ron Colquhoun, Chief Operating Officer, join me for this call.

Today's conference call is open to all members of the investment community and the media in listen-only mode. After the formal remarks, we will open up the phone call to questions and the operator will give the instructions for asking a question. Please note that all figures are in US dollars unless otherwise noted.

Before we begin today, I would like to caution everyone that certain statements made on this call may be forward-looking statements and as such, are subject to known and unknown risks and uncertainties, which may cause actual results to differ materially from those expressed or implied. For a more detailed discussion of the key assumptions, risk factors and uncertainties associated with Centerra's business and the industry we operate in, please refer to our news release issued today, February 6, and our various filings on the SEDAR website. And now I will turn the call over to Steve.

Thanks, John and good morning. Normally, Ian Atkinson, our Vice President, Exploration, is on the call to answer your questions regarding exploration, but he recently sustained an injury outside the office and he is probably listening in on the call today.

I cannot, again, provide much in the way of details on our continuing dialog in the Kyrgyz Republic in light of our commitment to maintain confidentiality around the negotiations. We continue to have regular consultations with the group that has been designated by the Kyrgyz government and with Cameco. As discussions are progressing, Kumtor continues to operate within the concession area without interruption and we continue to pay our taxes under the existing investment agreement.

A few comments regarding progress in Mongolia. As you are all aware, the Mongolian parliament made changes to the windfall profit tax as it applies to gold sales late last year. The tax is still in place, but the threshold where it becomes applicable was raised to $850 per ounce from $500 per ounce. Centerra has met with the Prime Minister, as well as the Minister of Mines and Energy and the Finance Minister. We have resumed our negotiations for an investment agreement for Gatsuurt.

For 2008, our consolidated gold production was about 749,000 ounces, a 35% increase over 2007 as Kumtor had a record fourth quarter, producing over 236,000 ounces of gold. With the solid operating results, operations generated $166 million, or $0.77 per share of cash flow for the year resulting in net earnings of about $135 million, or $0.62 a share after reflecting an $18.8 million write-down of goodwill in our Mongolian operating unit.

Centerra ended the year with a balance sheet that included $167.4 million in cash and short-term investments and no debt. This year, we have used a gold price of $675 per ounce to estimate our reserves and resources. After mining a million contained ounces, proven and probable reserves totaled 5.8 million contained ounces of gold at year-end. Additionally, there is a slight reduction in reserves due to the lowering of the head-grade capping levels at Kumtor and changes to the model interpolation methods. We felt it was appropriate to reduce the high-grade capping level from 100 grams per ton to 70 grams per ton at Kumtor to better manage the risk around the variability.

As a result of our successful drilling of the high-grade (inaudible) below the Stockwork area of Kumtor's central pit, we reclassified 757 contained ounces of the 2007 measured and indicated resources into the inferred category, which we have named the Kumtor Stockwork Underground. This area, we believe, will be more amenable to underground mining rather than surface mining, potentially providing us a second underground source of high-grade mineralization.

With this change, our measured and indicated resources decreased by 819,000 ounces to now total 4.9 million ounces of contained gold. At Kumtor, proven and probable reserves totaled 4 million contained ounces of gold after accounting for the processing of 697,000 contained ounces during 2008 and a reduction of 180,000 contained ounces. The reduction is due to the lowering of the high-grade capping levels, changes to the model interpolation method and normal reconciliation variances between the mining and milling operations during 2008.

The current pit design at Kumtor assumes glacial till and bedrock will be hydrologically depressurized to achieve the pit wall slope angles. Geotechnical work to date has indicated the till is amenable to depressurization. A program to hydrologically depressurize the till and bedrock was implemented in 2008. Therefore, to reflect the geotechnical risks and the technical risks associated with implementing the depressurization program, all remaining reserves in the central pit have been reclassified to probable reserves at Kumtor.

Ore in the stockpile inventory as of December 31, 2008 has been placed in the proven reserve category. At Boroo, 33,000 contained ounces have been added to the reserves before accounting for the 303,000 contained ounces of reserves mined in 2008. Boroo's reserves have 778,000 ounces of contained gold. The addition is due to the identification of additional heap leach and milling ore during the 2008 mining production compared to the block model. The proven reserves consist of all mill and heap leach ore and stockpile inventory as of December 31, 2008. The remaining reserves to be mined in the pit have been classified to probable reserves. Reserves and resources at Gatsuurt remain unchanged at one million contained ounces of reserves and 607,000 contained ounces of resources. I will now turn it over to Ron Colquhoun to discuss the operations.

