Centerra Gold Annual Report 2012

Plain-text annual report

We’re Centerra Gold. The Leading Western-based Gold Producer in Central Asia. Centerra Gold Inc. 2012 Annual Report Corporate Profile Centerra is a Canadian-based gold mining company engaged in operating, developing, acquiring and exploring gold properties primarily in Asia, the former Soviet Union and other emerging markets worldwide. The Company is the largest Western-based gold producer in Central Asia with two operating gold mines located in the Kyrgyz republic and mongolia. in 2012, Centerra produced 387,076 ounces of gold at an operating cash cost of $663 per ounce produced. Centerra’s objective is to establish annual gold production of 1.5 million ounces and build shareholder value by maximizing the potential of its current properties, expanding its portfolio of gold mining operations, continuing to increase its reserves and resources and add additional exploration properties. Centerra’s shares trade on the Toronto Stock exchange (TSX) under the symbol Cg. The Company is headquartered in Toronto, Ontario, Canada. All dollar amounts are expressed in U.S. dollars in this report, except as otherwise indicated. All information is given as of december 31, 2012 unless otherwise indicated. reserves and resources are as of december 31, 2012, please refer to the management’s discussion and Analysis (mdA) included in this Annual report, page 20. Cautionary Note Regarding Forward-looking Statements information contained in this Annual report 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 statements include statements related to the successful resolution of matters in the Kyrgyz republic relating to the State Commission report, including discussions with the government working group formed to open negotiations on the project agreement governing the Kumtor project (the “Kumtor project Agreements”), actions taken by the parliament and government as a result of the Kyrgyz republic parliamentary decree dated February 21, 2013, the Kyrgyz parliament and government not taking any unilateral actions that are inconsistent with the Kyrgyz republic’s obligations under the Kumtor project Agreements, the successful resolution of environmental claims for the aggregate amount of approximately $467 million in the Kyrgyz republic, forecasted gold production and unit costs for 2013, expected 2013 capital expenditures, 2013 mining and exploration plans and forecasted expenditures on community investments, continued operations in mongolia, including the ability to develop the gatsuurt project and our plans for the Öksüt property. Such forward-looking statements involve 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 statements. For a detailed discussion of such risks and other factors, see the management’s discussion and Analysis included in this Annual report and the Company’s most recent Annual information Form which is available on SedAr. mineral resources are not mineral reserves and do not have demonstrated economic viability. inferred mineral resources have a greater amount of uncertainty as to whether they can be mined economically. it cannot be assumed that all or part of the inferred resources will ever be upgraded to a higher category. There is no certainty that mineral resources of any category can be upgraded to mineral reserves through continued exploration. Although Centerra believes that the assumptions inherent in these forward-looking statements are reasonable, the reader should not place undue reliance on these statements. Forward-looking information is as of march 28, 2013. For a detailed discussion of the key assumptions and risk factors, please refer to the management’s discussion and Analysis included in this Annual report. Centerra disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except to the extent required by applicable laws. Contents 2 Highlights 4 president’s message 6 leadership Team 14 Kumtor 15 Boroo 16 Corporate responsibility 17 management’s discussion and Analysis 81 report of management’s Accountability 82 independent Auditors’ report 83 Consolidated Financial Statements 87 notes to the Consolidated Financial Statements 126 definitions 128 Corporate information 4 CenTerrA gOld inC. 11.1 Proven and probable reserves of 11.1 million contained ounces. We have over 20-years experience in one of the world’s most promising and underdeveloped gold regions. As the leading Western-based gold producer in Central Asia, we have developed an expertise of operating in the region. The Kumtor mine, in the Kyrgyz Republic, has been in production for 16 years and has a further 13 years of operating life left based on its current reserves. The Boroo mine, in Mongolia, has been in production for 10 years and conceivably the mill could run for another decade or more as we develop other opportunities in the region. Our successful exploration continues to add to our reserve and resource base as we expand into new areas and create new opportunities for potential production platforms going forward. We have a seasoned management team with proven operating, development and exploration experience, which is always looking for ways to maximize the full potential of our current operations and to further enhance shareholder value by searching for new properties and opportunities with immediate potential. 2012 ANNUAL REPORT 1 Centerra_Front.indd 1 Centerra_Front.indd 1 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Highlights Selected Annual Information 2012 2011 2010 Revenue – millions Adjusted net earnings (loss) – millions (1) Adjusted net earnings (loss) per share – $ per share (1) Loss on de-recognition of underground assets – millions Net earnings (loss) – millions Net earnings (loss) per share – $ per share Cash provided by operations – millions Cash ﬂ ow per share – $ per share Cash and short-term investments – millions Total assets – millions Ounces produced Operating cash cost – $ per oz produced (2) All-in cash cost (pre-tax) – $ per oz produced (3) Average realized price – $ per oz $661 $(3) $(0.01) $181 $(184) $(0.78) $135 $0.57 $382 $1,554 387,076 $663 $1,882 $1,692 $1,020 $371 $1.57 – $371 $1.57 $435 $1.84 $568 $1,689 642,380 $502 $929 $1,569 $850 $322 $1.37 – $322 $1.37 $281 $1.19 $413 $1,400 678,941 $440 $838 $1,236 (1) Adjusted net earnings (loss) excludes an accounting charge of $180.7 million relating to the de-recognition of the underground assets at Kumtor. (2) Operating cash cost is comprised of mine operating costs such as mining, processing, regional ofﬁ ce administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes depreciation, depletion and amortization, reclamation costs, capital investments, community investments, exploration expenses and corporate general and administration expenses. Operating cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in the MDA. (3) All-in cash cost (pre-tax) per ounce produced includes operating cash costs, sustaining and growth capital, corporate general and administrative expenses, global exploration expenses, and community investments, but excludes revenue-based taxes at Kumtor and income taxes. All-in cash cost (pre-tax) per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in the MDA. 2 CENTERRA GOLD INC. Centerra_Front.indd 2 Centerra_Front.indd 2 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Reserves (as at December 31) (millions of contained ounces) Gold Production (thousands of ounces) 11.1 676 679 642 Cash Flow from Operations ($ millions) 435 8.2 8.1 7.3 387 281 246 135 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 Centerra_Front.indd 3 Centerra_Front.indd 3 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM 2012 ANNUAL REPORT 3 Understanding the market place in which we work is key. President’s Message 2012 was a challenging year for the Company, with the unexpected ice and waste movement at Kumtor resulting in the revised mining plan and the increased public proﬁ le of Kumtor associated with the Kyrgyz parliamentary and state commission reviews of our Kumtor operation. In addition we had lower than expected production at Kumtor in the fourth quarter because of the lower than expected mill throughput and recovery, as well as lower than expected mill head grades encountered when mining the newly discovered portion of the orebody. However, we had a number of accomplishments in the year, with a very signiﬁ cant increase in reserves at Kumtor, acquiring 100% interest in the exciting Öksüt property in Turkey and in Mongolia we were successful in converting the ATO exploration license to a mining license and we received the necessary permits to restart the heap leach operation at Boroo. Centerra had another strong year in exploration, replacing reserves mined at Kumtor, with the expansion of the open pit and the new KS-13 mine plan, extending Kumtor’s mine life by an additional ﬁ ve years to 2026. The Company’s proven and probable reserves now total 11.1 million contained ounces of gold, the highest in the Company’s history. In addition to our reserves we have 1.9 million contained ounces of high-grade underground inferred resources at Kumtor and indicated and inferred resources outlined on our ATO and Öksüt properties. 4 CENTERRA GOLD INC. Centerra_Front.indd 4 Centerra_Front.indd 4 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM In December, we announced our plans to acquire the remaining 30% interest in the Öksüt project and completed that transaction in January this year to hold 100% of the Öksüt property. Additionally, we announced our initial resource estimate at the Öksüt property of 682,000 contained ounces of indicated resources and 477,000 contained ounces of inferred resources. We are planning on advancing this project to a decision point as quickly as possible. In 2012, our production was signiﬁ cantly lower than 2011 with consolidated gold production of 387,076 ounces. Gold production at Kumtor was 315,238 ounces due to the unexpected acceleration of ice and waste into the Central Pit which created unsafe mining conditions and the need to revise the mining plan. The resulting rescheduling of mining activities to the southwest end of the SB Zone delayed access to the ore zone and resulted in a 46% decrease in production at Kumtor year over year. At Boroo, 71,838 ounces of gold were produced as the site restarted the heap leach operation in the fourth quarter, recovering 7,486 ounces of gold from the heap leach in the fourth quarter. Our operating cash costs for 2012 came in at $663 per ounce produced. Centerra, like many of our peers, has moved to reporting “all-in cash costs”. While this is a non-GAAP measure we believe this measure more fully reﬂ ects the actual cost of producing an ounce of gold than the Gold Institute cash cost measure. For 2012, our all-in cash cost (pre-tax) was $1,882 per ounce produced, which is high due to the reduced production at Kumtor in 2012. The all-in cash cost measure includes all operating cash costs, sustaining and growth capital (including capitalized stripping), corporate general and administrative expenses, global exploration expenses, and community investments, but excludes revenue-based taxes at Kumtor and income taxes. The measure is more fully discussed under “Non- GAAP Measures” in the Management’s Discussion and Analysis accompanying this annual report. On the ﬁ nancial front in 2012, Centerra recorded a net loss of $184 million or $0.78 per share reﬂ ecting the $180.7 million charge for the de-recognition of the underground assets at Kumtor as well as the lower production at Kumtor. Also during the year, we generated approximately $135 million in cash from operations. At the end of the year the Company had $382 million of cash and short-term investments, as well as $74 million undrawn on our $150 million credit facility. We also invested $411 million for the future of our operations and $38 million in exploration. We remain unhedged, allowing us to participate in all of the upside of any increases in the gold price. For 2012, our revenues decreased to $661 million, due to the lower production and sales volumes which was offset partially by our higher average realized gold price of $1,692 per ounce, up from $1,569 per ounce in 2011. Looking forward in 2013, we are forecasting consolidated gold production to be in the range of 605,000 to 660,000 ounces with consolidated all-in cash costs (pre-tax) between $1,067 and $1,164 per ounce, as Kumtor returns to more normal production levels. In 2013, the Kumtor mine is expected to produce between 550,000 and 600,000 ounces, with approximately 50% of the gold production expected to occur in the fourth quarter. According to the KS-13 mine plan, 2013 is expected to be the last year with a signiﬁ cant back-end loaded production proﬁ le as the mine continues to build stockpiles, which will allow for more consistent production on a quarterly basis going forward. At the Boroo mine, gold production is forecast to be approximately 55,000 to 60,000 ounces, which includes about 24,000 ounces from heap leaching and 36,000 ounces from processing mill stockpiles. The Boroo mill is expected to process ore stockpiles during the year with an average grade of 0.82 g/t. The 2013 forecast assumes no mining activities at Boroo and Gatsuurt, and no gold production from Gatsuurt. In 2013, we will continue to invest in our properties. Total capital expenditures excluding capitalized stripping are estimated to be $107 million, which includes $75 million of sustaining capital and $32 million of growth capital. Capitalized stripping costs related to the development of the open pit at Kumtor are expected to be $212 million. We will continue our strong commitment to exploration investing $45 million in 2013, an increase from the $38 million spent in 2012. Exploration and business development programs will focus on Central Asia, Turkey, Russia and China, and expand into new regions to meet the longer term growth targets of Centerra. We are committed to resolving the issues surrounding Kumtor through constructive dialogue to develop a mutually beneﬁ cial solution which is fair to all Centerra shareholders. I would like to congratulate our employees on their continued commitment to maintaining the high safety, health, and environmental standards at our mines. We continue to meet and exceed international standards on a consistent basis. The safety and environmental record at both of our mines is signiﬁ cantly better than the North American averages and our employees have every reason to be very proud of that fact. Ian Atkinson President and Chief Executive Ofﬁ cer 2012 ANNUAL REPORT 5 Centerra_Front.indd 5 Centerra_Front.indd 5 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Our leadership team has strong operating, development and exploration experience. Management Team Ian Atkinson President and Chief Executive Ofﬁ cer Jeffrey S. Parr Vice President and Chief Financial Ofﬁ cer Gordon D. Reid Vice President and Chief Operating Ofﬁ cer David A. Groves Vice President, Global Exploration Frank H. Herbert General Counsel and Corporate Secretary Anthony J. Meade Vice President, Human Resources and Administration Dennis C. Kwong Vice President, Business Development 6 CENTERRA GOLD INC. Centerra_Front.indd 6 Centerra_Front.indd 6 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM 8% With the rising gold price in 2012 Centerra’s average realized gold price increased 8% over the prior year. Centerra_Front.indd 7 Centerra_Front.indd 7 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM 2012 ANNUAL REPORT 7 We’re experts at getting gold out of the ground, we also know where to look for more. Öksüt Exploration On January 24, 2013, the Company completed the purchase of the remaining 30% interest in the Öksüt Gold Project to own 100% of the project. The Öksüt property is located in the Kayseri region of central Turkey, approximately 50 kilometres south of the city of Kayseri and 10 kilometres south of the town of Develi. During 2012, exploration work focused on the Ortaçam North deposit and included both step-out and inﬁ ll drilling. Our initial indicated and inferred resource estimate for Öksüt, includes only oxide mineralization and is based upon 52 drill holes in the Ortaçam North Zone and 21 drill holes in the Ortaçam Zone. The gold mineralization on the property is contained within an oxidized, high-sulphidation epithermal system. At December 31, 2012, the Öksüt project has an indicated resource of 682,000 ounces of contained gold and an inferred resource of 477,000 ounces of contained gold on a 100% basis. The resource estimate is contained in two zones; the Ortaçam North Zone which has an indicated resource of 682,000 ounces of contained gold and an inferred resource of 353,000 ounces of contained gold and the Ortaçam Zone which has an inferred resource of 124,000 ounces of contained gold. The resource estimate is contained within a preliminary whittle shell using a cut-off grade of 0.2 g/t and raw assays were top-cut to 15 g/t before compositing. Preliminary metallurgical test work, comprising bottle roll tests on core samples of oxidized and partially oxidized material from the Ortaçam North deposit indicates the ore is potentially amenable to heap leaching. Further metallurgical test work, consisting of heap leach column tests, is currently underway. The mineralized zone at Ortaçam North remains open to the east, south and at depth and there are other targets to be tested on the property. In 2013 exploration spending will increase to approximately $8 million as work focuses on expanding and upgrading the Öksüt gold deposit resource, advancing ongoing metallurgical testwork and initiating detailed environmental, social and technical project studies. 52 682 8 The number of drill holes in the Ortaçam North Zone. 682,000 contained ounces in the Ortaçam North Zone of indicated resources. 2013 planned exploration spending $8 million 8 CENTERRA GOLD INC. Centerra_Front.indd 8 Centerra_Front.indd 8 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Öksüt Project, Turkey Ortaçam North Zone 2012 ANNUAL REPORT 9 Centerra_Front.indd 9 Centerra_Front.indd 9 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM We have a plan that will lead to a signiﬁ cant increase in production. Kumtor KS-13 Plan In November 2012 the Company announced the new KS-13 life-of-mine plan for the Kumtor deposit based on the positive results of the detailed technical and ﬁ nancial study carried out during the year. Proven and probable reserves increased by 58% or 3.6 million contained ounces and at December 31, 2012, Kumtor’s proven and probable reserves total 9.5 million contained ounces of gold. The expanded open pit mine plan incorporates into reserves 1.2 million contained ounces that were previously classiﬁ ed as high-grade inferred underground resources and also captures an additional 2.2 million contained ounces of resources representing material between the cut-off grade for the open pit and the cut-off grade for the underground resource estimation. The new reserves and resources and the new mine plan includes a much larger open pit and extends the mine life of Kumtor by a further ﬁ ve years to 2026. The opportunity to expand the open pit was created by successful exploration drilling of the SB Zone between 2006 and September 2012 that more than doubled the strike length of the SB Zone and extended the SB Zone resource down dip, which resulted in an expansion of resources. This expansion of resources, in conjunction with the decision made in March of 2012 to mitigate the impact of the high-movement areas by ofﬂ oading the ice and waste in the upper portion of the southeast section of the Central Pit, created the opportunity to expand the Central Pit with the resulting signiﬁ cant increase in reserves, extension of the mine life and increase in the project net present value. The new KS-13 mine plan is expected to provide a more consistent quarterly production proﬁ le after 2013 with consistent annual gold production averaging 650,000 ounces for the ﬁ rst 10 years of the mine plan and is based only on open-pit mineral reserves. The new mine plan also includes plans to expand mill throughput by 18% to 6.7 million tonnes per annum in 2016. The expanded open pit consumes a signiﬁ cant amount of the existing underground development infrastructure. As a result, the Company de-recognized the capitalized cost of the underground development and underground equipment and recorded a charge of $180.7 million in the fourth quarter of 2012. An opportunity for underground mining still exists, with 1.9 million contained ounces of inferred high-grade underground resources identiﬁ ed beneath the new KS-13 planned pit bottom. Exploration will continue to test the down dip extension of the SB Zone. The Company will assess the opportunity to develop both the Stockwork and SB Zones underground once mining of the SB Zone is ﬁ nished in the open pit and detailed technical studies are completed. 58% 18% 9.5 The new KS-13 mine plan increased reserves by 58%. Planned mill throughput increase in 2016. Total reserves at Kumtor as at December 31, 2012, 9.5 million contained ounces of gold. 10 CENTERRA GOLD INC. Centerra_Front.indd 10 Centerra_Front.indd 10 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM We have a 20-year history of success at our Kumtor mine. 20 The Kumtor Project is going to celebrate its 20th anniversary this year. It is the ﬁ rst and largest investment project ever launched in the mining sector of the Kyrgyz Republic. The mine is considered to be the locomotive engine of the mining business and contributes signiﬁ cantly to the economy of the Kyrgyz Republic, accounting for up to 12% of GDP, more than 25% of industrial output and about 50% of Kyrgyzstan’s exports. 3,034 people, the number of personnel employed by the Company and contract organizations. They provide for the operation of the mine, one of the world’s highest gold deposits located in Jety-Oguz district, Issy Kul province of the Kyrgyz Republic. 1993 February 16, 1993, the date when the Company's predecessor company was created. Within four years, it was able to prepare the deposit for development and build the necessary infrastructure for production. In 1997, commercial production of gold began. 240 kilometres of road, of which 90 kilometres pass through mountains, is the distance separating the Kumtor deposit from the nearest rail facilities. That is why all the equipment and supplies are taken to an altitude of 4,000 metres above sea level by motor transport. 150 thousand tonnes of various goods are annually handled by the Company’s marshaling yard located at Balykchy. 821 suppliers from 37 countries from around the world and 708 national companies provide for uninterrupted operation at the Kumtor mine. 16 thousand tonnes of ore is the daily throughput of the gold mill at Kumtor. The production cycle is fully automated and uses advanced technologies. Operation of the mill is maintained by only 16 employees per shift. 42 quality parameters for treated efﬂ uents at Kumtor are controlled by the Company’s and Government’s environ- mental experts. The Company is tirelessly monitoring the state of the environment and strictly adheres to the environmental and industrial safety standards effective in the Kyrgyz Republic and Canada, as well as, those recognized by the World Bank. 136 pieces of heavy-duty mining equipment, which is unprecedented in Kyrgyzstan, are what support developing and operating the Kumtor deposit. A heavy-duty equipment overhaul and expansion program is implemented by the Company on a regular basis. The giant trucks and other equipment are assembled and maintained in the mine’s ﬂ eet shops, which employ about 450 people. 26 stations at Kumtor are monitoring the quality of surface water and air. Support is provided to biodiversity programs and observations for many years show that the wildlife population is on the increase in the nearby territories. 1,700 people can be accommodated in Kumtor’s camp facilities, which consists of 30 residential blocks. After work, adequate rest is guaranteed to the employees while they stay in the camp. The camp has a canteen, gym, library, billiard and ping pong tables, as well as an internet café. 210 controllers are installed in the body of the tailings dam at Kumtor which enables the Company’s engineers to monitor its condition, stability, temperature and the groundwater levels. The dam is 34 metres high but its height will need to be raised. 4,020 metres is the altitude of one of Central Asia’s most advanced gold mills which is located at Kumtor. An ISA mill, an ultraﬁ ne grinding mill, has become the latest among the Company’s high-tech acquisitions. This mill is capable of grinding ore to 20-micron particles, which are 5 times thinner than a human hair. 8.7 million ounces of gold have been poured at Kumtor since the mill was commissioned in May, 1997. Kyrgyzaltyn JSC is the purchaser of all gold and silver produced at the mine. Moreover, Kyrgyzaltyn is the largest shareholder of Centerra Gold Inc. 2012 ANNUAL REPORT 11 Centerra_Front.indd 11 Centerra_Front.indd 11 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Our knowledge of Central Asia gives us a strong advantage in the marketplace. Turkey Ankara Altunhisar JV Kyrgyz Republic Bishkek * Öksüt Deposit Kumtor Mine 12 CENTERRA GOLD INC. Centerra_Front.indd 12 Centerra_Front.indd 12 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Mongolia Boroo Mine Kara Beldyr JV Laogouxi JV Ulaanbaatar * Gatsuurt Deposit Dvoinoy JV Umlekan JV ATO Deposit 2011 Gold Production Kumtor – 583,156 oz Boroo – 59,224 oz 2012 Gold Production Kumtor – 315,238 oz Boroo – 71,838 oz 2013 Estimated Gold Production Kumtor – 550,000 – 600,000 oz Boroo – 55,000 - 60,000 oz 2012 ANNUAL REPORT 13 Centerra_Front.indd 13 Centerra_Front.indd 13 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Kumtor Centerra owns 100% of the Kumtor gold mine which is located in the Kyrgyz Republic, about 350 kilometres southeast of the capital Bishkek and about 60 kilometres north of the border with the People’s Republic of China. It is the largest gold mine operated in Central Asia by a Western-based company, having produced more than 8.7 million ounces of gold between 1997 and the end of 2012. Production 2012 2011 2010 (1) Ore mined (thousands of tonnes) Ore milled (thousands of tonnes) Average mill head grade (grams/tonne) Recovery (%) Gold produced (thousands of ounces) Operating Cash Cost (1) Per tonne milled – ($) Per ounce produced – ($) 4,955 4,756 2.8 75.6 315 6,020 5,815 3.8 80.8 583 5,765 5,594 4.0 79.5 568 43.41 655 48.38 482 41.50(2) 409(2) All-in cash cost (pre-tax) per ounce produced (3) – ($) 1,808 768 731 Notes: Operating cash cost is comprised of mine operating costs such as mining, processing, regional ofﬁ ce administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes depreciation, depletion and amortization, reclamation costs, capital investments, community investments, exploration expenses and corporate general and administration expenses. Operating cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in the Management’s Discussion and Analysis accompanying this annual report. (2) Restated to exclude community investments costs. (3) All-in cash cost (pre-tax) per ounce produced includes operating cash costs, sustaining and growth capital, corporate general and administrative expenses, global exploration expenses, and community investments, but excludes revenue-based taxes at Kumtor. All-in cash cost (pre-tax) per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in the Management’s Discussion and Analysis accompanying this annual report. Mining the Central Pit During 2012, Kumtor produced 315,238 ounces of gold from the SB Zone in the Central Pit at an operating cash cost of $655 per ounce produced. The all-in cash cost (pre-tax), which includes capitalized stripping, sustaining and growth capital, but excludes the revenue-based tax, was $1,808 per ounce produced for the year. Production results during the year were impacted, starting in March, by accelerated movement of the ice and waste above the SB Zone which required a change in mine plan, and, later by an irregular till/bedrock contact encountered while transitioning from waste rock to ore in the southwest area of the pit in the fourth quarter and lower than expected mill throughput, mill feed grade, and recovery, encountered when mining a newly discovered portion of the orebody. However, as outlined in the December 20, 2012 Kumtor technical report, the resource block model has proven to be a reliable indicator of mineral reserves relative to gold production and that trend is expected to continue as mining transitions back to better understood areas of the orebody. In 2013, approximately 75% of the production is expected to come from the SB Zone which has had a number of years of historical production. In 2013, approximately 50% of Kumtor’s gold production is expected to occur in the fourth quarter. Gold production from the mine is expected to be between 550,000 and 600,000 ounces in 2013. Ore production in the fourth quarter of 2013 will come from the high-grade SB Zone for which there has been several years of production history. The high-grade ore will be available for mining at the end of the third quarter when it is exposed by cut-back 15. According to the KS-13 mine plan, 2013 is expected to be the last year with a signiﬁ cant back-end loaded production proﬁ le as the mine continues to build stockpiles, which will allow for more consistent production on a quarterly basis going forward. Replacing reserves In 2012, Kumtor more than replaced the reserves it mined in the Central Pit as a result of additional drilling and the KS-13 open pit expansion announced in November 2012. Kumtor’s proven and probable reserves (as of December 31, 2012) increased by 58% or 3.6 million contained ounces of gold compared to 6.3 million ounces of gold as of December 31, 2011 and now total 9.5 million contained ounces of gold. In addition to the open pit reserves at Kumtor, there is still 1.9 million contained ounces of high-grade underground inferred resources in the SB and Stockwork Zones below the expanded KS-13 pit bottom. The inferred resources in the high-grade underground SB Zone totals 1.2 million contained ounces of gold with an average grade of 11.2 g/t. In addition, the high-grade underground Stockwork Zone inferred resource totals 705,000 ounces of contained gold with an average grade of 11.0 g/t. Exploration will continue to test the down dip extension of the SB Zone and other targets on the mining concession. The Company will assess the opportunities to develop both the Stockwork and SB Zones underground once mining of the SB Zone is completed in the open pit and further technical studies are completed. 14 CENTERRA GOLD INC. Centerra_Front.indd 14 Centerra_Front.indd 14 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM Boroo Centerra owns a 100% interest in the Boroo mine which is located 110 kilometres northwest of Ulaanbaatar, Mongolia’s capital. Boroo is within three kilometres of the all-weather Ulaanbaatar-Irkutsk highway and enjoys easy access to the Trans-Mongolian railway. This open pit operation began commercial production in the ﬁ rst quarter of 2004 and has produced approximately 1.66 million ounces of gold through the end of 2012. Production Heap leach material mined (thousands of tonnes) Ore mined direct millfeed (thousands of tonnes) Ore milled (thousands of tonnes) Average mill head grade (grams/tonne) Recovery (%) (1) Gold produced (thousands of ounces) Operating Cash Cost (2) Per tonne milled – ($) Per ounce produced – ($) All-in cash cost (pre-tax) per ounce produced (3) – ($) 2012 2011 2010 143 – 1,694 907 2,382 1.3 64.0 72 21.07 699 820 – 2,340 1.1 68.9 59 17.54 694 800 2,399 2,466 1.9 71.8 111 27.08(4) 601(4) 672 Notes: (1) Excludes heap leach ore. (2) Operating cash cost is comprised of mine operating costs such as mining, processing, regional ofﬁ ce administration, royalties and production taxes, but excludes depreciation, depletion and amortization, reclamation costs, capital investments, community investments, exploration expenses and corporate general and administration expenses. Operating cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in the Management’s Discussion and Analysis accompanying this annual report. All-in cash cost (pre-tax) per ounce produced includes operating cash costs, sustaining and growth capital, corporate general and administrative expenses, global exploration expenses, and community investments, but excludes income taxes. All-in cash cost (pre-tax) per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures” in the Management’s Discussion and Analysis accompanying this annual report. (4) Restated to exclude community investment costs. (3) 2012 Performance During 2012, the Boroo mine produced 71,838 ounces of gold compared to 59,224 ounces in the prior year. The 21% increase in gold production in 2012 was the result of higher mill throughput and higher grades, which were partially offset by lower recoveries, and the restart of the heap leach operation which contributed 7,486 ounces of gold in the fourth quarter. The higher operating cash costs in 2012 were the result of increased mining costs due to the resumption of mining activities, higher milling and site administration costs which were partially offset by the 21% increase in produced ounces. Mining operations resumed at Boroo in January 2012 to mine the remaining ore in Pit 6 and was completed in September 2012. In mid-September 2012 Boroo received regulatory approval for its mine plan for the heap leach facility and shortly thereafter resumed heap leach operations with gold recovery commencing in mid-October. During the second half of 2012 the Boroo mill blended Pit 6 ore and existing stockpiled material achieving higher head grades but with lower recoveries than material processed in the same period of 2011. The nearby Gatsuurt project remained under care and maintenance in 2012 due to continued delays in permitting resulting from the Mongolian Water and Forest Law which prohibits mining and exploration activities in water basins and forested areas but provides an exemption for “strategic deposits”. Further development of the project is subject to resolving matters with respect to the Water and Forest Law, and receiving all required approvals and regulatory commissioning from the Mongolian Government, which would allow the Gatsuurt project to move forward. At Boroo, 2013 gold production is forecast to be 55,000 to 60,000 ounces, which includes approximately 24,000 ounces from heap leaching and 36,000 ounces from processing mill stockpiles. The Boroo mill is expected to process ore stockpiles during the year with an average grade of 0.82 g/t. The 2013 forecast assumes no mining activities at Boroo and Gatsuurt, and no gold production from Gatsuurt. Centerra_Front.indd 15 Centerra_Front.indd 15 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM 2012 ANNUAL REPORT 15 Corporate Responsibility Facts & Figures (cid:129) Financed the construction of a new 150-bed Maternity Hospital in Ulaanbaatar, Mongolia. (cid:129) Investment by the Company $7.5 million. (cid:129) January 2013, hospital opens. At Centerra we are open about our mining activities and we approach our corporate responsibility seriously by engaging stakeholders who inﬂ uence or are inﬂ uenced by our activities. Our key stakeholders include employees, contractors, vendors, communities, shareholders, local and national governments, investors and non-governmental organiza- tions. As an international company, we respect the different needs and values of people and their cultures and operate with transparency to ensure stakeholder conﬁ dence. Putting our corporate responsibility principles into practice means being transparent about our activities and mining in a way that protects the environment. We are continually improving the management of our operations so that we can respond to the economic, environmental and social expectations of our stakeholders. We want to generate a sustainable stream of beneﬁ ts for the countries in which we operate and make investments in the communities that outlive the life of the mine. Just a few examples of these are the $7.5 million invested in the construction of a new maternity hospital in Mongolia, $10 million for the construction and repair of 27 schools throughout the Kyrgyz Republic and a $21 million contribution to a national micro-credit ﬁ nancing program in the Kyrgyz Republic. We strive for continuous improvement without compromising safety or the environment, while aligning our activities with international best practices. 16 CENTERRA GOLD INC. Centerra_Front.indd 16 Centerra_Front.indd 16 Apr/01/2013 12:30 PM Apr/01/2013 12:30 PM MD&A Management’s Discussion and Analysis For the Fiscal Year Ended December 31, 2012 18 Centerra’s Business 19 Gold Industry 20 Growth Strategy 20 Reserves and Resources 24 Developments in 2012 Affecting Operations 26 Consolidated Financial and Operating Highlights 27 Results of Operations 2012 Compared to 2011 Fourth Quarter Results – 2012 compared to 2011 Quarterly Results – Last Eight Quarters 42 Balance Sheet 43 Contractual Obligations 44 Non-GAAP Measures 53 Critical Accounting Estimates 55 Changes in Accounting Policies 56 Disclosure Controls and Procedures and Internal Control Over Financial Reporting 56 Sustainable Development 56 2013 Outlook 61 Qualified Person & QA/QC 62 Risk Factors 78 Caution Regarding Forward-Looking Information Centerra_Financials.indd 17 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 17 Management’s Discussion and Analysis The following discussion has been prepared as of February 20, 2013, and is intended to provide a review of the ﬁ nancial position and results of operations of Centerra Gold Inc. (“Centerra” or the “Company”) as at and for the ﬁ nancial year ended December 31, 2012 in comparison with those as at and for the ﬁ nancial year ended December 31, 2011. This discussion should be read in conjunction with the Company’s audited ﬁ nancial statements and notes thereto for the year ended December 31, 2012 prepared in accordance with International Financial Reporting Standards. In addition, this discussion contains certain forward-looking information regarding Centerra’s businesses and operations. Such forward- looking statements involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. See “Risk Factors” and “Caution Regarding Forward- Looking Information” in this discussion. All dollar amounts are expressed in United States (US) dollars, except as otherwise indicated. Additional information about Centerra , including the Company’s Annual Information Form for the year ended December 31, 2012, will be available on the Company’s website at www.centerragold.com and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. CENTERRA’S BUSINESS Centerra is a Canadian-based gold company, focused on acquiring, exploring, developing and operating gold properties in Asia, the former Soviet Union and other emerging markets around the world. Centerra’s principal operations are located in the Kyrgyz Republic and Mongolia and are subject to political and regulatory risks. See “Other Corporate Developments” and “Risk Factors”. Centerra’s common shares are listed for trading on the Toronto Stock Exchange. As of February 20, 2013, being the date of this Management’s Discussion and Analysis (“MD&A”), there are 236,376,011 common shares issued and outstanding. As of December 31, 2012, Centerra’s signiﬁ cant subsidiaries and jointly-controlled entities include its wholly-owned Kumtor Gold Company and Kumtor Operating Company in the Kyrgyz Republic, Boroo Gold LLC and Centerra Gold Mongolia LLC (owner of the Gatsuurt property and the Altan Tsagaan Ovoo (“ATO”) property) in Mongolia, its 70% interest in the Kara Beldyr Russian joint venture and 70% interest in the Öksüt Turkish joint venture (subsequently increased to a wholly-owned operation in January 2013). Additionally, the Company is earning an interest in other joint venture exploration properties located in Russia, Turkey and China. The Gatsuurt property is in the development phase. The Kara Beldyr, Öksüt and other Russian, Turkish, Chinese and Mongolian properties are in the exploration phase. Substantially all of Centerra’s revenues are derived from the sale of gold. The Company’s revenues are derived from production volumes from its mines and gold prices realized. Gold doré production from the Kumtor mine is purchased by Kyrgyzaltyn JSC (“Kyrgyzaltyn”) for processing at its reﬁ nery in the Kyrgyz Republic while gold doré produced by the Boroo mine is exported and until September 30, 2011 sold under a reﬁ ning agreement with Johnson Matthey Limited or under a master sale agreement with Auramet Trading LLC. The average spot price for gold in 2012 based on the London PM ﬁ x was $1,669 per ounce, an increase of 6% over the average in 2011. This follows year-over-year increases of 28% in 2011 and 26% in 2010. The average realized price of gold received by Centerra in 2012 was $1,692 per ounce. The Company’s costs are comprised primarily of the cost of producing gold from its two mines, exploration expenses relating to its own projects and its joint venture projects, administrative costs from the Toronto, Bishkek, Ulaanbaatar and other exploration ofﬁ ces worldwide and secondarily from depreciation and depletion. There are many operating variables that affect the cost of producing an ounce of gold. In the mine, costs are inﬂ uenced by the ore grade and the stripping ratio. The stripping ratio means the tonnage of waste material which must be removed to allow the mining of one tonne of ore. The ore grade refers to the amount of gold contained in a tonne of ore. The signiﬁ cant costs of mining include labour, diesel fuel and equipment maintenance. 18 CENTERRA GOLD INC. Centerra_Financials.indd 18 Apr/01/2013 1:28 PM In the mill, costs are dependent mainly on the ore grade and the metallurgical characteristics of the ore which can impact gold recovery. For example, a higher grade ore would typically contribute to a lower unit production cost. The signiﬁ cant costs of milling are reagents, consumables, mill maintenance and energy. Both mining and milling costs are also affected by labour costs, which depend on the availability of qualiﬁ ed personnel in the regions where the operations are located, the wages in those markets, and the number of people required. Mining and milling activities involve the use of many materials. The varying costs of acquiring these materials and the amount used in the processing of the ore also inﬂ uence the cash costs of mining and milling. The non-cash costs (primarily depreciation, depletion and amortization (“DD&A”)) are inﬂ uenced by the amount of costs related to the mine’s acquisition, development and ongoing capital requirements and the estimated useful lives of capital items. Over the life of each mine, another signiﬁ cant cost that must be planned for is the closure, reclamation and decommissioning of each operating site. In accordance with standard practices for Western-based mining companies, Centerra carries out remediation and reclamation work during the operating period of the mine, where feasible, in order to reduce the ﬁ nal decommissioning costs. Nevertheless, the majority of rehabilitation work can only be performed following the completion of mining operations. Centerra’s practice is to record estimated ﬁ nal decommissioning costs based on conceptual closure plans, and to accrue these costs according to the principles of IFRS. In addition, Kumtor has established a reclamation trust fund to pay for these costs (net of forecast salvage value of assets) from the revenues generated over the life of mine. At Boroo, 50% of the upcoming year’s annual reclamation budget is deposited by Boroo into a government account and such funds are recovered by Boroo when the annual reclamation commitments are completed. GOLD INDUSTRY The two principal uses of gold are bullion investment and product fabrication. A broad range of end uses is included within the fabrication category, the most signiﬁ cant of which is the production of jewelry. Other fabrication uses include ofﬁ cial coins, electronics, miscellaneous industrial and decorative uses, medals and medallions. The gold price fell during the fourth quarter of 2012 from US$1,776 per ounce to US$1,657 per ounce, a 6.7% decrease. The 2012 performance remained positive with an overall gain of 8.3% for the year. In 2013, the global gold production is anticipated to have modest growth with producers refocusing to ensure that mines under development and current operating mines are proﬁ table and achieve acceptable return on investments. The increasing cost of gold production pressures along with the higher than anticipated capital expenditures which were experienced in 2012 are expected to continue. This has led to several planned projects being deferred in the global gold industry. In addition to supply factors internal to the industry, described above, external factors also impact the gold price. The underlying U.S. economic performance indicators have shown some early signs of recovery from the global ﬁ nancial crisis though not consistently demonstrating economic recovery has been achieved, likely as a result of the volatility of the U.S. dollar and the gold price. It is unlikely in the near term that the U.S. monetary policy regulators will tighten monetary policies to impact the trade-weighted U.S. dollar exchange rate and the same remains true in other developed countries such as Europe and Japan. Central banks of the developed countries and in recent years, countries with emerging economies, are also now driving investment demand for gold by diversifying their reserves from traditional holdings of paper currencies. Emerging-market central banks, which own on average 4.6% of foreign reserves in gold, hold considerably lower gold reserves than the 22% allocation of the developed-market country counterparts. The Company believes that fundamentals remain positive for gold in the coming year. Burgeoning federal deﬁ cits in the U.S. resulting from economic stimulus measures are expected to weaken the U.S. dollar and ultimately usher in a period of higher inﬂ ation. The role of gold as a hedge against inﬂ ation would support continued demand for the metal as would growing appetite by central banks and developing Asian nations seeking a more reliable store of value as compared with other investments. Centerra_Financials.indd 19 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 19 The following table shows the average afternoon gold price ﬁ xing, by quarter, on the London Bullion Market for 2011, and 2012: Quarter 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 LIQUIDITY Average Gold Price ($) 1,386 1,506 1,702 1,688 1,721 1,597 1,667 1,711 Financial liquidity provides the Company with the ability to fund future operating activities and investments. Centerra has two operating mines, located in the Kyrgyz Republic and Mongolia. Centerra generated $134.7 million in cash from operations in 2012 and has a balance of cash and short-term investments of $382.1 million at December 31, 2012 after drawing $76 million from its revolving line of credit. The Company’s ﬁ nancial risk management policy focuses on cash preservation, while maintaining the liquidity necessary to conduct operations on a day-to-day basis. The Company manages counterparty credit risk, in respect of cash and short-term investments, by maintaining bank accounts with highly-rated U.S. and Canadian banks and investing only in highly-rated Canadian and U.S. Government bills, term deposits or banker’s acceptances with highly-rated ﬁ nancial institutions, and corporate direct credit of highly-rated, highly-liquid issuers. Continued uncertainty in global ﬁ nancial markets has constrained the ability of many companies to access capital markets ﬁ nancing. Financial markets have retained an interest in gold producers and, under the right conditions, equity issues of many of these producers have been well received. In November 2010, Centerra secured a three-year, $150 million revolving credit facility to increase liquidity available for working capital and future growth initiatives. The Company has $76 million outstanding on this facility, currently repayable in August 2013, however, at the Company’s direction, this amount can be rolled over to a future period. It is expected that all planned capital and operating expenditures can be funded out of cash ﬂ ow for 2013. See “Caution Regarding Forward-Looking Information”. GROWTH STRATEGY Centerra’s growth strategy is to increase its reserve base and expand its current portfolio of mining operations by: • developing new reserves at or near its existing mines; • advancing late-stage exploration properties, including properties owned by joint ventures where the Company’s interests were earned by funding the costs of exploration drilling and feasibility studies; and • pursuing selective acquisitions in Asia, the former Soviet Union and other emerging markets worldwide. Centerra’s growth strategy could be impacted by the risk factors described on page 62. RESERVES AND RESOURCES During 2012, the Company continued its exploration drilling activities in and around the Kumtor mine site and on its various advanced exploration projects in the Asian region. On February 7, 2013, the Company released the results of the updated reserve and resource estimates for the Kumtor and Boroo mines and updated resource proﬁ les for its advanced projects providing estimates of the Company’s reserves and resources as of December 31, 2012. 