Thanks, Steve and good morning, everyone. I will now briefly review the operations. Kumtor produced about 237,000 ounces of gold in the fourth quarter, setting records for mill throughput, material moved and gold produced and sold. Kumtor generated its highest ever quarterly revenue in the 11-year operating history. For the year, Kumtor produced 556,000 ounces of gold as we mined the higher grade SB zone. During the fourth quarter, the average mill feed grade was 5.6 grams per ton.

On the cost side of things, cash costs decreased from $561 per ounce in the third quarter to 361 ounces (sic) due to the 77% increase in gold production from the third quarter.

Work is continuing on the SB underground decline, which has advanced 195 meters by quarter-end. The ground conditions have been improving in the last quarter, which has allowed the development to improve the advance rate.

In the third quarter, we expect the drift to be advanced enough to allow exploration drilling to begin. This will enable us to investigate the possible extension of the SB zone structure. We are now targeting underground production to commence in the second half of 2011.

At Boroo, production came in at 52,000 ounces as the heap leach facility produced 12,800 ounces of gold during the quarter. The heap leach facility is operating well. We anticipate 40,656 ounces to be recovered from the heap leach facility in 2009.

Looking forward at 2009, we anticipate Kumtor gold production to increase to between 560,000 and 600,000 ounces at the expected total cash costs of $485 to $525 per ounce. The 2009 gold production profile will be similar in 2008.

The plant mining sequence for the year was approximately 15% of the gold production being recovered in the first quarter and 40% in the fourth quarter. At Kumtor, the depressurization and dewatering program were initiated in 2008 and are fully functional. This program allows for the geotechnical consolidation of the tills, more stable wall conditions and it allows us to mine the planned pit wall angles in 2009 and thereafter as mining activity in the first quarter is expected to expose unfrozen glacial tills.

In the third quarter of 2009, the company anticipated a two-week shutdown of the Kumtor mill to change the ball mill ring gear and to perform the planned replacement of the SAG mill lining system. Kumtor's 2009 forecast gold production is lower than the 697,000 ounce forecast outlined in the life of mine plan in the technical report. This is due to three factors -- the deferral of the mining of the Sarytor starter pit in 2010, the necessity to accelerate the pre-stripping of the waste dump and glacial till in the SB zone, which contributes to a lower overall head grade since more tons will be coming out of the lower grade stockpiles, and the lowering of the cap grade reduced the contained ounces in the plant.

At Boroo, 2009 production included heap leach production -- including the heap leach production, is expected to be 160,000 to 170,000 ounces. The mill head grade is estimated at 2.65 grams per ton with an estimated recovery of 63% as the ore becomes more refractory. Total cash costs at Boroo's site in 2009 is expected to be $485 to $525 per ounce. At Boroo, the first quarter will be weaker than the following three quarters due in part to lower recoveries from the heap leach as the result of winter weather-related issues.

At this point, I would like to turn the call over to Jeff to provide a review of our financial performance.

Thanks, Ron. Good morning, everyone. I'll start with our Mongolian segment and the financial results at Boroo. The quarterly comparison of fourth quarter 2008 to fourth quarter 2007 shows revenues flat at $33 million. As Ron mentioned, the cash costs for 48,000 ounces of gold produced were adversely affected compared to 2007 by the higher costs for major consumables such as reagents and explosives.

In Mongolia, net earnings before tax and impairment charge for the fourth quarter were lower than last year at $8 million versus [$18] million for the fourth quarter 2007, reflecting the lower sales and increasing costs.

In our Kyrgyz Republic segment, revenue increased by 269% to $209 million in the fourth quarter of 2008 as sales and gold production was significantly higher than a year ago, reflecting increased realized gold prices and 262% more ounces sold.

Net earnings for the quarter of $70 million before tax were up significantly compared to $1 million in the fourth quarter of 2007. This is despite an increase in operating costs, notably maintenance, materials and supplies, consumables, including diesel fuel and labor.