20 CENTERRA GOLD INC. Centerra_Financials.indd 20 Apr/01/2013 1:28 PM Reserves: During 2012, Centerra’s proven and probable gold reserves increased by 3.6 million contained ounces (before accounting for 2012 production) to 11.1 million ounces of contained gold, compared to 8.1 million ounces as of December 31, 2011. This represents an increase of 45% before accounting for 534,000 contained ounces processed at Kumtor and Boroo during 2012. The total reserve increase is the result of the signiﬁ cant expansion of the Kumtor Central Pit and is described in detail in a new National Instrument 43-101 technical report ﬁ led on SEDAR in December 2012. All 2012 year-end reserves were estimated using a gold price of $1,350 per ounce compared to $1,200 per ounce at December 31, 2011. For the 2012 Kumtor year-end reserve statement, the KS-13 model has been updated from the reserve estimate completed and published at the end of September 2012 by the addition of 17 diamond drill holes and accounting for the gold production and mine reconciliation completed during the last quarter of 2012. In Mongolia, at the Boroo mine, proven and probable reserves total 178,000 contained ounces of gold after accounting for approximately 110,000 contained ounces being processed through the mill or loaded on the heap leach pad in 2012. The remaining reserves are now entirely within existing ore stockpiles on surface. At the current reserve gold price assumption, the Boroo operation can continue to feed the mill for approximately two more years and operate and recover gold from the heap leach pad into 2014. At the Gatsuurt project, proven and probable reserves remain unchanged at 1.5 million ounces of contained gold. Resources: As of December 31, 2012, Centerra’s measured and indicated resources decreased by 23% or 1.5 million ounces over the December 31, 2011 ﬁ gures to a total of 5.1 million ounces of contained gold, compared to 6.6 million contained ounces as of December 31, 2011. The majority of this decrease is a result of the conversion of Kumtor’s Central Pit measured and indicated open pit resources into mineral reserves as a result of the KS-13 Pit expansion. This conversion of resources to reserves has been offset by increased resources at Kumtor and the addition of 682,000 contained ounces of new resources at the Öksüt project. As of December 31, 2012, Centerra’s inferred resources increased by 22,000 contained ounces over the December 31, 2011 ﬁ gures to a total of 4.1 million ounces of contained gold. The conversion of Kumtor underground resources into reserves within the KS-13 expanded pit was offset by new high grade resources outlined below the KS-13 pit design and the addition of 477,000 contained ounces of new resources at the Öksüt project. At the Öksüt project in Turkey, Centerra calculated its initial resource estimate based on the successful 2012 drilling program. As of December 31, 2012, the Öksüt project has an indicated resource of 682,000 ounces of contained gold and an inferred resource of 477,000 ounces of contained gold. At the ATO project in Mongolia, measured and indicated contained gold, resources have decreased by 53,000 contained ounces of gold from 2011 year-end, to a total of 0.8 million contained ounces of gold at December 31, 2012. Extensive metallurgical test work completed in 2012 has resulted in revised lower process recovery and net smelter return assumptions for the sulphide mineralization which has lowered the contained gold resources. This has also decreased the corresponding contained silver, lead and zinc resources. Some of the decrease has been offset by increased recovery assumptions for the oxide mineralization and the addition of 50 new exploration drill holes completed in 2012. Inferred resources at ATO have also decreased by 18,000 contained ounces of gold from 2011 year-end, to a total of 8,000 contained ounces of gold at December 31, 2012 as a result of the same factors outlined above. The 2012 year-end resource estimates on the Boroo, Gatsuurt, Ulan Bulag properties in Mongolia and Kara Beldyr property in Russia remain unchanged from those outlined at the end of 2011. Inferred resources have a great amount of uncertainty as to whether they will be mined economically. It cannot be assumed that all or part of the inferred resources will be upgraded to a higher category. Centerra_Financials.indd 21 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 21 2012 YEAR-END GOLD RESERVE AND RESOURCE SUMMARY (as of December 31, 2012) Gold Mineral Reserves (1) (3) (13) (14) (tonnes and ounces in thousands) Property (3) Tonnes Kumtor (5) Boroo (7) Gatsuurt (8) (16) Total 3,149 7,196 – 10,345 Proven Grade (g/t) 1.9 0.8 – 1.1 Probable Total Proven and Probable Contained Gold (oz) 196 178 – 374 Tonnes 88,371 – 16,349 104,720 Grade (g/t) Contained Gold (oz) 3.3 – 2.8 3.2 9,270 – 1,489 10,759 Tonnes 91,520 7,196 16,349 115,065 Grade (g/t) Contained Gold (oz) 3.2 0.8 2.8 3.0 9,466 178 1,489 11,133 Gold Measured and Indicated Mineral Resources(2) (3) (13) (14) (tonnes and ounces in thousands) Measured Indicated Total Measured and Indicated Property (3) Tonnes Grade (g/t) Contained Gold (oz) Tonnes Grade (g/t) Contained Gold (oz) Tonnes Grade (g/t) Contained Gold (oz) Kumtor Open Pit (4) (5) Kumtor Stockwork Underground (6) Boroo (4) (7) Gatsuurt (4) (8) (16) Ulaan Bulag (9) ATO (10) Kara Beldyr (11) Öksüt (12) Total 21,975 – 452 – – 9,663 – – 32,090 2.3 – 2.2 – – 1.5 – – 2.1 1,631 12,113 2.3 898 34,088 2.3 – 32 – – 465 – – 2,128 351 4,464 5,533 1,555 8,920 3,790 15,404 52,130 10.7 1.5 2.4 1.5 1.1 2.4 1.4 1.8 121 210 426 73 306 289 682 3,005 351 4,916 5,533 1,555 18,583 3,790 15,404 84,220 10.7 1.5 2.4 1.5 1.3 2.4 1.4 1.9 2,529 121 242 426 73 771 289 682 5,133 Gold Inferred Mineral Resources(2) (3) (13) (14) (15) (tonnes and ounces in thousands) Property (3) Kumtor Open Pit (4) (5) Kumtor Stockwork Underground (6) Kumtor SB Zone UG (6) Boroo (4) (7) Gatsuurt (4) (8) (16) Ulaan Bulag (9) ATO (10) Kara Beldyr (11) Öksüt (12) Total Tonnes 9,339 2,002 3,413 7,323 5,926 315 386 3,354 14,009 46,067 Grade (g/t) Contained Gold (oz) 2.4 11.0 11.2 1.0 2.6 1.3 0.7 2.0 1.1 2.8 712 705 1,229 235 491 13 8 211 477 4,081 (1) The mineral reserves have been estimated based on a gold price of $1,350 per ounce. (2) Mineral resources are in addition to reserves. Mineral resources do not have demonstrated economic viability. (3) Centerra’s equity interests as of this MD&A are: Kumtor 100%, Gatsuurt 100%, Boroo 100%, Ulaan Bulag 100%, ATO 100%, Öksüt 100% (including the acquisition of the remaining interest in January 2013) and Kara Beldyr 70%. All contained ounces in table above are shown on a 100% basis. (4) Open pit resources occur outside the current ultimate pits which have been designed using a gold price of $1,350 per ounce. (5) The open pit reserves and resources at Kumtor are estimated based on a cut-off grade of 0.85 gram of gold per tonne for the Central Pit and 1.0 grams of gold per tonne for the Southwest, Sarytor and Northeast deposits. (6) Underground resources occur below the Central pit and are estimated based on a cut-off grade of 6.0 grams of gold per tonne. (7) The open pit reserves and resources at Boroo are estimated based on a 0.5 gram of gold per tonne cut-off grade. (8) The open pit reserves and resources at Gatsuurt are estimated using either a 1.2, 1.4 or 1.5 grams of gold per tonne cut-off grade depending on ore type and process method and include the Central Zone and Main Zone deposits. (9) The open pit resources at Ulaan Bulag are estimated on a cut-off grade of 0.8, 0.9 or 1.0 grams of gold per tonne depending on ore type and process method (10) The ATO open pit resources are estimated based on a Net Smelter Return (NSR) cut-off grade of $6.50 NSR per tonne for oxide mineralization and $25.50 NSR per tonne for sulphide mineralization (11) The open pit resources at Kara Beldyr are estimated based on a 1.0 gram of gold per tonne cut-off grade and the contained ounces are shown on a 100% basis. (12) The open pit resources at Öksüt are estimated based on a 0.2 gram of gold per tonne cut-off grade (13) A conversion factor of 31.10348 grams per ounce of gold is used in the reserve and resource estimates. (14) Numbers may not add up due to rounding. (15) Inferred mineral resources have a great amount of uncertainty as to their existence and as to whether they can be mined economically. It cannot be assumed that all or part of the inferred resources will ever be upgraded to a higher category. (16) In July 2009, the Mongolian Parliament enacted legislation that would prohibit mineral prospecting, exploration and mining in water basins and forest areas in the territory of Mongolia and provides for the revocation of mining and exploration licenses affecting such areas. The legislation exempts any “mineral deposit of strategic signiﬁ cance”. If the legislation is not repealed or amended or if Gatsuurt is not designated as a “mineral deposit of strategic importance” that is exempt from this legislation, mineral reserves at Gatsuurt may have to be reclassiﬁ ed as mineral resources or eliminated entirely. See “Other Corporate Developments – Mongolia”. 22 CENTERRA GOLD INC. Centerra_Financials.indd 22 Apr/01/2013 1:28 PM Polymetallic Mineral Resources as of December 31, 2012 ATO Project (17) (18) (19) (20) (21) (23) (24) Category Tonnes (000’s) Gold Grade (g/t) Measured Resources Indicated Resources Measured and Indicated Inferred Resources (19) 3,677 3,294 6,971 87 Measured Resources Indicated Resources Measured and Indicated Inferred Resources (19) 5,986 5,626 11,612 299 1.3 0.7 1.0 0.8 1.7 1.3 1.5 0.6 Contained Silver Gold (22) Grade (g/t) (oz 000’s) Contained Silver (oz 000’s) Lead Grade (%) Contained Zinc Lead Grade (%) (lb 000’s) Contained Zinc (lb 000’s) Oxide Mineral Resources (> $6.50 NSR cut-off Grade) 148 78 226 2 8.5 7.2 7.9 4.9 1,010 758 1,768 14 – – – – – – – – – – – – – – – Sulphide Mineral Resources (> $25.50 NSR cut-off Grade) 318 228 545 6 8.02 8.52 8.26 5.78 1,543 1,541 3,085 56 0.979 0.803 0.894 1.025 129,197 99,598 228,795 6,757 1.704 1.447 1.579 2.306 224,874 179,474 404,349 15,201 (17) Mineral resources have been estimated on the following metal prices (gold $1,350 per ounce), (silver $20 per ounce), (lead $ 0.87 per lb), (zinc $0.87 per lb). (18) Mineral resources do not have demonstrated economic viability. (19) Inferred mineral resources have a great amount of uncertainty as to their existence and as to whether they can be mined economically. It cannot be assumed that all or part of the inferred resources will ever be upgraded to a higher category. (20) Centerra’s equity interest in the ATO project is 100%. (21) Numbers may not add up due to rounding. (22) The contained gold resources have also been included in Centerra’s 2012 Year-end Gold Reserve and Resource Summary (23) The ATO resources are estimated based on a Net Smelter Return cut-off grade of $6.50 NSR per tonne for oxide mineralization and $25.50 NSR per tonne for sulphide mineralization. (24) Variables used to calculate NSR values include; Oxide total recovery of gold=69.8% Oxide total recovery of Silver=56.7% Sulphide Net Smelter Return total recovery of gold=59.9% Sulphide Net Smelter Return total recovery of silver=48.5% Sulphide Net Smelter Return total recovery of lead=42.6% Sulphide Net Smelter Return total recovery of zinc=27.7% Payable royalty on total recovered gold=10.0% Payable royalty on total recovered silver=6.75% Payable royalty on total recovered lead=6.75% Centerra_Financials.indd 23 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 23 Reconciliation of Gold Reserves and Resources (in thousands of ounces of contained gold) (8) (9) Gold Proven and Probable Mineral Reserves Kumtor (4) (5) Boroo (4) Gatsuurt (4) (7) (11) Total Proven and Probable Reserves Gold Measured and Indicated Mineral Resources Kumtor (4) (6) Kumtor Stockwork Underground (4) Boroo (4) Gatsuurt (4) (7) (11) Ulaan Bulag (4) ATO (4) Kara Beldyr (4) Öksüt (4) Total Measured & Indicated Resources Gold Inferred Mineral Resources (10) Kumtor Open Pit (4) (6) Kumtor Stockwork Underground (4) Kumtor SB Underground (4) Boroo (4) Gatsuurt (4) (7) (11) Ulaan Bulag (4) ATO (4) Kara Beldyr (4) Öksüt (4) Total Inferred Resources December 31 2012 2012 Addition December 31 2011 (1) Throughput (2) (Deletion) (3) 2012 6,278 298 1,489 8,065 4,799 0 242 426 73 824 289 0 6,653 694 629 1,760 235 491 13 26 211 0 4,059 424 110 0 534 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3,612 (10) 0 3,602 (2,270) 121 0 0 0 (53) 0 682 9,466 178 1,489 11,133 2,529 121 242 426 73 771 289 682 (1,520) 5,133 18 76 (531) 0 0 0 (18) 0 477 22 712 705 1,229 235 491 13 8 211 477 4,081 (1) Reserves and resources as reported in Centerra’s Annual Information Form ﬁ led in March 2012. (2) Corresponds to mill feed at Kumtor and mill feed or stacked ore on heap leach pad at Boroo. (3) Changes in reserves or resources, as applicable, are attributed to information provided by drilling and subsequent reclassiﬁ cation of reserves or resources, an increase in the gold price, changes in pit designs, reconciliation between the mill and the resource model, and changes to operating costs. (4) Centerra’s equity interests as of this MD&A are as follows: Kumtor 100%, Gatsuurt 100%, Boroo 100%, Ulaan Bulag 100%, ATO 100%, Öksüt 100% (including the acquisition of the remaining interest in January 2013) and Kara Beldyr 70%. Contained ounces are on a 100% basis in the table above at each property. (5) Kumtor open pit reserves include the Central Pit and the Southwest and Sarytor Deposits. (6) Kumtor open pit resources include the Central Pit, Southwest Deposit, Sarytor Deposit and Northeast Deposit. (7) Gatsuurt open pit reserves and resources include the Central Zone and Main Zone deposits. (8) Centerra reports reserves and resources separately. The amount of reported resources does not include those amounts identiﬁ ed as reserves. Mineral resources do not have demonstrated economic viability. (9) Numbers may not add up due to rounding. (10) Inferred mineral resources have a great amount of uncertainty as to their existence and as to whether they can be mined economically. It cannot be assumed that all or part of the inferred resources will ever be upgraded to a higher category. (11) In July 2009, the Mongolian Parliament enacted legislation that would prohibit mineral prospecting, exploration and mining in water basins and forest areas in the territory of Mongolia and provides for the revocation of mining and exploration licenses affecting such areas. The legislation exempts any “mineral deposit of strategic signiﬁ cance”. If the legislation is not repealed or amended or if Gatsuurt is not designated as a “mineral deposit of strategic importance” that is exempt from this legislation, mineral reserves at Gatsuurt may have to be reclassiﬁ ed as mineral resources or eliminated entirely. See “Other Corporate Developments – Mongolia”. DEVELOPMENTS IN 2012 AFFECTING OPERATIONS Kumtor operations: • Production at Kumtor for 2012 was signiﬁ cantly impacted by the accelerated ice movement in the SB zone in the ﬁ rst quarter which required a change in the mine plan for the year. As a result, production planned for 2012 in cut-backs 12B and14A of the SB zone had to be postponed to allow for the unloading of ice and waste to mitigate the accelerated ice movements (announced on March 27, 2012). The Company was able to partially mitigate the delay in reaching ore from cut-backs 12B and 14A by accelerating mining in the southwest portion of the Kumtor pit (cut-back 14B) such that ore from that area was reached in September 2012. Processing of ore obtained from cut-back 14B commenced on September 18, 2012. The mining costs to remove the ice and waste material in the high movement area and unload zone were recorded as abnormal as the activity was unrelated to production under the revised mine plan for 2012. 24 CENTERRA GOLD INC. Centerra_Financials.indd 24 Apr/01/2013 1:28 PM • Due to the delayed release of ore, Kumtor depleted its low grade stockpiled material on July 23, 2012 and consequently shut down its mill until September 18, 2012. During the seven week shutdown, planned and unplanned maintenance was performed across all sections of the mill. • The Company announced on May 1, 2012 that it was conducting a technical and ﬁ nancial study considering the potential for expanding the limits of the ultimate pit. • On August 10, 2012, Kumtor suspended the development work on the underground project and placed the project on care and maintenance pending completion of a detailed technical and ﬁ nancial study on the potential for expanding the limits of the ultimate pit. • Based on the positive results of the technical and ﬁ nancial study, the Board of Directors approved on November 7, 2012 the new reserves and resources and the new mine plan for Kumtor that included a much larger open pit and extended the mine life of Kumtor by 5 years (to 2026). The opportunity to expand the pit was created by exploration drilling between 2006 and September 2012 that more than doubled the strike length of the SB zone, the increase in the reserve gold price over the period which allowed a lower cut-off grade and the decision made on March 27, 2012 to mitigate the impact of the high movement areas by ofﬂ oading the ice and waste in the upper portion of the southeast section of the pit wall thereby reducing the stripping ratio of an expanded pit. • The expanded open pit mine plan incorporates 1.2 million contained ounces that were previously classiﬁ ed as inferred underground resources and also captures into reserves an additional 2.2 million contained ounces representing material between the cut-off grade for the open pit and the cut-off grade for the underground resource estimation. • The expanded pit consumes a signiﬁ cant amount of the existing underground development infrastructure. As a result, the Company de-recognized the capitalized cost of the underground development and underground equipment and recorded a charge of $180.7 million in the fourth quarter of 2012. • Kumtor’s gold production was further negatively impacted in the fourth quarter when the operations encountered an irregular till/bedrock contact while transitioning from waste to ore. This situation is not expected to occur again in the current mine plan (KS-13). Final production results at Kumtor were also impacted in the fourth quarter by lower than expected mill throughput and recovery as well as lower than expected mill head grades when processing ore from the newly discovered portion of the orebody. • By the end of 2012, the Company received and commissioned twenty-ﬁ ve new CAT 789 haul trucks, four Hitachi shovels and four large capacity drills it had previously ordered to meet its production needs. An additional ten new CAT 789 haul trucks and one Hitachi shovel were placed on order at the end of 2012 to meet the life of mine equipment requirements. The equipment on order is scheduled to arrive during the ﬁ rst quarter of 2013. • The arrival of the new mining equipment has allowed the planned high wall unloading of the waste and ice to remain on schedule. The success of the unloading effort has had the desired effect of reducing the ice and waste in the high movement areas and slowing the historical advance rates. The colder seasonal weather has also contributed to the decreasing advance rates. • In December 2012, a new two year collective bargaining agreement was signed at the Kumtor mine. Boroo and Gatsuurt operations: • Mining operations at Boroo resumed in January 2012 with stripping activities in Pit 6. At the end of the second quarter of 2012 ore was exposed at the bottom of Pit 6 and capitalization of the stripping costs ceased. During the last half of 2012 the Boroo mill blended Pit 6 ore and existing stockpiled material thereby achieving higher head grades but with lower recoveries than material processed in the same period of 2011. Pit 6 ores are more refractory in nature than other Boroo ores historically mined resulting in the lower recovery. • Mining activities in Pit 6 were completed in September 2012 while milling of Pit 6 ore extended to January 2013. • On September 19, 2012 Boroo received regulatory approval for its mine plan for the heap leach facility and shortly thereafter resumed heap leach operations. The operation achieved breakthrough of solution in mid- October and by the end of 2012 produced 7,486 ounces of gold from the heap leach facility. • The Gatsuurt project remained under care and maintenance in 2012 due to continued delays in permitting resulting from the Water and Forest Law which prohibits mining and exploration activities in water basin and forested areas but provides an exemption for “strategic deposits”. Further development of the project is subject to resolving matters with respect to the Water and Forest Law, and receiving all required approvals and regulatory commissioning from the Mongolian Government, which would allow the Gatsuurt project to move forward. See “Other Corporate Developments – Mongolia” and “Risk Factors”. 2012 ANNUAL REPORT 25 Centerra_Financials.indd 25 Apr/01/2013 1:28 PM Acquisition of Remaining Öksüt Interest: On January 24, 2013, the Company completed the purchase of the remaining 30% interest in the Öksüt Gold Project, located in the Kayseri region of central Turkey, from, Stratex International Plc. Closing of the transaction was conditional on the conversion of six exploration licenses to two operation licenses and other customary conditions. The two operation licenses were received on January 16, 2013. With the closing, the Company became the sole owner of the Öksüt Gold Project and assumed operatorship and day to day management of the project. Consideration for Stratex’s interest in the project consisted of $20 million paid at closing and a 1% Net Smelter Return royalty on the project, subject to a maximum of $20 million. CONSOLIDATED FINANCIAL AND OPERATING HIGHLIGHTS The consolidated ﬁ nancial statements of Centerra are prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board and have been measured and expressed in United States dollars. Some of the information discussed below are non-GAAP measures. See “Non-GAAP Measures”. Financial Summary ($ millions, except as noted) Year Ended December 31 Revenue Cost of sales Abnormal mining costs Mine standby costs Regional ofﬁ ce administration Earnings from mine operations Revenue-based taxes Other operating expenses Loss on de-recognition of underground assets Exploration and business development Corporate administration Earnings (loss) from operations Other (income) and expenses Finance costs Gain on sale of exploration project Earnings (loss) before income taxes Income tax expense Net earnings (loss) Earnings (loss) per common share (basic and diluted) – $/share Weighted average common shares outstanding – basic (thousands) Weighted average common shares outstanding – diluted (thousands) 2012 2011 2010 $ 661 387 61 5 21 187 75 35 181 38 27 (169) – 4 – (173) 12 $ (184) $ (0.78) 236,369 236,369 $ 1,020 $ 382 – – 21 617 132 15 – 43 45 382 (1) 4 – 379 8 371 1.57 $ $ $ $ 850 342 – 1 21 485 99 8 – 32 52 294 1 2 (35) 327 4 322 1.37 236,088 236,354 235,488 235,862 Total assets Long-term provision for reclamation, dividends payable and deferred income taxes $ $ 1,554 58 $ $ 1,689 56 $ $ 1,400 31 Operating Summary Gold produced – ounces poured Gold sold – ounces sold Average realized price – $ per ounce sold Average gold spot market price – $ per ounce (1) Cost of sales – $ per ounce sold (2) Operating cash costs – $ per ounce produced (2) Total production costs – $ per ounce produced (2) All-in cash costs (pre-tax) – $ per ounce produced (2) (3) 387,076 390,533 1,692 1,669 992 663 1,143 1,882 $ $ $ $ $ $ 642,380 650,258 678,941 687,706 $ $ $ $ $ $ 1,569 1,572 588 502 687 929 $ $ $ $ $ $ 1,236 1,225 498 440 555 838 (1) Average for the period as reported by the London Bullion Market Association (US dollar Gold P.M. Fix Rate). (2) Operating cash costs is comprised of mine operating costs such as mining, processing, regional ofﬁ ce administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes depreciation, depletion and amortization, reclamation costs, capital investments, community investments, exploration expenses and corporate general and administration expenses. Operating cash costs, total production costs and all-in cash costs (pre-tax) per ounce produced, as well as cost of sales per ounce sold, are non-GAAP measures and are discussed under “Non-GAAP Measures”. (3) All-in cash costs (pre-tax) per ounce produced includes operating cash costs, sustaining and growth capital, corporate general and administrative expenses, global exploration expenses and community investments, but excludes revenue-based taxes at Kumtor and income taxes. 26 CENTERRA GOLD INC. Centerra_Financials.indd 26 Apr/01/2013 1:28 PM RESULTS OF OPERATIONS 2012 Compared to 2011 For the year ended December 31, 2012, the Company recorded a net loss of $184.0 million or $0.78 per share, compared to net earnings of $370.9 million or $1.57 per share in 2011. The 2012 results reﬂ ect a charge for the de-recognition of the underground assets at Kumtor of $180.7 million and the negative impact on production of the acceleration of ice and waste in the high movement area above the SB zone which delayed the release of ore and required a re-design of the production plan for 2012 early in the year (see March 27, 2012 new release). The lower earnings at Kumtor for 2012 were partially offset by higher production and sales at Boroo, in part due to the resumption of activities of the heap leach operation in the fourth quarter. The earnings in 2012 were affected by 46% lower ounces produced and sold at Kumtor and higher spending on major sustainable community projects, partially offset by increased production and sales at Boroo and an 8% increase in the realized gold price. Production: Gold production for 2012 totaled 387,076 ounces compared to 642,380 ounces in the prior year. The decrease in ounces poured was mainly due to the revised mine plan at Kumtor, as a result of the accelerated ice and waste movements in the SB zone, which led to a 46% decrease in production at Kumtor year over year, partially offset by a 21% increase in production at Boroo, which was positively impacted by the start-up of the heap leach operation in November 2012. Revenue: Revenue for 2 012 decreased to $660.7 million compared to $1,020.3 million in the same period of 2011 due to a 40% decrease in ounces sold partially offset by an 8% increase in the realized gold price. Gold sold was 390,533 ounces in 2012 compared to the 650,258 ounces reported in 2011. This reduction reﬂ ects lower gold production at Kumtor (-46%) mostly due to lower volumes as a result of the revised mine plan, as well as lower grades and lower recoveries from the blending of stockpiled ore and in-pit ore processed through the mill. Milling activities at Kumtor were temporarily suspended on July 23, 2012 upon depletion of the low grade stockpiles being processed while awaiting the release of ore from the pit. The mill resumed operation on September 28, 2012 with the release of ore from cut-back 14B. At Boroo, ounce production in 2012 was 21% higher, beneﬁ ting from the resumption of heap leach operations in November and from the higher throughput of higher grade Pit 6 material through the mill. The mill at Boroo operated in 2011 by processing stockpiled material from the pit along with higher grade material from the heap leach stockpiles. The average realized gold price for 2012 was $1,692 per ounce compared to $1,569 per ounce in the same period of 2011 reﬂ ecting higher spot prices for gold throughout the year. Cost of sales: Cost of sales was $387.5 million in 2012 compared to $382.3 million in 2011, reﬂ ecting the processing of lower grade, higher cost stockpiled material at Kumtor for the period to September 2012, higher operating costs for labour, diesel and other consumables and increased DD&A of $43.8 million. Cost of sales in 2012 also includes a charge of $7.2 million representing a metal reconciliation variance between the gold content estimated in the stockpiles and the gold actually recovered through processing at Kumtor. The comparative period of 2011 costs of sales included a charge of $5.8 million for the settlement resulting from an audit by the Kyrgyz Social Fund, relating to the calculation of the premium for work conducted at high altitude at the Kumtor project. Depreciation, depletion, and amortization associated with production increased by 44% to $142.6 million in 2012 from $99.3 million in 2011 as a result of higher depreciation for the expanded mobile ﬂ eet at Kumtor and higher amortization of deferred stripping costs at both sites, partially offset by lower volumes. Centerra_Financials.indd 27 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 27 Abnormal mining costs: Abnormal mining costs of $60.9 million were recorded by Kumtor in 2012 (nil for 2011) representing $24.8 million for the cost of the ice and waste removal from the high movement unload zone and $36.1 million of stripping costs. This stripping activity, when ore release had been deferred as a result of the revised mine plan, has resulted in a signiﬁ cant amount of mining costs which did not relate to the production of inventory in the period and were expensed immediately as abnormal mining costs. Other operating expenses: Other operating expenses for 2012 totaled $34.3 million compared to $15.5 million in 2011. The 2012 amount includes $26.2 million spent on corporate social responsibility (“CSR”) programs and $7.8 million for closure costs of the underground project at Kumtor. In 2012, CSR spending in the Kyrgyz Republic totaled $24 million, of which $21 million was a contribution to a national micro-credit ﬁ nancing program, and CSR spending in Mongolia totaled $2.2 million including a continuing contribution by Boroo to the Ulaanbaatar maternity hospital of $1.1 million. In 2011, $11.5 million was spent on CSR programs in the Kyrgyz Republic, including a $10 million contribution for the school reconstruction program, and $1.1 million was spent in Mongolia on various CSR projects. Loss on de-recognition of underground assets: The Company recorded a charge of $180.7 million in the fourth quarter of 2012 for the de-recognition of the underground assets at Kumtor following the decision to expand the open pit, as announced on November 7, 2012. The larger open pit will partially consume the declines rendering them unusable for future mining activities. Exploration and business development: Exploration and business development expenditures in 2012 totaled $38.5 million, of which exploration spending was $37.9 million (2011 total $42.9 million, including $39.6 million of exploration). Exploration expenditures in 2012 decreased slightly from 2011 due to the suspension of regional exploration programs in Kyrgyzstan and the closure of the Reno ofﬁ ce and cessation of the U.S. exploration program in mid-2012. Exploration expenditures at Kumtor in 2012 totaled $11.3 million ($12.7 million in 2011), and included programs of surface drilling from the Central Pit and underground drilling from Declines 1 and 2. The Central Pit drilling program was directed toward inﬁ lling and expanding the upper portions of the SB Zone below the KS-12 pit. This drilling will continue in 2013 when platforms are available for drilling in the Central Pit. In the underground, a program of inﬁ ll and exploration drilling was completed in the Stockwork Zone, upgrading a portion of the deposit to measured and indicated resources and expanding the inferred resource. Exploration drilling from Declines 1 and 2 was directed at inﬁ lling portions of the southwest extension of the SB Zone and exploring portions of the SB Zone inaccessible from platforms in the Central Pit. Other work on the Kumtor mine concession included several exploration holes at the Sarytor deposit. Plans for continued exploration on the Karasay and Koendy exploration license were curtailed following a decision by the Agency for Subsoil and Natural Resources to not renew either license. In Mongolia, 2012 exploration expenditures totaled $10 million compared to $11.4 million in 2011. The Mineral Resource Authority of Mongolia (“MRAM”) accepted a Reserves and Resources report for the ATO deposit in June 2012, and a mining license was granted in late August 2012. Exploration activity at ATO included step-out drilling around the deposit in the second half of 2012 and testing of nearby prospects. Drilling results closed off portions of the pipe-like bodies at ATO and identiﬁ ed several new zones on the eastern ﬂ anks of the system. The drilling results, together with results from metallurgical test work, were used to update the ATO resource. Elsewhere in Mongolia, drilling was also conducted on the Uul Bayan license south of ATO and on the Ulaan Bulag mining license in the Boroo mining district. 28 CENTERRA GOLD INC. Centerra_Financials.indd 28 Apr/01/2013 1:28 PM Expenditures in Russia were $5.9 million in 2012 ($5.1 million in 2011) and included drilling programs on the Kara Beldyr and Dvoinoy Joint Ventures. At Kara Beldyr, drilling focused on expanding and inﬁ lling the Camp Zone, a 600 metre-long zone of auriferous, dike-ﬁ lled structures, and testing other exploration targets on the license. At the Dvoinoy Joint Venture in the Amur region, two drilling campaigns were completed testing several gold targets on the property. Initial results from one of the targets are positive and will be the subject of additional drilling in 2013. In Turkey, $6.4 million was spent on exploration in 2012 ($4.3 million in 2011). Exploration spending increased in 2012 as drilling accelerated on the Öksüt Joint Venture project. Work at Öksüt included both step-out and inﬁ ll drilling at the Ortaçam North deposit, a deeply-oxidized high-sulphidation gold system discovered in 2011. Centerra increased its ownership in Öksüt to 70% in October and, in December, signed an agreement with Stratex to purchase the remaining 30% not held by Centerra for $20 million and a 1% royalty capped at $20 million. The purchase of the remaining 30% closed in January 2013. Results from the 2012 drilling campaign were used to calculate an initial oxide resource for Öksüt. Elsewhere, the Company initiated exploration on the Laogouxi Joint Venture in Heilongjiang Province, China and received a two-year renewal on the exploration license. The Company also ﬁ nalized an agreement covering the Umlekan license in the Amur region, Russia. Umlekan adjoins the Dvoinoy Joint Venture and includes several drill ready gold and gold-copper targets. Generative exploration programs continued in Russia, Central Asia, Europe and China. Corporate administration: Corporate administration costs in 2012 were $27 million, a reduction of $17.9 million from the same period in 2011, reﬂ ecting a lower charge for share-based compensation primarily as a result of the lower price of Centerra’s shares. Taxes: Centerra reported $74.7 million in 2012 for revenue-based taxes at Kumtor compared to $131.8 million in 2011, and $11.7 million in 2012 for income taxes at Boroo compared to $8.1 million in 2011. The decrease in the revenue-based tax expense reﬂ ects the lower volumes sold in 2012 at Kumtor. The increase of $3.6 million in Boroo’s income tax expense is a result of the higher volumes and higher earnings achieved in 2012. Revenue-based tax is governed by the Restated Investment Agreement signed with the Kyrgyz Government on June 6, 2009. The agreement assessed tax on Kumtor at a rate of 13% of gross revenue, plus a monthly contribution of 1% of gross revenue to the Issyk-Kul Oblast Development Fund. Income tax expense at Boroo is calculated based on a Stability Agreement with the Government of Mongolia where an income tax rate of 25% is assessed on taxable income over 3 billion Mongolian Tugriks (MNT) (approximately $2.2 million at the 2012 year-end exchange rate) and a tax rate of 10% applicable to taxable income up to that amount. Losses incurred by Centerra’s entities in the North American segment have not been tax effected and as a result no deferred tax asset has been recognized. Net Loss: The net loss for 2012 was $184.0 million or $0.78 per share compared to net earnings of $370.9 million or $1.57 per share in 2011, reﬂ ecting the de-recognition of Kumtor’s underground assets and lower earnings at Kumtor from the revised mining plan. Unit Operating Costs: i) Cost of sales per ounce sold: Cost of sales per ounce sold in 2012, which includes the impact of DD&A, increased to $992 per ounce sold compared to $588 per ounce sold in 2011. The majority of the gold production in 2012 was from low-grade ore stockpiles resulting in lower production, reduced sales and an increased cost per ounce sold. Due to the delay in accessing ore, Kumtor also processed higher cost material from stockpiles for the ﬁ rst nine months of 2012. Cost of sales per ounce sold is discussed under “Non-GAAP Measures”. Centerra_Financials.indd 29 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 29 ii) Operating cash costs per ounce produced: Operating cash cost per ounce produced for 2012 increased to $663 compared to $502 per ounce in 2011 (operating cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”). The increase in 2012 reﬂ ects the impact of lower production levels due to lower grades and recoveries from the processing of stockpiled materials at Kumtor and higher operating costs at Kumtor and at Boroo. iii) All-in cash costs per ounce produced: All-in cash costs – Consolidated (1) $ millions, unless otherwise speciﬁ ed (unaudited) Year Ended December 31 Operating cash costs Capitalized stripping and ice unload – cash (1) Operating cash costs and capitalized stripping Sustaining capital (cash) (1) Growth capital (cash) (1) Operating cash costs including capital Corporate and other cash costs (1) (2) All-in Cash Costs (pre-tax) (1) Ounces poured All-in Cash Costs (pre-tax) – per ounce produced 2012 256.6 152.7 409.3 43.5 177.2 630.0 98.5 728.5 2011 322.4 39.4 361.8 34.6 99.9 496.3 100.4 596.7 387,076 642,380 1,882 929 (1) All-in cash costs (pre-tax), capitalized stripping and ice unload – cash, sustaining and growth capital (excluding stripping) and corporate and other cash costs are non-GAAP Measures and are discussed under “Non-GAAP Measures”. (2) Corporate and other cash costs include corporate general and administrative expenses, global exploration expenses, and community investments. Centerra’s all-in cash costs (pre-tax) per ounce produced for 2012 was $1,882, and includes all cash costs related to gold production, except for revenue-based taxes in the Kyrgyz Republic. This compares to pre-tax all-in cash costs of $929 per ounce produced in 2011. The increase is due to a combination of higher operating costs and lower production at Kumtor in 2012. The cash costs for capitalized stripping and ice and waste unloading costs incurred in 2012 amounted to $152.7 million or $394 per ounce compared to $39.4 million of capitalized stripping cash costs ($61 per ounce) incurred in 2011. In addition, the capital expenditures excluding capitalized stripping cash costs increased from $134.5 million ($209 per ounce) to $220.7 million ($570 per ounce) as the Kumtor mine expanded its mining ﬂ eet during 2012. All-in cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”. Cash generation and Capital Investments $ millions Year ended December 31 Cash provided by (used in) operating activities Cash provided by (used in) investing activities Cash provided by (used in) ﬁ nancing activities Increase (decrease) in cash Capital spent & accrued (Kumtor) Capital spent & accrued (Boroo & Gatsuurt) Capital spent & accrued (Consolidated) 30 CENTERRA GOLD INC. 2012 134.7 (48.6) 52.5 138.6 399.9 10.2 410.6 2011 434.9 (473.5) (96.6) (135.2) 180.7 6.6 187.9 Centerra_Financials.indd 30 Apr/01/2013 1:28 PM Cash Flow: Cash provided from operations for 2012 totaled $134.7 million compared to $434.9 million in 2011, primarily as a result of signiﬁ cantly lower earnings at Kumtor in 2012 and the prepayment of $30 million of revenue based taxes in the Kyrgyz Republic in 2012. Working capital, which consists of amounts receivable, gold inventory, supplies inventory, prepaid expenses net of accounts payable and accrued liabilities, decreased in 2012 by $2 million compared to an increase of $44 million in 2011. Cash used in investing activities totaled $48.6 million in 2012 compared to $473.5 million in the prior year. Investing activities in 2012 primarily include investments in capital projects, offset by proceeds from the sale of short-term investments. In 2011, cash was used for investment in capital projects and the purchase of short-term investments. Investments in capital projects were $366.4 million in 2012 compared to $175.1 million in 2011, represents higher spending on growth projects mainly for capitalized stripping at both operations and for the additions to the ﬂ eet at Kumtor. Spending for sustaining capital was also higher at both operations. Investments in growth capital for 2012 totaled $322.9 million ($140.5 million in 2011), while $43.5 million was invested in sustaining capital ($34.6 million in 2011). A net amount of $324.7 million in short-term ﬁ nancial instruments were sold in 2012, whereas a net amount of $290.4 million of short-term investments were purchased in 2011. Cash provided from ﬁ nancing activities in 2012 was $52.5 million (cash used of $96.6 million in 2011), including the borrowing of $76 million from Centerra’s credit facility and proceeds from shares issued on the exercise of stock options, partially offset by a lower dividend payment of $22.2 million (dividends of $99.3 million in 2011 included a special dividend of $74.5 million) and the payment of fees related to the new borrowing. Net cash and short-term investments at December 31, 2012 decreased to $382.1 million from $568.2 million at the prior year end. Capital: Capital expenditures (spent and accrued) in 2012 were $410.6 million as compared to $187.9 million in the prior year. Sustaining capital in 2012 was $43.5 million (including $40.8 million at Kumtor and $2.1 million at Boroo), compared to $34.6 million in 2011 (including $32.2 million at Kumtor and $1.8 million at Boroo). Growth capital was $367.1 million in 2012, compared to $153.3 million the prior year, primarily reﬂ ecting $359.0 million of spending at Kumtor mainly on ﬂ eet expansion ($117 million), the stripping of cut-back 14B and 14A ($179.8 million) and on underground development of phase I and II ($30.0 million) and spending at Boroo of $7.7 million in 2012 mainly to strip Pit 6 prior to reaching ore. Credit and Liquidity: On August 8, 2012, the Company drew $76 million under its $150 million revolving credit facility with the European Bank for Reconstruction and Development (EBRD), leaving a balance of $74 million undrawn at December 31, 2012. The drawn amount is due to be repaid on August 8, 2013, or at the Company’s discretion repayment of the loaned funds could be extended until February 2014. Foreign Exchange: The Company receives its revenues through the sale of gold in U.S. dollars. The Company has operations in the Kyrgyz Republic and Mongolia, and its corporate head ofﬁ ce is in Toronto, Canada. During 2012, the Company incurred combined costs (including capital) totaling roughly $908 million. Approximately $367 million of this (40%) was in currencies other than the U.S. dollar. The percentage of Centerra’s non-U.S. dollar costs, by currency was, on average, as follows: 39% in Kyrgyz soms, 27% in Canadian dollars, 17% in Mongolian tugriks, 12% in Euros, and approximately 5% in Russian Rubles, Australian dollars, Turkish Lira, British pounds, Chinese Yuan, Japanese Yen and Swiss Franc combined. In 2012, the average value of the currencies of the Kyrgyz Republic, and the Japanese Yen appreciated against the U.S. dollar by approximately 1.6%, and 3.8% respectively, from their value at December 31, 2011. Centerra_Financials.indd 31 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 31 The Mongolian Tugrik, British Pound, Canadian dollar, Australian dollar, Turkish Lira and the Russian Ruble increased in value against the U.S. dollar by 2.5%, 1.9%, 2.1%, 1.4%, 4.8% and 3.4%, respectively. On average, the value of the Euro, Chinese Yuan, and the Swiss Franc remained virtually ﬂ at compared to their value at December 31, 2011 with appreciation of 0.8%, 0.2%, and a decline of 0.1%, respectively, against the U.S. dollar. The net impact of these movements in 2012, after taking into account currencies held at the beginning of the year, was to increase annual costs by $0.8 million (increase of $6.2 million in 2011). Gol d Hedging and Off-Balance Sheet Arrangements: The Company had no gold hedges in place as of December 31, 2012. Centerra currently intends that its future gold production will remain unhedged. Centerra does not enter into off-balance sheet arrangements with special purpose entities in the normal course of its business, nor does it have any unconsolidated afﬁ liates. In the case of joint ventures, the Company’s proportionate interest for consolidation purposes is equivalent to the economic returns to which it is entitled as a joint venture partner. RESULTS OF OPERATING SEGMENTS Kumtor Mine The Kumtor open pit mine, located in the Kyrgyz Republic, is the largest gold mine in Central Asia operated by a Western-based gold producer. It has been in production since 1997 and has produced over 8.7 million ounces of gold to December 31, 2012. Kumtor experienced six recordable injuries and one level II environmental incident in 2012. Kumtor Operating Results Year Ended December 31 Tonnes mined – 000s Tonnes ore mined – 000s Average mining grade – g/t (1) Tonnes milled – 000s Average mill head grade – g/t (1) Recovery – % Gold produced – ounces (1) g/t means grams per tonne. 2012 2011 Change % Change 147,610 4,955 2.95 4,756 2.79 75.6 315,238 150,605 6,020 3.49 5,815 3.79 80.8 (2,995) (1,065) (0.54) (1,059) (1.00) (5.2) 583,156 (267,918) (2%) (18%) (15%) (18%) (26%) (6%) (46%) Overview of Operating Results – 2012 Versus 2011 Due to the accelerated ice movements and resulting revised mine plan, Kumtor mined very little ore and processed material from historical low grade stockpiles during the ﬁ rst nine months of 2012, until it reached ore in September in cut-back 14B. Total tonnes mined for 2012 were 147.6 million tonnes compared to 150.6 million tonnes in the comparative period of 2011, a decrease of 2% due to the increased mining of lower density ice and a ten day work stoppage in February 2012 with subsequent delays in re-starting the equipment due to the extremely cold weather. The bank cubic meters (BCM’s) of all ore, waste and ice moved in 2012 increased by 15% due to the increased capacity of the expanded ﬂ eet compared to the same period of 2011. Kumtor produced 315,238 ounces of gold in 2012 compared to 583,156 ounces of gold in 2011. The company processed ore from low grade stockpiles for the ﬁ rst nine months of the year resulting in signiﬁ cantly lower ounces produced in 2012. In comparison, in 2011 Kumtor processed the higher grade benches of cut-back 12A and the then newly accessed cut-back 12B. The comparative period of 2011 was positively impacted by higher throughput, higher consistent feed grades and higher recovery. The mill head grades averaged 2.79 g/t with a recovery of 75.6% in 2012 versus 3.79 g/t and a recovery of 80.8% in 2011. Tonnes processed through the mill in 2012 were 4.76 million, 18% lower than the comparative year as a result of lower mill operating time due to both the seven week shutdown of the processing plant and the labour dispute and related ten day work stoppage that occurred during the ﬁ rst quarter of 2012. 32 CENTERRA GOLD INC. Centerra_Financials.indd 32 Apr/01/2013 1:28 PM Kumtor Cost Performance Year Ended December 31 Operating cash costs ($ millions): Mining – including capitalized stripping and abnormal mining costs Mining – excluding capitalized stripping and abnormal mining costs (1) Milling Site support Bishkek administration Mine stand-by costs Management fees and other Reﬁ ning fees By-product credits Operating cash costs Non-cash DD&A costs Total production costs Unit operating costs Mining costs ($/t mined material) Milling cost ($/t milled material) Operating cash costs ($/t milled material) Operating cash costs ($ per ounce produced) (2) Total production costs ($ per ounce produced) (2) All-in cash costs – pre-tax ($ per ounce produced) (2) (3) 2012 2011 Change % Change 222.4 75.5 58.2 53.3 15.5 4.6 0.4 1.9 (2.9) 206.5 164.1 370.5 1.51 12.24 43.41 655 1,175 1,808 197.3 157.8 63.5 47.3 15.4 – 0.6 2.9 (6.2) 281.3 110.9 392.2 1.31 10.92 48.38 482 673 768 25.1 (82.3) (5.3) 6.0 0.1 4.6 (0.2) (1.0) 3.3 (74.8) 53.2 (21.7) 0 1 (5) 173 503 1,040 13% (52%) (8%) 13% 1% 100% (47%) (36%) (54%) (27%) 48% (6%) 15% 12% (10%) 36% 75% 135% (1) Mining costs charged to operations reduced by amounts charged to capital for stripping and amounts accounted for as abnormal mining costs. (2) Operating cash costs, total production costs and all-in cash costs (pre-tax) per ounce produced are non-GAAP Measures and are discussed under “Non-GAAP Measures”. (3) All-in cash costs (pre-tax) per ounce produced is calculated and discussed on page 35. Operating cash costs at Kumtor (see “Non-GAAP Measures”) in 2012 decreased by $74.8 million to $206.5 million, excluding the capitalization of stripping activities and the expensing of unloading activities (increased by $32.6 million including capitalization and unloading expense), compared to $281.3 million in 2011. The movements in the major components of operating cash costs (mining, milling and site support) are explained as follows: Mining Costs – Kumtor, including capitalized stripping and abnormal mining costs (2012 compared to 2011): 197.3 13.0 5.5 4.3 2.4 0.1 222.4 s n o i l l i M $ 250.0 200.0 150.0 100.0 2011 Diesel Tires Labour Explosives Other 2012 The increased cost of mining activities is primarily related to the increased consumption requirements of the expanded CAT 789 ﬂ eet for consumables such as diesel, tires and increased maintenance work. Diesel costs increased by $13.0 million, which also included an increase in fuel prices (increased from US$0.76 per litre to US$0.81 per litre). Labour costs were higher due to increases in the social fund payments related to the high altitude coefﬁ cient as well as inﬂ ation adjustments. Explosives and blasting accessories increased due to increased mining volumes and higher prices for ammonium nitrate. Centerra_Financials.indd 33 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 33 Milling Costs – Kumtor (2012 compared to 2011): 63.5 2.6 2.3 s n o i l l i M $ 65.0 55.0 0.9 0.5 58.2 2011 Electricity Sodium cyanide Grinding Other 2012 Milling costs were lower in 2012 due to the lower amount of material processed as a result of the illegal ten day work stoppage in February and the seven week shutdown from July 23 to September 18 due to the mill running out of stockpiled ore to process. This resulted in a lower consumption of sodium cyanide, electricity and grinding balls saving approximately $5.8 million. This was partially offset by increases in other costs including national labour and higher maintenance costs during the mill shutdown period. Site support costs – Kumtor (2012 compared to 2011): 2.2 0.6 0.5 0.1 53.3 s n o i l l i M $ 55.0 45.0 2.8 47.3 2011 Labour Insurance Consultants Scrap handling Other 2012 Site support costs increased due primarily to higher national labour costs predominantly from higher social fund payments for the high altitude coefﬁ cient ($2.8 million) and increased insurance costs ($2.2 million). Kumtor Unit operating costs Operating cash cost per ounce – Kumtor: For 2012, operating cash cost per ounce produced was $655 per ounce compared to $482 per ounce in 2011, as a result of 46% lower production due to the seven week mill shutdown and lower grades and recovery from the stockpiled material processed in 2012. This was partially offset by decreased operating costs resulting from a higher allocation of mining costs to capitalized stripping and abnormal ice unloading activities as the mining equipment was deployed to address the ice movement and to expedite stripping of ore under the new mine plan. Operating cash cost per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”. 