Looking at the income statement on a consolidated basis, 2008 fourth-quarter revenue at $241 million reflects the slightly higher realized gold prices and a 164% increase in ounces sold. Results were impacted by higher cost of sales and higher depreciation, depletion and amortization, due primarily to increased production.

Fourth-quarter net income of about $43 million, or $0.20 per share includes a charge to earnings of $19 million to write down the goodwill associated with the Mongolian operating unit. This compares to net earnings before unusual items of $9.7 million, or $0.05 per share in 2007. The results of our impairment tests for the assets at the year-end indicated an impairment of goodwill associated with the Mongolian operating unit resulting in it being written down to its fair value.

With respect to cash flow, I would like to start by saying the Company is well-positioned given the current economic uncertainties. We have $167 million in cash at December 31, no debt and continue to generate more cash. Our capital projects can be easily funded out of cash flow and currently, we have no financing requirements.

Looking at the flow of funds, $103 million of cash was generated by the operations in the quarter. Cash used in investing activities of $45.5 million for the current quarter is higher than the comparative quarter last year, mainly due to increased growth capital spending and about $18 million of the Company's cash being reclassified to short-term investments. Gross spending was $10.9 million and sustaining or maintenance capital was just over $16 million.

With regard to our outlook for 2009, our total cash costs per ounce guidance of $485 to $525 reflects the revenue-based taxes and royalties we are incurring at Kumtor under our existing 2003 investment agreement. We anticipate that if we are successful in agreeing to a new tax regime with the Kyrgyz government that replaces current taxes with a revenue- based tax, the total cash cost outlook would be reduced by $86 for Kumtor and $67 for Centerra on a consolidated basis since total cash costs would exclude the revenue-based taxes.

Just a word on our assumptions. We have included an assumption on the diesel fuel price instead of oil since we felt it would be a more useful tool. Both of our mine sites source their diesel fuel from separate Russian suppliers and the prices only loosely correlate with world oil prices.

We know from last year the difficulty everyone had in issuing cost guidance as oil and other consumable prices changed so dramatically over the year. We have some of the same difficulties this year as we see oil prices moving lower from the assumptions we made for our guidance. We have tried to give you some sensitivity to both currency exchange rates and the diesel fuel price since it is a big factor in our operations. However, due to the continued volatility, we plan to leave our guidance as is.

In 2009, total capital expenditures are anticipated to be $96 million, which includes $49 million of maintenance or sustaining capital. Growth capital is expected to be $47 million, which is made up of $17 million for the underground development of the SB zone decline, $10 million for the construction of the road to Gatsuurt and an additional $12 million further capital for Gatsuurt for other site and infrastructure development subject to the completion of an investment agreement with the Mongolian government.

As Steve mentioned, the cash balance at the end of the year was $167 million. This is after investing $95 million in our properties, $24 million in exploration and repaying a $10 million revolving line of credit, which remains available to us in the future. I will now turn it back to Steve.

Thanks, Jeff. Just as a recap, Centerra expects 2009 consolidated gold production of 720,000 to 770,000 ounces with total cash costs between $485 and $525 per ounce. This includes the revenue-based taxes and royalties in the Kyrgyz Republic at the rates fixed under our existing investment agreement. We anticipate that should we be successful in agreeing to a new tax regime with the Kyrgyz government and the agreement results in current taxes being replaced with revenue-based taxes, total cash costs would exclude the revenue-based taxes. As Jeff mentioned, in such case, the outlook for total cash costs would be reduced by $67 per ounce for Centerra on a consolidated basis and $86 per ounce for Kumtor.

Looking at our fourth-quarter and year-end results, we are in good financial shape. Our cash position is very solid and should continue through 2009 as operations generate positive cash flow. The fundamentals of our business remain strong and we are closely watching the economic conditions as they develop. I believe that many business development opportunities are going to come up in the following months. With that, let's open the call for questions. Operator, please give the instructions for the process on the question-and-answer session.

(Operator Instructions). Victor Flores, HSBC.

Thank you. Hi, Steve. I have a few questions regarding the operations for Kumtor for this year and maybe in the next couple of years. Could you tell us what the stripping ratio will be for this year and how many tons at what grade are coming from stockpile into the plant?

I will probably defer most of the operating details over there to Ron. I think generally we would expect the mining rate as just a small increase versus last year in the production -- (multiple speakers). So any other comment I will turn over to Ron.

Yes, Victor. We have very a similar (inaudible) activity at a little higher rate, but we are maintaining a 22 to 1 strip ratio.

With regards to the tons, we have a certain amount -- I don't have the exact number coming out of the stockpile at this point in time. It is a low-grade stockpile. It averages around 1.8 grams per ton. As we pointed out earlier, most of the tonnages or the grade is coming out in the fourth quarter and that is primarily the configuration of the SB orebody. The main structure is at the bottom of the pit. We do have ore as we go down that will come out in midyear, but the majority of the production is in the fourth quarter.

Thanks. And should we expect that, going forward, say in 2010 and 2011, you will have this same sort of awkward production sequence where you have to go in and do your stripping in the first half of the year and then you get the benefits in the second or is this going to normalize at some point in time?

I think part of the reason we would hesitate to answer that a little bit is it depends in part on the status at the Sarytor pit.

Oh, yes. Okay. So if you have Sarytor, you have obviously more flexibility?

Correct.

Okay. Fair enough. And then just one final question, you mentioned in your comments that you expect to be producing from the underground in the second half of 2011. Could you give us a sense of how many tons you think you would be getting at what kind of grade and what the outlook would be say for 2012, assuming you would be in full production during that year?

We are still investigating the underground at this point in time. We have committed capital this year of approximately $17 million. We are going to further the exploration program of $7 million planned when we have access to the zone and then we also have a further capital release of dollars looking at long lead items that would help us get the mining equipment on-site and the equipment available to further development.

So the idea of producing at 2011 is on our schedule. The grade will continue to be at the targeted 18 grams per ton from the stopes. That is what we have in our studies and the tonnage coming from the facility will be relatively low because of the nature of the stope design and the methodology, but it will be ramping up over that period of time into 2012.

Victor, one thing I guess is to say, look, we did complete a preliminary assessment with SRK on the SB underground. One of the issues here is the legal requirements concerning disclosure on this preliminary assessment based on inferred resources. So we cannot really get into the economic analysis at this time. But obviously, as Ron mentioned, we are continuing to spend money and in fact, in addition to just the continuation of the underground development that we had started last year, we are adding a fair chunk of our underground, about $7 million in exploration work from the underground this year, as well as placing orders for capital equipment on longer lead items for additional development underground.

Great. Thank you.

Fred Thompson, FW Thompson Co. Ltd.

Steve, could you tell me what percentage of your gold production is hedged, if any?

I'm glad I got a question that is real easy. Zero.

That's fine. That is what I hoped I would hear. Thank you.

Terence Ortslan, TSO & Associates.

Thanks. Good morning. Just to follow up on Victor's question on the underground potential, given the sequencing and zones and the rock conditions or whatever, what is the range you are looking in terms of tons per day?

I think that is within the realm of this study that we are a bit reluctant with the classification currently in inferred resources and I would also point out that the study, even as we have completed it, did not take into account anything with the Stockwork underground. So this is still an area where we are studying quite a bit.

And you will know about this SRK report and the input when?

It is pretty tough to speculate exactly on when things would progress to the point that we can really go through the economics in more detail.

It will be due here some time though (inaudible)?

I think probably the one thing we would look at probably the earliest date where we would see resources reclassified into reserves would be year-end 2010.

Okay, in that sense, I agree. Okay. I'll just come back to the Gatsuurt road construction and all. You obviously preempting this before the investment agreement, given the size of the investment, it's still a fairly reasonable expectation that it is going to go smoother than [dressed]. Where are you on that please with the government?

I'll let Jeff answer that as he has been really our lead in the negotiations there.

Terry, we have had meetings with the government and as you know, it has been a bit of a changing fiscal regime going on in Mongolia right now with the change in the windfall profit tax and whatnot. So it is a bit of a moving target, but we are having ongoing discussions and we hope that, certainly during 2009, we would have something in place.

Okay. You are building [your road] because otherwise you're going to be falling behind schedule I assume if you don't do that, given the leadtime for the deposits. Am I right?

That is correct.

And the economics of the deposits updated, are there any internal numbers given the previous number that we have I believe was 70 million or something like that?

Just to clarify the question, was that regarding the estimated capital cost of the total project?

That's right, yes.