34 CENTERRA GOLD INC. Centerra_Financials.indd 34 Apr/01/2013 1:28 PM All-in cash costs – Kumtor: Year Ended December 31 (unaudited) All-in Cash Costs – pre-tax (1): Operating cash costs Capitalized stripping and ice unload – cash (1) Operating cash costs and capitalized stripping Sustaining capital (cash) Growth capital (cash) Operating cash costs including capital (1) Corporate and other cash costs (2) All-in Cash Costs – pre-tax (1) 2012 2011 $ millions ($ per ounce produced) ($ per ounce $ millions produced) 206.5 146.4 352.9 40.8 176.4 570.1 – $ $ $ $ $ $ 655 464 1,119 129 560 1,808 – 281.3 39.4 320.7 32.2 95.0 447.9 – $ $ $ $ $ $ 482 68 550 55 163 768 – 570.1 $ 1,808 447.9 $ 768 (1) All in cash costs, capitalized stripping – cash, sustaining and growth capital (excluding stripping) and corporate and other cash costs are non-GAAP Measures and are discussed under “Non-GAAP Measures”. (2) Corporate and other cash costs include corporate general and administrative expenses, global exploration expenses and community investments. Kumtor’s all-in cash cost per ounce produced for 2012 is $1,808 and includes all cash costs related to gold production, except for revenue-based taxes in the Kyrgyz Republic. The same all-in cash cost measure for 2011 was $768 per ounce produced. The increase in all-in cash costs is due to a combination of higher capital and operating costs and the 46% decrease in production at Kumtor year-over-year. The cash costs for capitalized stripping and ice unload activities incurred in 2012 amounted to $146.4 million or $464 per ounce produced compared to $39.4 million of capitalized stripping cash costs ($68 per ounce produced) incurred in 2011. In addition, the capital expenditures excluding capitalized stripping cash costs increased from $127.2 million ($218 per ounce produced) to $217.2 million ($689 per ounce produced) as the Kumtor mine expanded its mining ﬂ eet during 2012, including the purchase and commissioning of twenty ﬁ ve CAT 789 haul trucks. Boroo and Gatsuurt The Boroo open pit mine, located in Mongolia, was the ﬁ rst hard rock gold mine in Mongolia. It has produced approximately 1.66 million ounces of gold since it began operation in 2004. Boroo had no recordable injuries and no reportable environmental incidents in 2012. Boroo Mine Boroo Operating Results Year Ended December 31 Total tonnes mined – 000s Average mining grade (non heap leach material) – g/t (2) Tonnes mined heap leach – 000s Tonnes ore mined direct mill feed – 000s Tonnes ore milled – 000s Average mill head grade – g/t (1) (2) Recovery – % (1) Gold produced – mill (ounces) Gold produced – heap leach (ounces) Total gold produced (ounces) (1) Excludes heap leach ore. (2) g/t means grams per tonne. 2012 2011 Change % Change 6,338 2.00 143 907 2,382 1.32 64.0% 64,352 7,486 71,838 – – – – 2,340 1.11 68.9% 57,778 1,446 6,338 2.00 143 907 42 0.21 (5%) 6,574 6,040 59,224 12,614 100% 100% 100% 100% 2% 19% (7%) 11% 418% 21% 2012 ANNUAL REPORT 35 Centerra_Financials.indd 35 Apr/01/2013 1:28 PM Overview of Operating Results – 2012 Versus 2011 Boroo produced 71,838 ounces of gold in 2012 as compared to 59,224 ounces of gold in 2011. During 2012, the milling operation achieved higher throughput and processed higher ore grades mainly from Pit 6. The higher throughput and higher grades were partially offset by lower recoveries. The ore grade averaged 1.32 g/t with a recovery of 64% in 2012, compared to 1.11 g/t with a recovery of 68.9% in 2011. Boroo Cost Performance Year Ended December 31 Operating cash costs ($ millions): Mining – including capitalized stripping Mining – excluding capitalized stripping Milling Leaching Site support Ulaanbaatar administration Mine stand-by costs Production taxes and royalties Reﬁ ning fees By-product credits Other Operating cash costs Non-cash DD&A costs Total production costs Unit operating costs Mining costs ($/t mined material) Milling costs ($/t milled material) Operating cash costs ($/t milled material) Operating cash costs ($ per ounce produced) (1) Total production costs ($ per ounce produced) (1) All-in cash costs – pre-tax ($ per ounce produced) (1) (2) 2012 2011 Change % Change 12.1 5.8 22.4 2.1 8.3 5.5 0.0 6.1 0.3 (0.4) 0.1 50.2 21.6 71.8 1.96 9.39 21.07 699 999 820 2.1 2.1 21.0 0.3 7.7 6.0 0.2 3.9 0.2 (0.3) (0.0) 41.1 8.0 49.0 – 8.99 17.54 694 828 800 10.0 3.7 1.4 1.8 0.6 (0.5) (0.2) 2.2 0.1 (0.1) 0.1 9.1 13.7 22.8 1.96 0.40 3.52 5 171 20 486% 182% 6% 697% 8% (8%) (100%) 55% 8% 46% 100% 22% 172% 46% 100% 4% 20% 1% 21% 3% (1) Operating cash costs, total production costs and all-in cash costs (pre-tax) per ounce produced are non-GAAP Measures and are discussed under “Non-GAAP Measures”. (2) All-in cash costs (pre-tax) per ounce produced is calculated and discussed on page 38. Operating cash costs at Boroo (see “Non-GAAP Measures”) increased by $9.1 million in 2012 excluding the capitalization of stripping costs at Pit 6 ($15.4 million including capitalization) compared to 2011. The movements in the major components of operating cash costs (mining, milling and site support) are explained as follows: Mining Costs – Boroo including capitalized stripping (2012 compared to 2011): 3.4 12.1 1.7 1.6 10.0 s n o i l l i M $ 0.0 3.3 2.1 2011 Diesel Maintenance Labour Other 2012 36 CENTERRA GOLD INC. Centerra_Financials.indd 36 Apr/01/2013 1:28 PM Mining costs for 2012 including capitalized stripping costs were $12.1 million, $10.0 million higher than the prior year. Boroo capitalized $6.3 million of mining costs to stripping costs for Pit 6 in 2012. The increase in mining costs is a result of the resumption of Pit 6 mining operations beginning in January 2012 and ending in September 2012. Diesel costs and equipment maintenance costs increased by $3.3 million and $1.7 million respectively, and reﬂ ect higher consumption of fuel and maintenance materials. Labour costs were $1.6 million higher due to the temporary re-hire of mining personnel in 2012 for Pit 6 mining. Other mining cost increases include higher costs for consumables, drilling, and tires. The mining costs incurred during 2011 represented ongoing activities for site supervision, road maintenance work and maintenance on equipment used on the tailings dam construction and in reclamation activities. Milling costs – Boroo (2012 compared to 2011): 0.4 0.8 0.3 22.4 s n o i l l i M $ 20.0 21.0 0.1 2011 Labour Electricity Consumables Other 2012 Milling costs for 2012 were higher than in 2011 due to 2% increase in the mill throughput and higher unit costs incurred for major consumables such as grinding media and electricity. In addition, there was a higher consumption of reagents, grinding media and electricity in 2012 as the mill was available throughout the year, compared to the prior year when equipment problems led to mill downtime in May 2011. Site support costs – Boroo (2012 compared to 2011): 7.7 0.3 0.1 0.2 8.3 s n o i l l i M $ 9.0 7.0 5.0 2011 Labour Permits & Fees Other 2012 Site administration costs for 2012 increased due mainly to higher payroll related costs and camp catering costs incurred as a result of the resumption of mining activities in Pit 6 in 2012. Boroo regional administration costs in 2012 were $5.5 million, $0.5 million or 8% lower than in 2011. This is mainly due to lower payroll related costs. Other operating costs: Heap leach Costs for heap leaching activities in 2012 were $2.1 million as Boroo resumed the heap leaching operation in October 2012. There were no heap leaching activities in 2011. Royalties Production taxes and royalties increased in 2012 to $6.1 million compared to $3.9 million in 2011 primarily due higher revenues. 2012 ANNUAL REPORT 37 Centerra_Financials.indd 37 Apr/01/2013 1:28 PM Boroo Unit operating costs Operating cash costs per ounce – Boroo: Operating cash costs per ounce produced in 2012 was $699 compared to $694 per ounce for 2011. The increase in the unit cash cost of $5 per ounce is a result of higher operating costs partially offset by a 21% increase in the ounce production. Total operating cash costs per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”. All-in cash costs – Boroo Year Ended December 31 (unaudited) All-in Cash Costs – pre-tax (1): Operating cash costs Capitalized stripping – cash (1) Operating cash costs and capitalized stripping Sustaining capital (cash) (1) Growth capital (cash) (1) Operating cash costs including capital Corporate and other cash costs (2) All-in Cash Costs – pre-tax (1) 2012 2011 $ millions ($ per ounce produced) ($ per ounce $ millions produced) 50.2 6.3 56.5 2.1 0.3 58.9 – $ $ $ $ $ $ 699 87 786 30 4 820 – 41.1 0.0 41.1 1.8 4.5 47.4 – $ $ $ $ $ $ 694 0 694 30 76 800.4 – 58.9 $ 820 47.4 $ 800 (1) All-in cash costs, capitalized stripping – cash and sustaining and growth capital (excluding stripping) are non-GAAP Measures and are discussed under “Non-GAAP Measures”. (2) Other cash costs include corporate general and administrative expenses, global exploration expenses and community investments. Boroo’s all-in cash costs (pre-tax) per ounce produced for 2012 was $820 and includes all cash costs related to gold production except for income tax paid in Mongolia. The same all-in cash costs (pre-tax) measure for 2011 was $800 per ounce produced. The increase in all-in cash costs is due to higher costs partially offset by the 21% increase in production at Boroo year-over-year. The costs for capitalized stripping incurred in 2012 amounted to $6.3 million or $87 per ounce produced compared to no capitalized stripping costs in 2011. The increase in operating and stripping cash costs was partially offset by lower capital expenditures, which decreased from $6.3 million ($106 per ounce produced) in 2011 to $2.4 million ($34 per ounce produced) as the Boroo mine is nearing the end of its mine life. Gatsuurt Project As at December 31, 2012, proven and probable reserves for the Gatsuurt Project remain unchanged at 16.3 million tonnes averaging 2.8 g/t for a total of 1.5 million ounces of contained gold. Measured and Indicated resources are exclusive of proven and probable reserves and are estimated at 5.5 million tonnes averaging 2.4 g/t for a total of 426,000 ounces of contained gold. In December 2005, a feasibility study was completed with the conclusion that mining and processing of the Gatsuurt Project ores was technically and economically feasible. The plan proposed in the feasibility study is to mine the Gatsuurt Project ores by open pit mining methods, to transport the mined ore by a 55 kilometres haulage road to the Boroo processing plant for gold extraction, and the production of doré bars for sale. The mined waste will be stored at the Gatsuurt site in areas designated for that purpose. The Gatsuurt Project anticipates mining and processing of the Gatsuurt Project ores in two phases; an oxide ore phase and a sulphide ore phase. The oxide ore phase encompasses mining of the Gatsuurt oxide and transition ores, haulage of the ores to the Boroo processing plant, and processing of the ores utilizing the existing Boroo CIL facility. As sulphide ores are encountered during mining, they will be stockpiled at the Gatsuurt site for future processing. Concurrent with the oxide ore phase, a ﬂ otation and bio-oxidation facility will be constructed at the Boroo processing plant in preparation of processing the Gatsuurt Project sulphide phase ores. The sulphide ore phase encompasses the mining, haulage and processing of the Gatsuurt Project sulphide ores, which are refractory in nature, through a ﬂ otation and bio-oxidation facility constructed at the Boroo processing plant. 38 CENTERRA GOLD INC. Centerra_Financials.indd 38 Apr/01/2013 1:28 PM The Company anticipates overall gold recovery of 87% for the Gatsuurt Project oxide ore, and 73% for the transitional ore, using the existing Boroo processing facility. Pilot plant test results have conﬁ rmed that an overall gold recovery of 87% is achievable for the refractory sulphide ore utilizing bio-oxidation technology followed by cyanide leaching. Approval to begin construction of the Gatsuurt Project was received from Centerra’s Board of Directors in December 2008. To date, $33.3 million has been expended on pre-production site construction and initial engineering of the proposed ﬂ otation and bio-oxidation facility. The Gatsuurt Project site infrastructure and basic engineering for the ﬂ otation and bio-oxidation facility are substantially complete. Completed site infrastructure includes a 55 kilometres haul road to the Boroo mill, a services and administration building, a construction camp, pads for ore and waste stockpiles, and a fueling station. Going forward, all detailed engineering development and construction activities at Gatsuurt have been suspended pending clariﬁ cation of the impact of the Water and Forest Law on the Gatsuurt Project and until ﬁ nal approvals and regulatory commissioning to commence mining are received. See “Other Corporate Developments – Mongolia”. The Gatsuurt deposit is described in the Company’s most recently ﬁ led AIF and a technical report dated May 9, 2006 prepared in accordance with NI 43-101, which are available on SEDAR at www.sedar.com. The technical report describes the exploration history, geology and style of gold mineralization at the Gatsuurt deposit. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the drilling programs at the Gatsuurt site are the same as, or similar to, those described in the technical report. The development of Gatsuurt is subject to certain risks and uncertainties. See “Other Corporate Developments – Mongolia” and “Risk Factors”. Change % Change FOURTH QU ARTER RESULTS – 2012 COMPARED TO 2011 Financial Summary ($ millions, except as noted) – Unaudited Three Months Ended December 31 Revenue Cost of sales Abnormal mining costs Regional ofﬁ ce administration Earnings from mine operations Revenue-based taxes Other operating expenses Loss on de-recognition of underground assets Exploration and business development Corporate administration Earnings (loss) from operations Other (income) and expenses Finance costs Earnings (loss) before income taxes Income tax expense Net earnings (loss) Operating Summary Gold produced – ounces poured Gold sold – ounces sold Average realized price – $ per ounce sold Average gold spot market price – $ per ounce (1) Cost of sales – $ per ounce sold (2) Operating cash costs – $ per ounce produced (2) Total production costs – $ per ounce produced (2) All-in cash costs (pre-tax) – $ per ounce produced (2) (3) 2012 368.5 165.2 8.9 5.6 188.8 44.5 4.8 180.7 11.5 8.8 (61.5) (0.1) 1.3 (62.7) 5.2 (68.0) $ $ 2011 248.0 104.1 – 5.8 138.1 33.6 3.6 – 11.1 10.3 79.5 (1.3) 0.5 80.3 0.9 79.4 $ $ $ 120.5 61.1 8.9 (0.2) 50.7 10.9 1.2 180.7 0.4 (1.5) (141.0) 1.2 0.8 (143.0) 4.3 $ (147.4) 219,316 215,361 1,711 1,721 $ $ $ $ $ $ 767 360 998 839 151,562 146,704 67,754 68,657 $ $ $ $ $ $ 1,690 1,688 709 603 820 934 21 33 58 (243) 178 (95) 49% 59% 100% -3% 37% 33% 33% 100% 4% -14% -177% -96% 142% -178% 486% -186% 45% 47% 1% 2% 8% -40% 22% -10% (1) Average for the period as reported by the London Bullion Market Association (US dollar Gold P.M. Fix Rate). (2) Operating cash costs is comprised of mine operating costs such as mining, processing, regional ofﬁ ce administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes depreciation, depletion and, amortization, reclamation costs, capital investments, community investments, exploration expenses and corporate general and administration expenses. Operating cash costs, total production costs and all-in cash costs (pre-tax) per ounce produced, as well as cost of sales per ounce sold, are non-GAAP measures and are discussed under “Non-GAAP Measures”. (3) All-in cash costs (pre-tax) per ounce produced includes operating cash costs, sustaining and growth capital, corporate general and administrative expenses, global exploration expenses and community investments, but excludes revenue-based taxes at Kumtor and income taxes. 2012 ANNUAL REPORT 39 Centerra_Financials.indd 39 Apr/01/2013 1:28 PM Overview In the fourth quarter of 2012, the Company recorded a net loss of $68.0 million ($0.29 loss per common share) after the charge for the underground de-recognition. This compares to net earnings of $79.4 million ($0.34 per common share) over the same period of 2011. The Company recorded a charge of $180.7 million in the fourth quarter of 2012 for the de-recognition of its underground assets at Kumtor. • Gold production for the fourth quarter of 2012 was 219,316 ounces compared to 151,562 ounces in the same quarter of 2011. The increased gold production in the current quarter reﬂ ects 37% higher production at Kumtor as higher throughput was achieved in the mine and mill in the fourth quarter at Kumtor, processing higher grades with lower recoveries following the exposing of ore in cut-back 14B at the end of September. Boroo achieved signiﬁ cantly higher production (+132%) in the fourth quarter of 2012 compared to the same period of 2011, processing higher grades with slightly lower recoveries through the mill and pouring gold from its heap leach operations which resumed activities in October 2012 after receiving all required permits. • Revenues in the fourth quarter of 2012 increased by $120.5 million to $368.5 million from $248 million in the same period last year mainly as a result of 47% higher ounces sold. Ounces sold for the fourth quarter of 2012 totaled 215,361 compared to 146,704 in the fourth quarter of 2011, reﬂ ecting the increased production at both sites. The average gold price realized in the fourth quarter of 2012 was $1,711 per ounce, an increase from $1,690 per ounce realized in the same quarter of 2011. • Cost of sales for the fourth quarter of 2012 was $165.2 million compared to $104.1 million in the same quarter of 2011. The increase reﬂ ects the higher ounces sold at both sites and higher operating costs due to price increases for diesel, volume increases due to the increased use of consumables for the expanded ﬂ eet at Kumtor and the start-up of the heap leach operation at Boroo. • DD&A included in costs of sales for the fourth quarter of 2012 of $91.2 million increased by $60.7 million compared to the same period last year, due in part to the processing and sale of signiﬁ cantly higher ounces in the fourth quarter of 2012. In addition, depreciation expense for the fourth quarter of 2012 was higher than the comparative quarter reﬂ ecting the increased depreciation from the expanded mining ﬂ eet and achieving higher throughput mining cut-back 14B in the last quarter of 2012 compared to the same quarter of 2011 where lower volumes were mined in cut-back 14A. • Abnormal mining costs at Kumtor of $8.9 million were recorded in the fourth quarter of 2012 representing the ice and waste removal from the high movement unload zone. The expansion of the open pit at Kumtor, announced in early November 2012, was made possible in part by the work undertaken to unload ice and waste from the high movement area. As a result, from the date of the announcement the continuing cost to unload the high movement area is now capitalized and will be amortized as additional cost of the ore produced from the area. Stripping activity in cut-back 14B ceased to be classiﬁ ed as abnormal once ore was exposed in August 2012. Thereafter the stripping costs were recorded as normal course inventory and cost of production. • Other operating expenses for the fourth quarter of 2012 totaled $4.8 million compared to $3.6 million in the same quarter of 2011. Costs in the current quarter of 2012 include $2.9 million for the closure of the underground development project at Kumtor and $1.9 million for ongoing sustainable development projects in both countries where we operate. A charge of $180.7 million was recorded in the fourth quarter of 2012 to reﬂ ect the de-recognition of the underground assets at Kumtor. This results from the decision in early November to expand the open pit at Kumtor and as a result consume a major portion of the underground infrastructure. • • Exploration expenditures for the fourth quarter of 2012 were $11.5 million compared to $11.7 million in the same quarter of 2011 mainly reﬂ ecting increased drilling activity at the ATO property and the Dvoinoy Joint Venture in Russia during the current period. Exploration activity at Kumtor focused on drilling of the SB Zone from the Central Pit and underground exploration drilling of the Southwest Extension and SB Zones from Declines #1 and #2. Underground drilling ceased in late November of 2012 following the Company’s decision to expand the Kumtor Central Pit and terminate the planned underground development program. 40 CENTERRA GOLD INC. Centerra_Financials.indd 40 Apr/01/2013 1:28 PM • Corporate administration costs for the fourth quarter of 2012 were $8.8 million, a reduction of $1.5 million from the same period in 2011, reﬂ ecting a lower charge for share-based compensation primarily as a result of the lower market price of Centerra’s common shares. • Cash provided by operations was $208.2 million in the fourth quarter of 2012 compared to $60.3 million in the same period of 2011. The increase over 2011 reﬂ ects higher earnings from higher production and ounces sold, higher realized prices and a reduction in working capital levels, partially offset by higher operating costs. • Investing activities in the fourth quarter of 2012 totaled $126 million, including the purchase of $46 million of short-term investments in government securities and commercial paper and investments of $83 million in sustaining and growth capital spent at Centerra’s operations. The comparative in 2011 of $137 million includes the purchase of $107 million in short-term investments in government securities and commercial paper and investments of $30 million of sustaining and growth capital at Centerra’s operations. Cash used in ﬁ nancing activities in the fourth quarter of 2012 includes a dividend payment of $6.6 million. • Capital expenditures (spent and accrued) in the fourth quarter of 2012 were $85.0 million as compared to $30 million in the same period of 2011. Sustaining capital in the fourth quarter of 2012 of $11.1 million (including $10.5 million at Kumtor and $0.4 million at Boroo), compared to $9 million in 2011 (including $7.8 million at Kumtor and $0.9 million at Boroo). Growth capital of $73.9 million in the fourth quarter of 2012 ($30 million in the same quarter of 2011), reﬂ ects $73.4 million of spending at Kumtor mainly on ﬂ eet expansion ($23.1 million) and the stripping of cut-back 14A ($36.8 million) and spending at Boroo of $0.3 million. • Cost of sales per ounce sold for the fourth quarter of 2012, which includes the impact of DD&A, increased to $767 per ounce compared to $709 per ounce for the same period in 2011. The increase on a per ounce basis reﬂ ects higher depreciation from the expanded mining ﬂ eet at Kumtor and higher operating costs partially offset by higher production achieved from higher throughput at Kumtor, the higher grades at both sites and the start-up of the heap leach operation at Boroo. • Operating cash costs per ounce produced was $360 in the fourth quarter of 2012 compared to $603 in the comparative quarter of 2011. The decrease in the 2012 period results mainly from signiﬁ cantly higher production at both sites, partially offset by higher operating costs. Operating cash costs per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”. • All-in cash costs per ounce produced were $839 in the fourth quarter of 2012 compared to $934 in the same quarter of 2011. The decrease reﬂ ects the higher production at both sites in the 2012 quarter, partially offset by increased costs associated with the larger truck ﬂ eet. All-in cash costs per ounce produced is a non-GAAP measure and is discussed under “Non-GAAP Measures”. QUARTERLY RESULTS – LAST EIGHT QUARTERS Over the last eight quarters, Centerra’s results reﬂ ect the impact of rising gold prices as well as increasing costs. Of note, production and sales in 2012 have been impacted by the accelerated ice movement at Kumtor which necessitated a change in the mine plan and a delay in the release of gold from the pit. Non-cash costs have also progressively increased over 2011 and into 2012 as depreciation at Kumtor grew with its expanded mining ﬂ eet and the amortization of capitalized stripping. Cost of sales in the second and third quarters of 2011 included a charge for the settlement of the Kyrgyz Social Fund audit totaling $14.1 million and an increase to labour costs in the fourth quarter of 2011 resulting from the revised social fund calculation which now includes the high altitude premium. Other operating charges in the second quarter of 2012 for social development programs include $21 million spent by Kumtor on a national micro-credit ﬁ nancing program and $1.1 million accrued by Boroo to increase its funding of a maternity hospital in Ulaanbaatar. Similarly Kumtor spent in the third quarter of 2011 $10 million for special funding of a school improvement program in the Kyrgyz Republic and Boroo committed to funding and accrued Centerra_Financials.indd 41 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 41 for the construction of a maternity hospital totaling $6.4 million in the fourth quarter of 2010. The fourth quarter of 2011 includes other charges of $2.5 million for the resolution of a claim by the Mongolian authorities in relation to the sterilization of alluvial reserves at the Boroo property. The quarterly ﬁ nancial results for the last eight quarters are shown below: Key results by quarter $ millions, except per share data Quarterly Data Unaudited Revenue Net earnings (loss) Earnings (loss) per share 2012 Q4 368 (68) Q3 69 (47) Q2 90 (55) Q1 134 (15) Q4 248 79 2011 Q3 278 84 Q2 244 71 Q1 250 137 (basic and diluted) (0.29) (0.20) (0.23) (0.06) 0.34 0.35 0.30 0.58 BALANCE SHEET Inventory Total inventory at December 31, 2012 of $299 million ($292 million at December 31, 2011) includes gold inventory of $124 million ($136 million in 2011) and supplies inventory of $175 million ($156 million in 2011). The increase in 2012 reﬂ ects the higher parts requirements from the expanded capital ﬂ eet at Kumtor and lower gold inventory due to timing of shipments. Property, Plant and Equipment The aggregate book value of property, plant and equipment at December 31, 2012 of $589 million, compares to $590 million at the end of 2011 and is allocated as follows: Kyrgyz $482 million, Mongolia $106 million and corporate entities $1 million. The small consolidated net increase in 2012 includes additions of $356 million from the major growth projects at Kumtor (ﬂ eet expansion of $146 million and capitalized stripping of $210 million), maintenance capital spending at both sites, offset by the depreciation and amortization charges of $242 million and the de-recognition of Kumtor’s underground equipment of $167 million. Goodwill During the year ended December 31, 2012, the Company undertook its normal annual review of the $129.7 million of goodwill recorded by the Kyrgyz reporting unit. As a result, management concluded that current circumstances did not indicate that the carrying value of the unit exceeded its fair value. Asset Retirement Obligations The total future asset retirement obligations were estimated by management based on the Company’s ownership interest in all mines and facilities, estimated costs to reclaim the mine sites and facilities and the estimated timing of the costs to be incurred in future periods. The Company has estimated the net present value of the total asset retirement obligations to be $54.6 million as at December 31, 2012 (December 31, 2011 – $55.6 million). These payments are expected to commence over the next 1 to 15 years. The Company used a risk-free rate of 2.0% at Kumtor and 1.3% at Boroo to calculate the present value of the asset retirement obligations. 