Terry, it's Ron. We have seen some growth on costs, but I think in other areas we have seen benefits come to the project. So we are seeing probably a 5% to 10% growth, not a significant growth. $75 million to $80 million is considered our target.

Okay, fair enough. The Mongolian tugrik has dropped a lot since the beginning of the year. It's down to about 35%, 40% from the number that you have. So we can assume that these sensitive numbers that you have given to us, that is another like $15 million, $16 million annualized from that level for the Mongolian cash flow at hand because about a 0.92 to a 25 tugrik. I mean tugrik is now running about 1500 thereabouts.

That's right. You are correct on the depreciation amounts. We did include the sensitivity there along with the guidance. I think generally, as Jeff mentioned, last year, we struggled on achieving our cost guidance in part because of exchange rate and fuel prices and those changed as you pointed out quite a bit here in the last two months. I think we were reluctant to just update our guidance and reset those baselines right away, but do point out that we have used the lower exchange rate of 1140.

Okay. And what happened to Kyrgyz [sum] since the beginning of the year from the levels you disclosed, which is 38?

I believe --

31 and 41.

41 right now.

Not much. Just one last question on the price of oil and diesel. By the way, it is a great disclosure that you guys have. We really appreciate it. The $75 per barrel that you have the diesel cost per liter, obviously there are taxes and fixed amounts within that. If you (inaudible) take 75 down to 50, what happens to the per liter number. That is very difficult to gauge, right, because given the fixed cost components that the governments take away?

If it was just directly related to the price of diesel, $1 a barrel equates to -- sorry to have to flip back and forth between units here -- but it is 0.0238 per gallon. So roughly one-fourth of that per liter just kind of direct -- if there were a direct tie-in. The tie-in is not direct. It is a little bit looser than that. It can swing either way. But that is an approximate just general statement on the sensitivity.

So in other words, you are still paying quite a high price for the diesel in Mongolia. I mean that is $4 a gallon. That is a significant amount compared to other places.

Well, it has come down a bit, but we do typically pay more for diesel in Mongolia than we do in, for instance, the Kyrgyz Republic.

At $50 then, it would be an approximate $0.25 or $0.20 lower per liter for Kumtor and for Boroo. Is that what it is roughly?

I think that is a fair assessment on the long term, but the timing on how prices change and what other demands are depends a lot on how the rest of their economy performs.

Fair enough. Thank you very much for the details. Thank you.

Barry Cooper, CIBC World Markets.

Yes, good day, everyone. Just wondering if you can walk me through the rationale for the need to change your top cut from the 100 grams down to 70 grams. Was the basically the block models not working with reality?

Thanks for the call, Barry. I will take a first pass at this and Ron and I will answer it in Ian's absence here. But we did a review with an outside consultant in December and in January just kind of reaffirming how we have been modeling and that also, obviously, is looking into our initial performance there and the mining there in the fourth quarter.

When we look at the general statistics, the modeling they felt was done appropriately, but one of the issues we are concerned about is with any block model there is going to be a bit of variation in results, particularly on a small area. And given the small area that we typically mine in the SB zone and the fact that it comes in very late in the year, the variability means that there is a higher amount of metal at risk in the short term on a percentage basis and this lowering of the top level used in capping kind of gives a bit more certainty around that ability on a short-term basis to deliver the contained ounces. And that is about the extent of my geotechnical knowledge, so I will ask Ron if he can -- if he has anything to add to that.

Yes, Barry, we are quite confident in the work that we have done. We had good results with our consultant. We are being conservative on our approach. The variance is occurring -- it is a very slight variance, approximately 3% to 4% in the very higher grade component. So we took a conservative stance on this and I might add that December was very -- a very good month for us when it comes to reconciliation regarding the model.

Right. I guess I am just trying to rationalize this because, obviously, the reserve grade for the entire deposits dropped quite substantially there given that you are mining below the reserve grade, quoted reserve grade throughout 2008 relative to what it started at and yet the grade dropped half a gram. I am just wondering -- and of course, in Q3, I think when we talked to you in I guess it was early November, maybe it was the last day or two of October, you expected 6 gram material coming out of Kumtor pit and it was 5, 6. So I am assuming that that 6 gram was kind of based off of your block model and 5, 6 is reality and that is what triggered a lot of this revamping?

That's correct. The minutia was in the October -- September, October, November period where we initiated the very top of the orebody and as we got into it, it consolidated. But the concern was it generated in October and November and we did study it during that period of time.

And you have applied that now to SB underground as well, that top cut reduction?

Yes, we have.

Okay. That explains that one there. I am just wondering then the 7 gram bottom cut that you are using for underground for quoting the inferred resources or measured and indicated as the case might be. Is that a -- how was 7 grams chosen because I would have thought that with the ground conditions that you have indicated so far that mining 7 gram underground might be a bit of a challenge given the amount of difficulty you have had with those ground conditions and maybe you can just elaborate if you were to go to 10 grams or something like that, particularly on the SB zone, how does that hold together if you use that as a kind of a lower cutoff?

We looked at the 7 gram because I think we were in firm territory with regards to our operating costs and the production. I think at this point in time, we are staying with 7 grams. We haven't looked at a 10 gram out of necessity. 7 gram looks like it is a very fair and a middle-of-the-road possibility.

And what is your grade for Kumtor for all of 2009?

It averages 5.5 gram material. I would have to check that. But we have a lower grade, obviously, in the first quarter. We come up a little bit in the second. We have a slightly lower grade and throughput in the third quarter and then we have a strong fourth quarter. We would certainly want a flat system, but the SB zone does not allow us to do that.

Right. I am assuming the 5.5 is not correct only because that is almost a grade that you used in Q4 and you have basically got -- if you replicated that in Q1, you would have half your guidance over and done with. So maybe it is 5.5 from the pit, coupled with a blend of 1.8 coming from the stockpiles to give you a blended grade of something less than -- certainly something less than 4.5 grams I would have anticipated.

I think you are right, Barry. I think, generally, we would expect throughput to be up a little bit this year and we had the six-week shutdown late in the first quarter and into the second quarter last year. We do have a shutdown to replace the shell of that mill or the mill gear at that mill is the gear that failed last year, but it won't take as long. Just looking at those two factors, we have a little bit more throughput expected this year. Recovery would be in about the same range and you can see where the production is. I think we could probably calculate back the head grade from that.

Okay. And then the shortening of the mine life of Boroo, what was the cause of that?

The metallurgical aspect of the orebody is becoming more and more refractory. I think we are continuing to study it metallurgically and doing a lot of work with that. The heap leach is certainly helping us as an area of production.

I think the other thing I would add to that -- Ron has been testing the refractory ores there at Boroo and we see that they are very amenable to the bio-ox.

Right. And then you quote something I don't recall you doing before where you give us basically the change in operating costs per ounce at Kumtor and for Centerra and you included that in your introductory remarks, Steve. Should I interpret the fact that you are telling these numbers as a realistic expectation of what the ultimate deal will come out at?

I think all we are saying there is that we would expect the ultimate deal will come out where -- as the -- the one that was released mid '07, that agreement moved everything into a revenue-based tax consolidating quite a number of different taxes. The fact that we give that guidance I think suggests we still believe that that would probably happen without being specific about what level the new regime would be.

Right. Okay, well good enough on that then and hopefully you get her done because it has been an overhang on your stock as you are well aware. Thanks.

Yes, it has.

Steve Butler, Canaccord Adams.

Guys, good morning or almost afternoon. Just a question to follow up on Barry's with respect to reserves. I mean, obviously, you guys had a higher gold price. We would've maybe expected a booking of a bigger reserve basis, but I understand some of the changes there. Is some of it also complicated by the fact that now you look at the Stockwork Zone as an underground scenario potentially given its grade. I guess in a world if the pit were to reach deeper with the higher gold prices, ounces could have been converted into a reserve at a certain gold price in a pit, but now you're looking at it underground. Is that sort of a reasonable characterization?

I think that is correct. One of the things that happens there -- the additional drilling really strengthened our belief in what we have there, but there is two things that changed. One, by moving that to an underground category, we raised the cutoff grade from 1 gram to 7 grams. So we have dropped that low-grade piece that had been in the measured and indicated resource. The other change is that the drill density for the open pit would have left us -- leave that in measured and indicated. By putting this material into an underground resource, we would reclassify it as inferred.