42 CENTERRA GOLD INC. Centerra_Financials.indd 42 Apr/01/2013 1:28 PM There were no new updates to the closure costs estimates at either site in 2012. The next regular update to the closure costs estimates at Kumtor is scheduled later in 2013, at which time the asset retirement obligation for Kumtor will be updated for the new closure cost estimates and for the extension in its mine life resulting from the recently announced open pit expansion. The last closure cost update at Boroo was completed in 2011 and its asset retirement obligation was updated at that time. The Company’s future undiscounted decommissioning and reclamation costs have been estimated to be $61.6 million before salvage value. Share capital As of February 20, 2013, Centerra had 236,376,011 shares outstanding and options to acquire 1,674,194 common shares outstanding under its stock option plan with exercise prices ranging between Cdn $4.81 and Cdn $22.28 per share, with expiry dates ranging between 2014 and 2020. CONTRACTUAL OBLIGATIONS The following table summarizes Centerra’s contractual obligations, including payments due for the next ﬁ ve years and thereafter, as of December 31, 2012. $ millions Kumtor Reclamation trust deed (1) Capital equipment (2) Operational supplies Lease of premises Boroo Capital projects & operational supplies Lease of premises Corporate Loan repayment (principal & interest) Lease of premises (3) $ Total 25.7 28.8 69.1 0.4 0.4 0.4 77.4 1.8 Due in Less than One year Due in 1 to 3 Years Due in 4 to 5 Years Due After 5 Years $ 2.2 28.8 69.1 0.1 0.4 0.1 77.4 0.4 $ 7.4 $ 5.0 $ 11.1 – – 0.3 0.3 0.9 8.9 – – – – – – 0.5 5.5 $ $ 11.1 Total contractual obligations $ 204.0 $ 178.5 $ (1) Centerra’s future decommissioning and reclamation costs for the Kumtor mine are estimated to be $37.0 million. The estimated future cost of closure, reclamation and decommissioning of the project are used as the basis for calculating the amount to be deposited in the Reclamation Trust Fund ($25.7 million). This restricted cash is funded by sales revenue, annually in arrears and on December 31, 2012 the balance in the fund was $11.3 million (2011 – $9.1 million), with the remaining $25.76 million to be funded over the life of the mine. (2) Agreements as at December 31, 2012 to purchase capital equipment. (3) Lease of corporate ofﬁ ce premises expiring in November 2016. Centerra_Financials.indd 43 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 43 NON-GAAP MEASURES This MD&A presents information about operating cash costs of production of an ounce of gold produced, total production costs per ounce produced, all-in cash costs per ounce produced and cost of sales per ounce sold for the operating properties of Centerra. Operating cash costs per ounce produced is calculated by dividing operating cash costs by gold ounces produced for the relevant period. Total production costs per ounce produced include operating cash costs plus depreciation, depletion and amortization attributable to production divided by gold ounces produced for the relevant period. All-in cash costs per ounce produced includes operating cash costs, plus capitalized stripping, plus capital spent and accrued (sustaining and growth capital) divided by gold ounces produced for the relevant period. Cost of sales per ounce sold is calculated by dividing cost of sales by gold ounces sold for the relevant period. Operating cash costs, total production costs and all-in cash costs per ounce produced, as well as cost of sales per ounce sold are non-GAAP measures. Operating cash costs include mine operating costs such as mining, processing, site and regional ofﬁ ce administration, royalties and operating taxes (except at Kumtor where revenue-based taxes are excluded), but exclude depreciation, depletion and amortization, reclamation costs, capital investments and exploration expenses. Certain amounts of stock-based compensation at the corporate level have been excluded. Total production costs includes total operating cash cost plus depreciation, depletion and amortization attributable to production. All-in cash costs includes operating cash costs, plus capitalized stripping and total sustaining and growth capital spent and accrued. Operating cash costs per ounce produced, total production costs per ounce produced, all-in cash costs per ounce produced and cost of sales per ounce sold have been included because certain investors use this information to assess performance and also to determine the ability of Centerra to generate cash ﬂ ow for use in investing and other activities. The inclusion of operating cash cost per ounce produced, total production cost per ounce produced, all-in cash costs per ounce produced and cost of sales per ounce sold may enable investors to better understand year-over-year changes in production costs, which in turn affect proﬁ tability and cash ﬂ ow. Reporting measure going forward Centerra has initiated an “all-in cash cost” reporting methodology for its gold production. Having ﬁ rst reported along these lines with the announcement of the revised life-of-mine plan for Kumtor in November 2012, the Company believes an all-in cash cost measure more fully reﬂ ects the actual cash cost of producing gold than the former Gold Institute total cash cost measure. The new measure does have limitations as an analytical tool as it may be distorted in periods where signiﬁ cant capital investments are being made to expand for future growth or where signiﬁ cant cash mining costs are being expended on stripping to beneﬁ t future periods. This new measure should therefore not be considered in isolation, or as a substitute for, analysis of our results as reported under GAAP. It should also be noted that the mining industry is in early stages of deﬁ ning an industry-wide standard on the reporting of “all-in cash costs” hence, the deﬁ nition adopted by the mining industry may differ from the Company’s current deﬁ nition. The Company may modify the calculation of its “all-in cash cost” to conform to the industry’s standard once it is known. Management uses all-in cash cost per ounce produced to evaluate current operating performance and for planning and forecasting of future periods. Management believes that the presentation of this new measure is useful for the investor because it allows investors to view results in a manner similar to the method used by management. 44 CENTERRA GOLD INC. Centerra_Financials.indd 44 Apr/01/2013 1:28 PM Operating Cash Cost per Ounce Produced and Total Production Cost per Ounce Produced can be reconciled as follows: (unaudited) ($ millions, unless otherwise speciﬁ ed) Centerra: Cost of sales, as reported Less: Non-cash component Cost of sales, cash component Adjust for: Reﬁ ning fees & by-product credits Regional ofﬁ ce administration Mining Standby Costs Non-operating costs Inventory movement Operating cash cost Depreciation, depletion, amortization and accretion Inventory movement – non-cash Total production cost Ounces poured (000) Operating cash cost per ounce produced Total production cost per ounce produced Kumtor: Cost of sales, as reported Less: Non-cash component Cost of sales, cash component Adjust for: Reﬁ ning fees & by-product credits Regional ofﬁ ce administration Mining Standby Costs Non-operating costs Inventory movement Operating cash cost Depreciation, depletion, amortization and accretion Inventory movement – non-cash Total production cost Ounces poured (000) Operating cash cost per ounce produced Total production cost per ounce produced Boroo: Cost of sales, as reported Less: Non-cash component Cost of sales, cash component Adjust for: Reﬁ ning fees & by-product credits Regional ofﬁ ce administration Mining Standby Costs Non-operating costs Inventory movement Operating cash cost Depreciation, depletion, amortization and accretion Inventory movement – non-cash Total production cost Ounces poured (000) Operating cash cost per ounce produced Total production cost per ounce produced Year ended December 31, Fourth Quarter ended December 31, 2012 2011 2012 2011 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 387.5 142.2 245.3 (1.2) 21.0 4.6 32.6 (45.7) 256.7 142.6 43.0 442.3 387.1 663 1,143 311.1 121.1 190.0 (1.0) 15.5 4.6 32.6 (35.2) 206.5 121.4 42.6 370.5 315.2 655 960 76.4 21.1 55.3 (0.2) 5.5 – – (10.5) 50.2 21.2 0.4 71.8 71.8 699 1,033 $ 382.3 98.4 $ 283.9 (3.3) 21.3 0.2 (14.1) 34.4 $ 322.4 99.3 19.5 441.1 642.4 502 687 $ $ $ $ 332.6 88.3 $ 244.3 (3.3) 15.3 – (14.1) 39.1 $ 281.3 88.9 22.0 392.2 583.2 482 673 49.7 10.1 39.6 (0.1) 6.0 0.2 – (4.7) 41.1 10.4 (2.5) 49.0 59.2 694 828 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 165.2 91.1 74.1 (0.7) 5.6 – 15.2 (15.3) 78.9 91.2 48.7 218.8 219.3 360 998 137.3 80.1 57.2 (0.6) 4.2 – 15.2 (11.4) 64.6 80.1 48.8 193.5 189.4 341 491 27.9 11.0 16.9 (0.1) 1.5 – – (4.0) 14.3 11.1 (0.1) 25.3 29.9 479 793 $ 104.1 30.3 73.8 (0.3) 5.9 – – 11.9 91.3 30.5 2.5 124.3 151.6 603 820 96.9 29.1 67.7 (0.3) 4.1 – – 8.9 80.4 29.2 2.5 112.1 138.7 580 808 7.2 1.1 6.1 – 1.8 – – 3.0 10.9 1.3 – 12.2 12.9 849 951 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2012 ANNUAL REPORT 45 Centerra_Financials.indd 45 Apr/01/2013 1:28 PM Total capital and capitalized stripping presented in the All-in cash cost calculation can be reconciled as follows: Year – 2012 ($ millions, unaudited) Capitalized stripping – cash Sustaining capital – cash Growth capital – cash Net increase in accruals included in additions to PP&E Total – Additions to PP&E Year – 2011 ($ millions, unaudited) Capitalized stripping – cash Sustaining capital – cash Growth capital – cash Net increase in accruals included in additions to PP&E Total – Additions to PP&E Fourth Quarter – 2012 ($ millions, unaudited) Capitalized stripping – cash Sustaining capital – cash Growth capital – cash Net increase in accruals included in additions to PP&E Total – Additions to PP&E Fourth Quarter – 2011 ($ millions, unaudited) Capitalized stripping – cash Sustaining capital – cash Growth capital – cash Net increase in accruals included in additions to PP&E Total – Additions to PP&E Kumtor Boroo All other Consolidated 129.3 40.8 176.4 10.1 356.6 6.3 2.1 0.3 – 8.7 – 0.6 0.5 – 1.1 135.6 43.5 177.2 10.1 366.4(1) Kumtor Boroo All other Consolidated 39.4 32.2 95.0 1.3 167.9 – 1.8 4.5 – 6.3 – 0.6 0.4 – 1.0 39.4 34.6 99.9 1.3 175.2(1) Kumtor Boroo All other Consolidated 26.1 10.5 36.6 9.1 82.3 – 0.4 0.3 – 0.7 – 0.2 0.2 – 0.4 26.1 11.1 37.1 9.1 83.4(1) Kumtor Boroo All other Consolidated 6.0 7.8 12.4 2.1 28.3 – 0.9 0.3 – 1.2 – 0.3 – – 0.3 6.0 9.0 12.7 2.1 29.8(1) (1) As reported in the Company’s Consolidated Statement of Cash Flows as “Investing Activities – Additions to property, plant & equipment”. Corporate and other cash costs presented in the All-in cash cost calculation can be reconciled as follows: Fourth Quarter Year ($ millions) (unaudited) Other operating expenses Exploration and business development Corporate administration Subtotal (1) Adjust for: Non-operating charge – claim settlement and other Depreciation and amortization Total Corporate and other cash costs 2012 4.8 11.6 8.8 25.2 – (0.6) 24.6 $ $ $ $ $ 2011 3.7 11.1 10.3 25.1 (2.5) (0.1) 2012 34.3 38.5 27.0 99.8 $ $ $ 2011 15.5 42.9 44.9 $ 103.3 $ 22.5 $ 0.1 (1.4) 98.5 (2.5) (0.4) $ 100.4 (1) As reported in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the reported periods. 46 CENTERRA GOLD INC. Centerra_Financials.indd 46 Apr/01/2013 1:28 PM RELATED PARTY TRANSACTIONS Kyrgyzaltyn JSC Revenues from the Kumtor gold mine are subject to a management fee of $1.00 per ounce based on sales volumes, payable to Kyrgyzaltyn JSC (“Kyrgyzaltyn”), a shareholder of the Company and a state-owned entity of the Kyrgyz Republic. The table below summarizes the management fees and concession payments paid and accrued by Kumtor Gold Company (“KGC”), a subsidiary of the Company, to Kyrgyzaltyn and the amounts paid and accrued by Kyrgyzaltyn to KGC according to the terms of a Restated Gold and Silver Sales Agreement between KGC, Kyrgyzaltyn and the Government of the Kyrgyz Republic dated June 6, 2009. Year ended December 31 ($ thousands) Management fees paid by KGC to Kyrgyzaltyn Gross gold and silver sales from KGC to Kyrgyzaltyn Deduct: reﬁ nery and ﬁ nancing charges Net sales revenue received by KGC from Kyrgyzaltyn 2012 2011 315 535,437 (1,883) 533,554 599 944,020 (2,947) 941,073 Gold produced by the Kumtor mine is purchased at the mine site by Kyrgyzaltyn for processing at its reﬁ nery in the Kyrgyz Republic pursuant to a Restated Gold and Silver Sale Agreement. Amounts receivable from Kyrgyzaltyn arise from the sale of gold to Kyrgyzaltyn. Kyrgyzaltyn is required to pay for gold delivered within 12 days from the date of shipment. Default interest is accrued on any unpaid balance after the permitted payment period of 12 days. The obligations of Kyrgyzaltyn are partially secured by a pledge of 2,850,000 shares of Centerra owned by Kyrgyzaltyn. Based on movements in Centerra’s share price, and the value of individual or unsettled gold shipments over the course of 2012, the maximum exposure (reﬂ ecting the shortfall in the value of the security as compared to the value of any unsettled shipments during the year) was approximately $56.7 million, compared to $44.8 million in 2011. As at December 31, 2012, $48.3 million was outstanding under the Sales Agreement (December 31, 2011 – $47.4 million). Related party balances The assets and liabilities of the Company include the following amounts due from and to Kyrgyzaltyn: (Thousands of US$) Prepaid expenses Amounts receivable Total related party assets Dividend payable (net of withholding taxes) Total related party liabilities Dividend (Thousands of US$) Dividends declared to Kyrgyzaltyn December 31 December 31 2011 2012 $ – 48,325 $ 48,325 5,949 $ 5,949 $ $ 143 47,366 $ 47,509 $ $ – – 2012 2011 $ 5,949 $ 29,412 Dividend payable and restricted cash held in trust Pursuant to an Ontario court decision dated September 5, 2012, Kyrgyzaltyn’s portion of the Centerra dividend declared on August 1, 2012 and November 7, 2012 of $6.2 million net of withholding taxes of $0.3 million ($5.9 million net) is held in trust to the credit of the Sistem court proceedings. Centerra_Financials.indd 47 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 47 OTHER CORPORATE DEVELOPMENTS The following is a summary of corporate developments with respect to matters affecting the Company and its subsidiaries in the Kyrgyz Republic, Mongolia and Canada: Kyrgyz Republic Since the Company’s most recent quarterly news release dated November 7, 2012, there have been several developments with respect to the state commission established by the Kyrgyz Government for the purpose of inspecting and reviewing Kumtor’s compliance with Kyrgyz operational and environmental laws and regulations and community standards (the “State Commission”). In particular, the following developments have occurred, each of which will be discussed below in greater detail: (a) The State Commission released its ﬁ nal report (the “State Commission Report”) on December 25, 2012; (b) Kumtor received ﬁ ve claims from the State Inspectorate Ofﬁ ce for Environmental and Technical Safety under the Government of the Kyrgyz Republic (“SIETS”) for an aggregate of $152 million for alleged environmental violations, which was previously disclosed in a news release of the Company on December 14, 2012; (c) The Kyrgyz Republic Government received the State Commission Report on January 24, 2013 and created a working group to hold discussions with Centerra on revising the terms under which the Kumtor Project operates; and (d) the Kyrgyz Republic Parliament received the State Commission Report on February 20, 2013 and is considering a draft Parliamentary resolution. Such draft Parliamentary resolution calls on the Government to hold negotiations with Centerra with a view to revising the Kumtor Project Agreements (as deﬁ ned below) in the interest of the Kyrgyz Republic and recommends that, if mutually advantageous terms cannot be agreed, the Government take a number of steps including, without limitation, the repeal of the 2009 laws approving the Kumtor Project Agreements and the termination of the Kumtor Project Agreements; and (e) the Kyrgyz Republic Social Fund (the “Social Fund”) has appealed to the Supreme Court a lower court ruling that dismissed the Social Fund’s request to invalidate documentary acts (assessments) of the Social Fund against Kumtor for the years 2004 to 2009. The Company addresses each of the developments below in detail. Reference should also be made to the historical information contained in the Company’s news release dated November 7, 2012 regarding the State Commission and the related Parliamentary Commission which was formed in early 2012. The Company believes that the agreements entered into in 2009 governing the Kumtor Project (the “Kumtor Project Agreements”) are legal, valid and enforceable obligations. The Kumtor Project Agreements were reviewed and approved by the Kyrgyz Republic Government and the Kyrgyz Republic Parliament, and were the subject of a positive decision of the Kyrgyz Republic Constitutional Court and a legal opinion by the Kyrgyz Republic Ministry of Justice. The Company continues to be in discussions with the Government regarding the State Commission Report, with the objective of resolving these outstanding concerns through constructive dialogue. However, there can be no assurances that the Company will be able to successfully resolve any or all of these matters currently affecting the Kumtor Project. There can also be no assurance that the Kyrgyz Republic Government and/or Parliament will not take actions that are inconsistent with the Kyrgyz Republic’s obligations under the Kumtor Project Agreements or cancel government decrees, orders or licenses under which Kumtor currently operates. Any such actions could have a material adverse impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. See “Material Assumptions & Risks” and “Cautionary Note Regarding Forward-looking Information” below. For further information on risk factors relevant to Centerra and its operations, please see “Risk Factors” in the most recently ﬁ led MD&A and in the Company’s most recently ﬁ led Annual Information Form. State Commission Activities (A) State Commission Report In December 2012, the State Commission issued its ﬁ nal report (the “State Commission Report”), following ﬁ ve months of study and several visits to the Kumtor mine site, and over 120 written requests for information on a wide variety of matters going back to 1993 when the original agreement regarding the Kumtor Project was executed. The State Commission was comprised of three working groups with responsibility for environmental and technical matters, legal matters (including a review of all prior and current agreements relating to the Kumtor Project), and social-economic matters (including a review of ﬁ nancial, taxation, procurement and employment-related matters). 48 CENTERRA GOLD INC. Centerra_Financials.indd 48 Apr/01/2013 1:28 PM The State Commission Report includes a large number of allegations in regard to prior transactions relating to the Kumtor Project and the Kumtor Project’s operations and management, including the following: (i) that the Kumtor Project violated Kyrgyz Republic legislation relating to corporate, environment, and subsoil legislation at various times since project activities began in 1993, including allegations relating to the tender process for the deposit in 1993, the approval process for the initial development of the Kumtor Project, the placing of waste rock on glaciers, and causing environmental damage to water and land resources in the area of the Kumtor Project; (ii) that the Kumtor management is ineffective; (iii) that incorrect valuation of assets occurred during the 2003/2004 restructuring process, which purportedly led to signiﬁ cant losses sustained by the Kyrgyz Republic; (iv) that the Kumtor Project Agreements adopted in 2009 were improperly approved and violate the Kyrgyz Republic constitution. The State Commission Report recommends that the Kyrgyz Government open negotiations under which the Kumtor Project is governed, including requiring Kumtor to accept the current tax regime and pay higher environmental charges; changes in the management of Kumtor and Centerra including greater representation by Kyrgyzaltyn on the Centerra board of directors and greater representation of Kyrgyz citizens in management of the Kumtor Project; and recommendations for additional charges and fees to be paid by the Kumtor Project including for land use, and for those items raised by SIETS (see disclosure below regarding environmental claims received by Kumtor Project). The State Commission Report also recommends various actions to be taken by Kyrgyzaltyn, by the Kyrgyz Government, including revisions to Kyrgyz law, and the Kyrgyz Republic General Prosecutor’s Ofﬁ ce with respect to investigating the personal liability of parties who were involved in negotiating previous agreements governing the Kumtor Project for violations of Kyrgyz legislation and for inﬂ icting losses to the Kyrgyz Republic’s interests. The State Commission recommended the establishment of a working group to give effect to the recommendations, in particular the opening of negotiations with Centerra and Kumtor. The Company received the ﬁ nal copy of the State Commission Report on January 18, 2013. The Company believes that the conclusions and claims in the State Commission Report are exaggerated or without merit. While the Company has responded in detail in writing to such conclusions and claims, it also makes the following general responses: (i) The Company operates in accordance with Kyrgyz and international standards, and this has been proven over the years in systematic audits by Kyrgyz and international experts. In particular, in August 2012, the Safety, Health and Environment Committee of the Board of Directors of Centerra engaged an independent internationally recognized consultant to carry out a due diligence review of Kumtor’s performance on safety, health and environmental matters. The report issued in October 2012 concluded that “no major or materially signiﬁ cant environmental issues were identiﬁ ed”. (ii) The Kumtor Project Agreements provide for a full regime of all payments to the Kyrgyz Government including a comprehensive revenue-based tax and speciﬁ ed fees and payments for other matters including environmental charges. The Kumtor Project Agreements were negotiated at arm’s length, and reviewed and approved by the Kyrgyz Government and its Parliament. The agreements were the subject of a positive decision by the Kyrgyz Constitutional Court and a legal opinion of the Kyrgyz Republic Ministry of Justice. The Company believes these agreements are legal, valid and enforceable obligations of the parties. (iii) Centerra, Kumtor and the Kyrgyz Government, among other parties, entered into a release agreement (the Release Agreement) on June 6, 2009, as part of Kumtor Project Agreements. The Release Agreement provides that parties agreed to release each other from any claims, including any legal, tax and ﬁ scal matters, in respect of any matter arising or existing prior to June 6, 2009, whether such matters were known or unknown as of June 6, 2009, subject to certain exemptions which are not applicable in the circumstances. Accordingly, the conclusions and recommendations relating to alleged wrong doings prior to June 6, 2009, including matters relating to the 1993 Master Agreement and the 2003 Restructuring Agreement, have been released by all parties. Centerra_Financials.indd 49 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 49 (B) Kumtor Has Received Claims from Kyrgyz Authorities for Alleged Environmental Violations As previously disclosed, Kumtor received in mid-December 2012, ﬁ ve claims from the SIETS for alleged environmental violations. The claims are for an aggregate amount of approximately $152 million, including (i) a claim for approximately $142 million for alleged damages in relation to the placement on waste dumps of waste rock (unprocessed rock) from mining operations for the period from 2000 to 2011; (ii) a claim for approximately $4 million for use of water resources from Petrov Lake for the period of 2000 to 2011; and (iii) a claim for approximately $2.3 million for alleged damages caused to land resources, including in some cases from the time of initial construction of the Kumtor facilities in 1995. One Claim for $2.8 million for waste placed in the tailings management facilities and for emissions for 2009-2011 was withdrawn after discussions with the applicable Kyrgyz regulatory authorities, although there are no assurances that further claims will not be issued on this matter. The claims reference the review of the Kumtor Project carried out by the environmental and technical working group of the State Commission. Kumtor disagrees with these claims and has responded to them in detail in writing to the relevant authority. While the Company believes that such claims are exaggerated or without merit, there can be no assurances that these claims will be successfully resolved in favour of the Company or that further claims will not be issued. (C) Government Decree #34 The Kyrgyz Government received the State Commission Report on January 24, 2013 and issued a decree, Decree of the Kyrgyz Government dated January 24, 2013, #34 (“Decree #34”), accepting the State Commission Report and sending it to the Kyrgyz Parliament. Pursuant to Decree #34, the Kyrgyz Government also established a working group to hold discussions on the revisions of terms governing the Kumtor Project, particularly on revisions to the tax regime and other matters identiﬁ ed in the State Commission Report. The Company intends to meet with the working group and other Kyrgyz Government ofﬁ cials, with the objective of resolving matters through constructive dialogue. However, there can also be no assurance that such discussions will result in a successful outcome for the Company, or that the Kyrgyz Government will not take actions that are inconsistent with its obligations under the Kumtor Project Agreements or cancel government decrees, orders or licenses under which the Kumtor Project currently operates. Any such actions could have a material adverse impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial conditions. (D) Parliamentary Review and Draft Resolution On February 20, 2013, the Parliament of the Kyrgyz Republic debated the State Commission Report and discussed a draft resolution (the “Draft Resolution”) that endorses the Report and calls on the Government to hold negotiations with Centerra with a view to revising the Kumtor Project Agreements in the interests of the Kyrgyz Republic. The Company understands that the Draft Resolution further recommends that if mutually advantageous terms cannot be agreed the Government should take a number of steps including the following: (i) annul the legislation enacted by Parliament in 2009 approving the Kumtor Project Agreements; (ii) terminate the Kumtor Project Agreements, including the Restated Investment Agreement and Restated Concession Agreement dated June 6, 2009; (iii) initiate legal proceedings with a view to implementing a Government decree of July 5, 2012 “On Cancellation of the Government’s Decree on granting land plots to Kumtor Gold Company CJSC dated as of March 25, 2010. (Such March 25, 2010 decree granted Kumtor certain surface rights in relation to the project. See Centerra’s news release dated July 6, 2012.); (iv) review Government decisions issued between 1992 and 2012 which granted areas for carrying out exploration, mining operations and construction of facilities for the Kumtor Project; and (v) develop and submit amendments to laws on biosphere territories and prevention of damage to glaciers. In addition, the Draft Resolution advises the Government to: (i) ensure that the Kumtor mine remains in continuous operation; (ii) require Kumtor to develop additional designs for reclamation and determine relevant ﬁ nancial resources required to implement such designs; and (iii) ensure that the recommendations of the State Commission (the Report) and Draft Resolution are fulﬁ lled. The Draft Resolution also recommends that the Government review allegations that Kumtor has understated reserves of silver, tellurium and other elements. 50 CENTERRA GOLD INC. Centerra_Financials.indd 50 Apr/01/2013 1:28 PM The Draft Resolution calls for the Government to report on the fulﬁ llment of the recommendations contained in the State Commission Report and the Parliamentary resolution by June 1, 2013. While it is not certain that Parliament will pass the Draft Resolution in its current form, Centerra is reviewing the provisions of the Draft Resolution and will respond to any ﬁ nal Parliamentary resolution accordingly. However, as already stated in the news release, Centerra continues to be conﬁ dent in the continued validity of the Kumtor Project Agreements, which provide for disputes concerning the project to be resolved by international arbitration. Kyrgyz Republic Social Fund Dispute As previously disclosed, the Social Fund commenced a claim in the Kyrgyz courts to invalidate documentary acts (assessments) issued by the Social Fund for the years 2004-2009. Preliminary motions regarding jurisdictional matters were argued on August 28, 2012 and subsequently determined in favour of Kumtor. Such decision was appealed by the Social Fund to the Bishkek City Court, which dismissed the appeal of the Social Fund on November 28, 2012. In early February 2013, the Social Fund appealed this decision of the Bishkek City Court to the Kyrgyz Republic Supreme Court. For a further discussion regarding the Social Fund claim and the dispute for the 2010 taxation year regarding the payment of Social Fund contributions on the high altitude coefﬁ cient, please see the Company’s Annual Information Form for 2011. There are no assurances that the Company and Kumtor will be able to resolve the outstanding matters relating to the Social Fund without any material impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Other The Company is aware of certain statements made by the Kyrgyz Minister of Health and published on the Ministry’s website indicating that Centerra has committed to certain donations related to the improvement of cardiology, cardiac surgery and hemodialysis care in the Kyrgyz Republic. While the Company is reviewing the appropriateness of this donation along with other possible donations in the Kyrgyz Republic, the Company has not yet made a determination thereon. Mongolia Gatsuurt and the Impact of the Mongolian Water and Forest Law Further to information disclosed in Centerra’s MD&A for the third quarter 2009 and Centerra’s Annual Information Form for 2011, the Mongolian Parliament enacted in July 2009 the Mongolian Law to Prohibit Mineral Exploration and Mining Operations at River Headwaters, Protected Zones of Water Reservoirs and Forested Areas (the “Water and Forest Law”) which prohibits mineral prospecting, exploration and mining in water basins and forestry areas in Mongolia. The law provides for a speciﬁ c exemption for “mineral deposits of strategic importance”, which exempts the Boroo hard rock deposit from the application of the law. Centerra’s Gatsuurt licenses are currently not exempt. Under the Mineral Laws of Mongolia, Parliament on its own initiative or, on the recommendation of the Mongolian Government, may designate a mineral deposit as strategic. Such designation could result in Mongolia receiving up to a 34% interest in the applicable project. Centerra is currently in discussions with the Mongolian Government regarding the development of the Gatsuurt property. Centerra is reasonably conﬁ dent that the economic and development beneﬁ ts resulting from its exploration and development activities will ultimately result in the Water and Forest Law having a limited impact on the Gatsuurt property, in particular, and other Company’s Mongolian activities including ATO. There can be no assurance, however, that this will be the case. Unless the Water and Forest Law is repealed or amended such that the law no longer applies to the Gatsuurt project or Gatsuurt is designated as a “mineral deposit of strategic importance” that is exempt from the Water and Forest Law, mineral reserves at Gatsuurt may have to be reclassiﬁ ed as mineral resources or eliminated entirely and the Company may be required to write-off the associated investment in Gatsuurt and Boroo. Centerra_Financials.indd 51 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 51 As at December 31, 2012, the Company had net assets recorded amounting to approximately $37 million related to the investment in Gatsuurt and approximately $28 million remaining capitalized for the Boroo mill facility and other surface structures which are expected to be utilized for the processing of ore from Gatsuurt. Although the Company expects to exploit the Gatsuurt deposit, should this not be the case, the Company would be required to write-off these amounts. A revocation of the Company’s mineral licenses, including the Gatsuurt mineral license, or the reclassiﬁ cation of mineral reserves or the write-off of assets could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations or ﬁ nancial condition. For a further discussion relating to the Water and Forest Law, please see the Company’s Annual Information Form for 2011. The Boroo Heap Leach Boroo received regulatory approval for the mine plan for the heap leach facility in September 2012. As a result, Boroo recommenced heap leach operations in the fourth quarter of 2012. Corporate Enforcement Notice by Sistem: As previously disclosed, in March 2011, Centerra was served by a Turkish company, Sistem Muhenkislik Insaat Sanayi Ticaret SA (“Sistem”), with a notice of enforcement to seize any shares and dividends in Centerra held in the name of the Kyrgyz Republic, followed by a notice of garnishment in April 2011 for any debts owed by Centerra to the Kyrgyz Republic. These notices were served by Sistem as part of the enforcement proceedings brought by Sistem in the Ontario Superior Court to collect approximately US$11 million with additional interest, owed to Sistem by the Kyrgyz Republic in accordance with a judgment of the Ontario Superior Court enforcing an international arbitration award against the Kyrgyz Republic. In these Ontario proceedings, Sistem alleges that the shares in Centerra owned by Kyrgyzaltyn and any dividends paid in respect of those shares, are in fact legally and beneﬁ cially owned by the Kyrgyz Republic and are therefore subject to execution to pay the judgment. Based on legal advice received, Centerra disputes those allegations and paid to Kyrgyzaltyn its portion of Centerra dividends payable on May 18, 2011 (approximately C$31 million) and on May 31, 2012 (approximately C$3 million). Sistem is continuing with its claim regarding the Centerra shares owned by Kyrgyzaltyn. If this claim is successful in the Ontario court proceedings, Sistem may have a right to execute its judgment against those shares and may assert a claim against Centerra in respect of the payment of the dividends to Kyrgyzaltyn. However, Centerra believes it has a strong defense to that claim based on the facts and the law. Preliminary motions regarding jurisdictional matters have been heard in the Ontario Superior Court over the course of 2012, with the objective of setting aside the Ontario judgment enforcing the arbitration award. The lower court decision found in favour of Sistem and dismissed the motion. Kyrgyzaltyn appealed such decision to the Court of Appeal where it was not successful. At this point, the matter can either be appealed further by Kyrgyzaltyn or the trial on the substantive issue will commence. Pursuant to a Ontario court decision dated September 5, 2012 (the “Court Order”), Centerra is required to hold in trust to the credit of the Sistem court proceeding, Kyrgyzaltyn’s portion of dividends payable on shares of Centerra, up to a maximum of C$11.2 million. The Court Order has been put in place until the resolution of the court proceedings. To date, Centerra is holding in trust for the credit of the Sistem court proceedings, an amount equal to $5.9 million. The Court Order also places certain restrictions on 4 million of the Centerra shares held by Kyrgyzaltyn, including restrictions on the transfer or encumbrance of such shares. The Centerra shares pledged by Kyrgyzaltyn to Kumtor Gold Company and Kumtor Operating Company as security for payments due from Kyrgyzaltyn under the Restated Gold and Silver Sale Agreement dated as of June 6, 2009 are not subject to the Court Order restrictions. For a full discussion of risk factors that can have a material effect on the proﬁ tability, future cash ﬂ ow, earnings, results of operations, stated mineral reserves and ﬁ nancial condition of the Company, please see “Caution Regarding Forward-looking Information”. For information regarding risk factors relevant to Centerra and its operations, please see “Risk Factors” in this document and the Company’s most recently ﬁ led Annual Information Form. 52 CENTERRA GOLD INC. Centerra_Financials.indd 52 Apr/01/2013 1:28 PM CRITICAL ACCOUNTING ESTIMATES Centerra prepares its consolidated ﬁ nancial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board. In doing so, management is required to make various estimates and judgments in determining the reported amounts of assets and liabilities, revenues and expenses for each year presented and in the disclosure of commitments and contingencies. Management bases its estimates and judgments on its own experience, guidelines established by the Canadian Institute of Mining, Metallurgy and Petroleum and various other factors believed to be reasonable under the circumstances. In reference to the Company’s signiﬁ cant accounting policies as described in note 3 to the Consolidated Financial Statements management believes the following critical accounting policies reﬂ ect its more signiﬁ cant estimates and judgments used in the preparation of the consolidated ﬁ nancial statements. i. Share-based Compensation Share based compensation costs recognized for the share-based compensation plans are based on estimates of what the ultimate payout will be, using the Black-Scholes option pricing model or Monte Carlo simulation model, which are based on signiﬁ cant assumptions such as volatility, expected life, expected dividends, risk-free interest rate and expected forfeiture rates. ii. Asset retirement obligation Amounts recorded for asset retirement obligations and the related accretion expense require the use of estimates of the future costs the Company will incur to complete the reclamation and remediation work required to comply with existing laws and regulations at each mine site. The Company assesses and revises its asset retirement obligations on an annual basis or when new material information becomes available. Actual costs incurred may differ from those amounts estimated. Also, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required to be performed by the Company. Increases in future costs could materially impact the amounts charged to operations for reclamation and remediation. The provision represents management’s best estimate of the present value of the future reclamation and remediation obligation. The actual future expenditures may differ from the amounts currently provided. iii. Ore reserve estimation The Company estimates its ore reserves and mineral resources based on information compiled by qualiﬁ ed persons as deﬁ ned in accordance with the Canadian Securities Administrators’ National Instrument 43-101 Standards of Disclosure for Mineral Projects requirements. In order to estimate reserves, assumptions are required about a range of geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity demand, commodity prices and exchange rates. Estimating the quantity and/or grade of reserves requires the size, shape and depth of ore bodies to be determined by analyzing geological data such as drilling samples. This process may require complex and difﬁ cult geological judgments to interpret the data. Economic assumptions used to estimate reserves could change from period to period and as additional geological data is generated during the course of operations, estimates of reserves may change from period to period. Changes in reported reserves may affect the Company’s ﬁ nancial results and ﬁ nancial position. iv. Depreciation, depletion and amortization period for property plant and equipment The Company makes estimates about the expected useful lives of property plant and equipment and the expected residual values of the assets based on the estimated current fair value of the assets, the Company’s mine plan and the cash ﬂ ows they generate. Changes to these estimates, which can be signiﬁ cant, could be caused by a variety of factors, including future production differing from current forecasts of future production, expansion of mineral reserves through exploration activities, differences between estimated and actual costs of mining and differences in gold price used in the estimation of mineral reserves. Signiﬁ cant judgment is involved in the determination of useful life and residual values for the computation of depreciation, depletion and amortization and no assurance can be given that actual useful lives and residual values will not differ signiﬁ cantly from current assumptions. 2012 ANNUAL REPORT 53 Centerra_Financials.indd 53 Apr/01/2013 1:28 PM v. Impairment of long-term assets The Company reviews and tests the carrying amounts of long-term assets and intangible assets with deﬁ nite lives when an indicator of impairment is considered to exist. The Company considers both external and internal sources of information in assessing whether there are any indications that long-term assets and goodwill are impaired. When an indicator of impairment is identiﬁ ed or for goodwill annually at the anniversary date, an impairment test is performed by comparing the carrying amount of the asset or cash-generating unit (“CGU”) to their recoverable amount, which is calculated as the higher of an asset’s or cash-generating unit’s value-in-use or fair value less costs to sell. The estimated recoverable amount is calculated normally based upon a discounted cash ﬂ ow analysis, which requires management to make a number of signiﬁ cant assumptions including assumptions relating to future operating plans, gold prices, discount rates, exchange rates and future growth rates. While management believes that estimates of future cash ﬂ ows are reasonable, different assumptions regarding such cash ﬂ ows could materially affect the recoverable value of the long-term asset or CGU. Changes in these estimates which decrease the estimated recoverable value of the asset or CGU could affect the carrying amounts of assets and result in an impairment charge. vi. Deferred income taxes The Company operates in a number of tax jurisdictions and is, therefore, required to estimate its income taxes in each of these tax jurisdictions in preparing its ﬁ nancial statements. In calculating the income taxes, consideration is given to factors such as tax rates in the different jurisdictions, non-deductible expenses, valuation allowances, changes in tax law and management’s expectations of future results. The Company estimates deferred income taxes based on temporary differences between the income and losses reported in its ﬁ nancial statements and its taxable income and losses as determined under the applicable tax laws. The tax effect of these temporary differences is recorded as deferred tax assets or liabilities in the ﬁ nancial statements. If it is not more likely than not that the deferred tax assets will be utilized, a valuation allowance is provided for. The calculation of income taxes requires the use of judgment and estimates. If these judgments and estimates prove to be inaccurate, future earnings may be materially impacted. vii. Inventories of stockpiles ore, in-circuit and Gold doré Management makes estimates of recoverable quantities of gold in stockpiled ore, ore stacked on heap leach pads and in process to determine the average costs of ﬁ nished goods sold during the period and the value of the inventoried asset in the Company’s Statements of Financial Position. Costs that are incurred in or beneﬁ t the mine and mill production process are accumulated as stockpiles of ore, ore on leach pads, heap leach in circuit and gold-in circuit. Net realizable value tests are performed at least annually based on the estimated future sales price of the gold doré, based on prevailing and long-term gold prices, less estimated costs to complete production and bring the gold to selling condition. The recoverable quantity of ore on stockpiles is estimated based on tonnage added and removed from the stockpiles, the amount of contained gold ounces based on assay data, and the estimated recovery percentage based on the historical recoveries obtained in the expected processing method. Stockpiled ore tonnage is veriﬁ ed by periodic surveys. Changes in these estimates can result in a change in mine operating costs of future periods and carrying amounts of inventories. viii. Litigation and contingency On an ongoing basis the Company is subject to various claims and other legal disputes, the outcomes of which cannot be assessed with a high degree of certainty. A liability is recognized where, based on the Company’s legal views and advice, it is considered probable that an outﬂ ow of resources will be required to settle a present obligation that can be measured reliably. By their nature, these contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of signiﬁ cant judgment of the potential outcome of future events. 54 CENTERRA GOLD INC. Centerra_Financials.indd 54 Apr/01/2013 1:28 PM CHANGES IN ACCOUNTING POLICIES Future changes in accounting policies Recently issued but not adopted accounting guidance are as follows: IFRS 7 Financial Instruments – Disclosures (“IFRS 7”) was amended by the IASB in October 2010 and provides guidance on identifying transfers of ﬁ nancial assets and continuing involvement in transferred assets for disclosure purposes. The amendments introduce new disclosure requirements for transfers of ﬁ nancial assets including disclosures for ﬁ nancial assets that are not de-recognized in their entirety, and for ﬁ nancial assets that are de-recognized in their entirety but for which continuing involvement is retained. The Company intends to adopt IFRS 7 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 7 to have a material impact on its ﬁ nancial statements. The IASB has issued IFRS 9 Financial Instruments (“IFRS 9”) which proposes to replace IAS 39 Financial Instruments Recognition and Measurement. The replacement standard has the following signiﬁ cant components: establishes two primary measurement categories for ﬁ nancial assets — amortized cost and fair value; establishes criteria for classiﬁ cation of ﬁ nancial assets within the measurement category based on business model and cash ﬂ ow characteristics; and eliminates existing held to maturity, available-for-sale and loans and receivable categories. This standard is effective for the Company’s annual year end beginning January 1, 2015 (as amended from January 1, 2013 by the IASB in December 2011). The Company will evaluate the impact of the change to its consolidated ﬁ nancial statements based on the characteristics of its ﬁ nancial instruments at the time of adoption. IFRS 10 Consolidated Financial Statements (“IFRS 10”), which replaces parts of IAS 27, Consolidated and Separate Financial Statements (“IAS 27”) and all of SIC-12 Consolidation – Special Purpose Entities, changes the deﬁ nition of control which is the determining factor in whether an entity should be consolidated. Under IFRS 10, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company intends to adopt IFRS 10 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 10 to have a material impact on its ﬁ nancial statements. IFRS 11 Joint Arrangements (“IFRS 11”), which replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities – Non-monetary Contributions by Venturers, requires a venturer to classify its interest in a joint arrangement as either a joint operation or a joint venture. For a joint operation, the joint operator will recognize its assets, liabilities, revenue and expenses, and/or its relative share thereof. For a joint venture, the joint venturer will account for its interest in the venture’s net assets using the equity method of accounting. This is a change from the existing standards, under which the Company chose to proportionally consolidate joint ventures. The Company intends to adopt this standard effective January 1, 2013. The impact of these changes on the Company’s ﬁ nancial statements is currently under review in preparation for the ﬁ rst quarter 2013 ﬁ nancial reporting. IFRS 12 Disclosure of Interests in Other Entities (“IFRS 12”) is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The required disclosures aim to provide information in order to enable users to evaluate the nature of, and the risks associated with, an entity’s interest in other entities, and the effects of those interests on the entity’s ﬁ nancial position, ﬁ nancial performance and cash ﬂ ows. The Company intends to adopt IFRS 12 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 12 to have a material impact on its ﬁ nancial statements except additional disclosure requirements. IFRS 13 Fair Value Measurement (“IFRS 13”) replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It deﬁ nes fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables ﬁ nancial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use signiﬁ cant unobservable inputs (Level 3), the effect of the measurements on proﬁ t or loss or other comprehensive income. The Company intends to adopt IFRS 13 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 13 to have a material impact on its ﬁ nancial statements. 