Okay. All right, Steve. When you say Kumtor reserves reduced by 180,000 contained ounces before accounting for the processing, of course and you went on to say high-grade capping, is it mostly high-grade capping? Because indeed if you were to even use say -- if the overall reserve grade -- I guess what I'm trying to get at is what is the reserve grade affected by, by the grade capping factor if you know that. Because if it is 0.3 grams per ton, then that's a loss of maybe even 300,000 ounces unless I am missing something.

The capping is primarily in the very high-grade component. It is approximately 5%, 4%. That is 180.

Okay. That is -- so that is really the effect on reserves, is that right, Ron?

Yes.

I think one of the unique things about Kumtor is, given the location of the glaciers around there, there is not a big impact, if any, on the higher gold price. We just simply cannot lay the pit pack any further, even though it is not a strip ratio limitation that is dependent on gold price.

Right. Okay. And then sustaining capital, $49 million is that a number to -- I mean that is -- do you have a split there, guys? It seems a little higher than we were carrying and does it come down as we go through beyond 2009?

Sustaining capital I think was primarily the maintenance program. We have our significant amount of money going towards our program of rebuilds. It is the fleet age. The shovels are now at that point where we have a considerable a lot of money going into component replacement. Other is the -- I'd have to --

Is it fairly weighted, Ron, to Kumtor I assume and does the number come off a little bit as you go forward beyond 2009?

It is predominantly weighted towards Kumtor. It is -- also we have some replacement components coming up. We have a tailings dam development, which continues with the operation. That adds approximately $5 million to $7 million a year on raising of the tailings dam. Those are the main components. There's a lot of other smaller pieces.

Right. And just to clarify, you mentioned -- I wrote some numbers down obviously relating to Boroo, 2.65 grams per ton and 63% recovery. Is that the mill component upgrade and recovery at Boroo, is that correct, in 2009?

That's correct.

Okay, thanks very much.

Haytham Hodaly, Salman Partners.

Thanks, operator. Good morning, gentlemen. How are you? A couple of quick questions, just to follow up on also some of Barry's question previously. We talked about Kumtor and the 5.6 million tons we realized or we put through, pardon me, in 2008. I heard somebody say that it was going to be a little bit higher -- probably Ron. What number are you looking for for 2009?

We are optimizing the plant throughput. We are looking at 5.8 million to 5.9 million tons.

Okay. And give me just a general breakdown if you could for how you see that at least for the first quarter and maybe the fourth, the two most important at this point.

Well, I think we have stated it was -- from our annual production, it was 15% in the first quarter.

Sorry. That was gold I believe production.

Are you asking for tons?

That's right. I am asking for tonnage.

Just divide it by 12. (multiple speakers). We had a slight reduction in August, but we anticipate the total to -- we have plans of being able to put that tonnage and catch up on the tonnage during the balance of the year, but it will be in the order of 5.8 with a slight reduction in August when we have the shutdown on the SAG mill.

Sorry. Just to clarify, did that include inventoried ounces, inventoried tonnage as well? The 5.8?

Yes, yes.

Okay, good. Perfect. And next question I guess with regards to Kumtor. Can you just give us an idea of what the mining processing and G&A cost per ton breakdown was in the fourth quarter?

Give us a minute on that one.

Sure. I will let you handle that and I will go off to a different question then. Just with regard to DD&A at Kumtor on a per ounce basis, we saw it increase about 18%, 19% from the previous quarter. Is that going to be a reasonable number going forward or are you basically just capitalizing more of the development work what was happening?

It's Jeff, Haytham. I think it will be mostly more tied to the production rate since it is mostly on a units of production basis. So similar with our outlook guidance, you will see it probably higher in the fourth quarter of '09.

Okay. So if I use a similar cost per -- sorry -- depreciation per ounce, that should suffice then?

Right.

And then expensed exploration budget, you gave an exploration budget for 2009 of $25 million. How much of that is actually expensed or was that the expensed portion of the income statement?

That's all (technical difficulty).

Okay, that is all expense. Okay. And then going back to the cost per ton breakout?

I think we might be better off looking into that one and getting back to you. I would rather do that than --

That's fine. If John could get back to me or one of the gentlemen there, there would be appreciated. Thank you very much.

And sir, there are no further questions at this time.

Okay. With that, we will conclude the call. Thank you for your interest in Centerra Gold.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your line.