2012 ANNUAL REPORT 55 Centerra_Financials.indd 55 Apr/01/2013 1:28 PM IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (“IFRIC 20”) sets out the accounting for overburden waste removal (stripping) costs in the production phase of a mine. The new interpretation clariﬁ es when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. It considers when and how to account separately for beneﬁ ts arising from the stripping activity and how to measure these beneﬁ ts both initially and subsequently. It prescribes that the costs of the stripping activity be accounted for in accordance with the principles of IAS 2 Inventories to the extent that the beneﬁ t from the stripping activity is realized in the form of inventory produced. On the other hand, the costs of the stripping activity which provides a beneﬁ t in the form of improved access to ore in future periods is recognized as a non-current stripping activity asset when speciﬁ ed criteria are met. The Company intends to adopt IFRIC 20 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The impact of these changes on the Company’s ﬁ nancial statements is currently under review in preparation for the ﬁ rst quarter 2013 ﬁ nancial reporting. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING As of December 31, 2012, Centerra evaluated its disclosure controls and procedures and internal control over ﬁ nancial reporting, as deﬁ ned in the rules of the Canadian Securities Administrators. These evaluations were carried out under the supervision of and with the participation of management, including Centerra’s Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer. Based on these evaluations, the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer concluded that the design and operation of these disclosure controls and procedures and internal control over ﬁ nancial reporting were effective. SUSTAINABLE DEVELOPMENT Centerra believes in the principles of sustainable development. In endeavoring to achieve its strategic objectives, the Company strives to be a leading performer among its peers with regard to shareholder value, business ethics, workplace safety, environmental protection and community development. Centerra believes that its strong commitment to these principles, which is supported by its past practices, will further its objective of becoming a sought-after partner in Asia, Central Asia, the former Soviet Union and other emerging markets worldwide. The Company’s ﬁ rst Corporate Responsibility Report for its 2010 reporting year is available on the Company’s website at www.centerragold.com. 2013 OUTLOOK Centerra’s 2013 gold production and unit costs are forecast as follows: Kumtor Boroo Consolidated 2013 Production Forecast (ounces of gold) 550,000 – 600,000 55,000 – 60,000 605,000 – 660,000 2013 Operating Cash Costs (1) ($ per ounce produced) 2013 All-in Cash Costs (Pre-tax) (2) ($ per ounce produced) $342 – 373 $ 1,055 – 1,151 $ 406 – 443 $ 853 – 931 $ 1,225 – 1,336 $ 1,067 – 1,164 (1) Operating cash costs per ounce produced is a non-GAAP measure and includes mine operating costs such as mining, processing, regional ofﬁ ce administration, royalties and production taxes (except at Kumtor where revenue-based taxes are excluded), but excludes depreciation, depletion and amortization, reclamation costs, ﬁ nancing costs, capital investments, community investments, exploration expenses and corporate general and administration expenses. (2) All-in cash cost per (pre-tax) ounce produced is a non-GAAP measure and includes cash operating cost, sustaining and growth capital, corporate general and administrative expenses, global exploration expenses, and community investments, but excludes revenue-based taxes at Kumtor and income taxes. 2013 Production: Centerra’s 2013 consolidated gold production is forecast to be in the 605,000 to 660,000 ounce range. In 2013, approximately 50% of Kumtor’s gold production is expected to occur in the fourth quarter creating a potential variability to Kumtor’s 2013 production guidance. Centerra estimates that the Kumtor mine will produce between 550,000 and 600,000 ounces in 2013. Ore production in the fourth quarter is planned to come from the high-grade SB Zone ore that has several years of production history. The high-grade ore from the SB Zone is only available for mining at the end of the third quarter when it is exposed by Cut Back 15. 56 CENTERRA GOLD INC. Centerra_Financials.indd 56 Apr/01/2013 1:28 PM At the Boroo mine, gold production is forecast to be approximately 55,000 to 60,000 ounces, which includes about 24,000 ounces from heap leaching and 36,000 ounces from processing mill stockpiles. The Boroo mill is expected to process ore stockpiles during the year with an average grade of 0.82 g/t. The 2013 forecast assumes no mining activities at Boroo and Gatsuurt, and no gold production from Gatsuurt. All-in Unit Cash Costs: Centerra’s 2013 all-in unit cash production costs per ounce are forecast as follows: Operating cash costs (1) Capitalized stripping costs – cash Operating cash and stripping costs Sustaining capital (cash) Growth capital (cash) Operating cash costs including capital Corporate and other cash costs (2) All-in cash costs – (pre-tax) (1) Revenue-based tax and income tax Total All-in cash costs including taxes (1) Kumtor Boroo Consolidated ($ per ounce produced) ($ per ounce produced) ($ per ounce produced) $ $ $ $ $ 342 – 373 354 – 386 696 – 759 105 – 115 52 – 57 853 – 931 – 853 – 931 234 – 255 $ 1,087 – 1,186 $ 1,055 – 1,151 – $ 1,055 – 1,151 170 – 185 – $ 1,225 – 1,336 – $ 1,225 – 1,336 130 – 142 $ $ 1,355 – 1,478 $ $ $ 406 – 443 322 – 351 728 – 794 113 – 124 49 – 53 890 – 971 177 – 193 $ 1,067 – 1,164 224 – 245 $ $ 1,291 – 1,409 (1) Operating cash costs, all-in cash costs (pre-tax) and total all-in cash costs including taxes per ounce produced are non-GAAP measures and are discussed under “Non-GAAP Measures”. (2) Corporate and other cash costs per ounce produced include corporate general and administrative expenses, global exploration expenses, and community investments. 2013 Exploration Expenditures: Exploration expenditures of $45 million are planned for 2013, which is unchanged from the budgeted expenditures for 2012. The 2013 program will continue the successful exploration work below and west of the Central Pit at the Kumtor mine and includes drilling on the adjacent Sarytor and Northeast satellite deposits. Planned exploration expenditures on the Kumtor concession are expected to be about $13.5 million. In Mongolia, approximately $7 million is allocated for exploration programs that will focus on expanding the mineral resource at the Altan Tsagaan Ovoo (“ATO”) project and evaluating targets in the greater ATO district. Exploration spending in Turkey will increase to approximately $8 million as work focuses on expanding and upgrading the Öksüt gold deposit resource, advancing on-going metallurgical test work and initiating detailed environmental and technical project studies. In 2013, drilling programs will continue in Russia on the Kara Beldyr and Dvoinoy Joint Ventures and commence on the new Umlekan Joint Venture adjoining Dvoinoy. Expenditures for the projects in Russia are expected to be, in the aggregate, approximately $6 million. The China 2013 exploration program of $2 million includes the drilling of targets developed on the Laogouxi Joint Venture project and generating new projects in several prospective areas. Generative programs will continue in Central Asia, Russia, China, Turkey and several new regions to increase the pipeline of projects that the Company is developing to meet the longer term growth targets of Centerra. 2013 Capital Expenditures Centerra’s capital expenditures for 2013, excluding capitalized stripping, are estimated to be $107 million, including $75 million of sustaining capital and $32 million of growth capital. Capital expenditures (excluding capitalized stripping) include: Projects (millions of dollars) Kumtor mine Mongolia Corporate Consolidated Total 2013 Growth Capital 2013 Sustaining Capital $ 31 $ 1 – $ 32 $ 64 $ 10 $ 1 $ 75 2012 ANNUAL REPORT 57 Centerra_Financials.indd 57 Apr/01/2013 1:28 PM Kumtor At Kumtor, 2013 total capital expenditures, excluding capitalized stripping, are forecast to be $95 million including $64 million of sustaining capital. The largest sustaining capital spending will be the major overhaul maintenance of the heavy duty mine equipment ($29 million), purchase of new mining equipment ($17 million), tailings dam construction raise ($5 million) and other items ($13 million). Growth capital investment at Kumtor for 2013 is forecast at $31 million, which includes the relocation of certain infrastructure at Kumtor related to the KS-13 life-of-mine expansion ($26 million) and other items ($5 million). Capitalized stripping costs related to the development of the open pit are expected to be $212 million (cash) in 2013. Mongolia (Boroo and Gatsuurt) At Boroo, 2013 sustaining capital expenditures are expected to be $10 million primarily for raising the tailings dam at Boroo ($6 million) and maintenance rebuilds and overhauls. Growth capital for the Gatsuurt deposit is forecast at $1 million, related to environmental studies. 2013 Corporate Administration and Community Investment Corporate and administration expenses for 2013 are forecast at $45 million, which includes $7 million for business development activities. Total community investments for 2013 are forecast at $27.5 million, which include $7.5 million for donations and sustainable development projects in the various communities in which Centerra operates and $20 million for strategic community investment projects. Note that these costs are not included in operating cash costs. 2013 Depreciation, Depletion and Amortization Depreciation, depletion and amortization expenses included in costs of sales expense for 2013 are forecast to be approximately $218 million. Changes in DD&A are a result of increases or decreases to certain of the Company’s capital assets. Refer to the Company’s 2012 Audited Financial Statements note 10 for further details on the related capital assets. (In millions) Kumtor Mine equipment Less DD&A capitalized to stripping costs (1) Capital stripping costs amortized Other mining assets Mill assets Administration assets and other Inventory movement (non-cash depreciation) Subtotal for Kumtor Boroo Mine equipment Less DD&A capitalized to stripping costs Capital stripping costs amortized Mine development and other mining assets Mill assets Administration assets and other Inventory movement (non-cash depreciation) Subtotal for Boroo Consolidated Total 2013 DD&A Forecast (Unaudited) 2012 DD&A Actual 2011 DD&A Actual $ $ $ $ $ $ 95 (77) 291 1 6 12 (127) 201 1 – 2 1 6 6 1 $ $ 17 218 $ $ 87 (59) 117 1 4 3 (32) 121 1 (1) 9 1 4 8 (1) 21 142 $ $ $ $ $ 69 (14) 32 5 8 10 (22) 88 2 – – 1 1 3 3 10 98 (1) Use of the Company’s mining ﬂ eet for stripping activities results in a portion of the depreciation related to the mine ﬂ eet to be allocated to capitalized stripping costs. The amount for 2012 includes $2 million of depreciation expensed as mine standby costs, $6 million of depreciation expensed as abnormal ice unload costs, and $51 million of depreciation allocated to capitalized stripping costs. 58 CENTERRA GOLD INC. Centerra_Financials.indd 58 Apr/01/2013 1:28 PM Kumtor At Kumtor, the forecast for 2013 DD&A expensed as part of costs of sales is $201 million. The increase over the three years reﬂ ects a signiﬁ cant expansion of the mining ﬂ eet in order to achieve higher throughput levels of materials moved and the increased stripping of waste required to access the deposit. The amortization of capitalized stripping costs is the largest component of depreciation expense in 2013 totaling $291 million. The mine equipment assets are depreciated on a straight-line basis over their estimated useful lives. The depreciation expense related to mine equipment engaged in a stripping campaign is capitalized as stripping costs ($77 million forecasted to be capitalized as stripping costs in 2013). During 2013 Kumtor will be mining the remaining ore from cut-backs 14A and 14B and begin stripping campaigns on cut-backs 15, 16 and 17. The costs to remove waste and ice within the various cut-backs 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. Labour and consumables costs (such as diesel costs) have been steadily increasing over the last several years due to both increases in price and demand with the expanding operation at Kumtor. These costs are capitalized as stripping costs and amortized over the ounces contained in the ore body exposed by the stripping campaign. Based on the sequencing of production at Kumtor for 2013, ore from cut-backs 14A, 14B and 15 will be mined resulting in the amortization through cost of sales of $291 million in capitalized stripping costs. As Kumtor completes mining of the ore from cut-backs 14A and 14B, it will amortize the remaining unamortized capitalized stripping costs of $101 million related to those cut-backs. The forecast assumes that the stripping campaign for cut-back 15 is completed in the third quarter of 2013 providing access to the ore in the third and fourth quarters. As the ore in cut-back 15 is mined in the third and fourth quarters, the amortization expense for 2013 for the capitalized stripping costs related to cut-back 15 is forecast at $190 million. Boroo At Boroo, the forecast for 2013 DD&A expensed as part of costs of sales is $17 million, compared to $21 million in 2012 and $10 million in 2011. The decrease in 2013 reﬂ ects the completion of mining activities in Pit 6 in 2012. The largest components of depreciation expense are related to depreciation of the mill, the administration buildings and other assets forecasted at $6 million. Taxes: Pursuant to the Restated Investment Agreement, Kumtor’s operations are not subject to corporate income taxes. The Agreement replaced the prior tax regime applicable to the Kumtor project with a simpliﬁ ed regime effective January 1, 2008. This simpliﬁ ed regime, which assesses tax at 13% on gross revenue (plus 1% for the Issyk-Kul Oblast Development Fund effective January 2009), was approved and enacted by the Parliament of the Kyrgyz Republic in 2009. The corporate income tax rate for Centerra’s Mongolian subsidiary, BGC is 25% for taxable income over 3 billion Mongolian tugriks (approximately $2.2 million at the 2012 year-end foreign exchange rate) with a tax rate of 10% for taxable income up to that amount. These tax rates will continue to apply until the expiry of the Boroo Stability Agreement in July 2013, after which Boroo’s operations will be subject to a prevailing income tax rate of 25%. Royalty fees will increase from 5% under Boroo’s Stability Agreement to the current graduated royalty fee structure which would charge the maximum of 10% based on current gold prices. Centerra_Financials.indd 59 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 59 Sensitivities: Centerra’s revenues, earnings and cash ﬂ ows for 2013 are sensitive to changes in certain variables and the Company has estimated their impact on revenues, net earnings and cash from operations. Impact on Earnings before ($ millions) Gold Price Diesel Fuel (1) Kyrgyz som (2) Mongolian tugrik (2) Canadian dollar (2) Change Costs Revenues Cash ﬂ ow income tax $ 50 per ounce 10% 1 som 25 tugrik 10 cents 5.1 8.2 2.8 1.3 3.2 32.5 – – – – 27.4 8.2 2.8 1.3 3.2 27.4 8.2 2.8 1.3 3.2 (1) a 10% change in diesel fuel price equals $13 per ounce produced (2) appreciation of currency will result in higher costs and lower cash ﬂ ow and earnings, depreciation of currency results in decreased costs and increased cash ﬂ ow and earnings Material Assumptions & Risks: Material assumptions or factors used to forecast production and costs for 2013 include the following: • a gold price of $1,700 per ounce, • exchange rates: g $1USD:$0.99 CAD g $1USD:47.0 Kyrgyz som g $1USD:1,375 Mongolian tugriks g $1USD:0.78 Euro • diesel fuel price assumption: g $0.80/litre at Kumtor g $1.18/litre at Boroo The assumed diesel price of $0.80/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 separate Russian suppliers for both sites and only loosely correlates with world oil prices. The diesel fuel price assumptions were made when the price of oil was approximately $87 per barrel. Other material assumptions include the following: • 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. No assurances can be given by the Company in this regard, • the activities of the State Commission, referred to under the heading “Other Corporate Developments – Kyrgyz Republic – State Commission Activities” do not have an impact on operations or ﬁ nancial results. No assurances can be given by the Company in this regard, • the Government and the Parliament of the Kyrgyz Republic taking no action in connection with the matters referred to under the heading “Other Corporate Developments – Kyrgyz Republic State Commission Activities” that has an impact on operations or ﬁ nancial results. This includes the Parliament adopting the Draft Resolution referred to therein, and the Government (or a working group formed by the Government) seeking to negotiate the Kumtor Project Agreements, and taking the steps referred to in the Parliamentary Draft Resolution if such negotiations are not successful, including repealing laws passed in 2009 approving the Kumtor Project Agreements and terminating the Kumtor Project Agreements. No assurances can be given by the Company in this regard, • the previously disclosed environmental claims received from the Kyrgyz regulatory authorities in the amount of $152 million, in aggregate, and any further claims that may result from the State Commission, are resolved without material impact on Centerra’s operations or ﬁ nancial results. No assurances can be given by the Company in this regard, • grades and recoveries at Kumtor will remain consistent with the life-of-mine plan to achieve the forecast gold production, 60 CENTERRA GOLD INC. Centerra_Financials.indd 60 Apr/01/2013 1:28 PM • the Company is able to manage the risks associated with the increased height of the pit walls at Kumtor over the life-of-mine, • the design of the new and expanded waste dumps (contemplated by the new KS-13 life-of-mine plan) at Kumtor adequately address the risks associated with size and stability, • the dewatering program at Kumtor continues to produce the expected results and the water management system works as planned, • the Company is able to satisfactorily manage the ice movement and to unload the ice and waste in the southeast portion of the Kumtor pit, • prices of key consumables are not signiﬁ cantly higher than prices assumed in planning, • no unplanned delays in or interruption of scheduled production from our mines, including due to civil unrest, natural phenomena, regulatory or political disputes, equipment breakdown or other developmental and operational risks, • the Mongolian legislation which prohibits mineral prospecting, exploration and mining in water basins and forest areas in Mongolia (the “Water and Forest Law”) will be amended or repealed to allow Gatsuurt to proceed as planned, (see Company’s most recently ﬁ led AIF), • the royalty paid by Boroo increases to 10% after the Boroo stability agreement expires in July 2013 and the current 25% income tax rate remains unchanged, and • all necessary permits, licenses and approvals are received in a timely manner. Production and cost forecasts and capital estimates are forward-looking information and are based on key assumptions and subject to material risk factors. If any event arising from these risks occurs, the Company’s business, prospects, ﬁ nancial condition, results of operations or cash ﬂ ows and the market price of Centerra’s shares could be adversely affected. Additional risks and uncertainties not currently known to the Company, or that are currently deemed immaterial, may also materially and adversely affect the Company’s business operations, prospects, ﬁ nancial condition, results of operations or cash ﬂ ows and the market price of Centerra’s shares. See the section entitled “Risk Factors” in this discussion and also the Risk Factors listed in the Company’s most recently ﬁ led Annual Information Form (the “2011 Annual Information Form”), available on SEDAR at www.sedar.com and see also the discussion below under the heading “Caution Regarding Forward-looking Information”. QUALIFIED PERSON & QA/QC All exploration information and related scientiﬁ c and technical information in this MD&A were prepared in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) and were prepared, reviewed, veriﬁ ed and compiled by Centerra’s geological and mining staff under the supervision of David Groves, Certiﬁ ed Professional Geologist, Centerra’s Vice President, Global Exploration, who is the qualiﬁ ed 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 certiﬁ ed assay labs are used with the exception of the Kumtor project as described in its technical report ﬁ led on December 20, 2012, with an effective date of September 30, 2012 (the “Kumtor Technical Report”). All reserve and resource estimates, production information and other related scientiﬁ c and technical information in this MD&A were prepared in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and NI 43-101 and were prepared, reviewed, veriﬁ ed and compiled by Centerra’s geological and mining staff under the supervision of Dan Redmond, Ontario Professional Geoscientist, Centerra’s Director, Technical Services – Mining, who is the qualiﬁ ed 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 certiﬁ ed assay labs are used with the exception of the Kumtor project as described in its Technical Report. The Kumtor deposit is described in Centerra’s most recently ﬁ led AIF and a technical report dated December 20, 2012 prepared in accordance with NI 43-101. The technical report has been ﬁ led on SEDAR at www.sedar.com. The technical report describes the exploration history, geology and style of gold mineralization at the Kumtor deposit. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the drilling programs at the Kumtor site are described in the technical report. 2012 ANNUAL REPORT 61 Centerra_Financials.indd 61 Apr/01/2013 1:28 PM The Boroo deposit is described in Centerra’s most recently ﬁ led AIF and a technical report dated December 17, 2009 prepared in accordance with NI 43-101, which is available on SEDAR at www.sedar.com. The technical report describes the exploration history, geology and style of gold mineralization at the Boroo deposit. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the drilling programs at the Boroo site are the same as, or similar to, those described in the technical report. The Gatsuurt deposit is described in the Company’s most recently ﬁ led AIF and in a technical report dated May 9, 2006 prepared in accordance with NI 43-101. The technical report has been ﬁ led on SEDAR at www.sedar.com. The technical report describes the exploration history, geology and style of gold mineralization at the Gatsuurt deposit. Sample preparation, analytical techniques, laboratories used and quality assurance-quality control protocols used during the drilling programs at the Gatsuurt project are the same as, or similar to, those described in the technical report. RISK FACTORS Below are the risk factors that Centerra believes can have a material effect on the proﬁ tability, future cash ﬂ ow, earnings, results of operations, stated reserves and ﬁ nancial condition of the Company. If any event arising from these risks occurs, the Company’s business, prospects, ﬁ nancial condition, results of operations or cash ﬂ ows could be adversely affected, the trading price of Centerra’s common shares could decline and all or part of any investment may be lost. Additional risks and uncertainties not currently known to the Company, or that are currently deemed immaterial, may also materially and adversely affect the Company’s business operations, prospects, ﬁ nancial condition, results of operations or cash ﬂ ows. Political and Regulatory Centerra’s principal operations are located in the Kyrgyz Republic and Mongolia and are subject to political risk All of Centerra’s current gold production and mineral reserves are derived from assets located in the Kyrgyz Republic and Mongolia, countries that have experienced political difﬁ culties in recent years including, in the Kyrgyz Republic, civil unrest in April 2010 that resulted in the ouster of the incumbent President. Accordingly, there continues to be a risk of future political instability. Centerra’s mining operations and gold exploration activities are affected in varying degrees by political stability and government regulations relating to foreign investment, social unrest, corporate activity and the mining business in each of these countries. Operations may also be affected in varying degrees by terrorism, military conﬂ ict or repression, crime, extreme ﬂ uctuations in currency rates and high inﬂ ation in Central Asia. The relevant governments have entered into contracts with Centerra or granted permits, licenses or concessions that enable it to conduct operations or exploration and development activities. Notwithstanding these arrangements, Centerra’s ability to conduct operations or exploration and development activities is subject to obtaining and/or renewing permits or concessions (including a certiﬁ cate of temporary land use in relation to its concession area around the Kumtor project, which was issued in 2010 and then purported to have been cancelled in 2012, and permits and concessions to begin mining activities at Gatsuurt), changes in laws or government regulations or shifts in political attitudes beyond Centerra’s control. The Company does not currently have political risk insurance covering its investments in the Kyrgyz Republic nor in Mongolia. The political risk insurance policy that covered the Company’s investments in the Kyrgyz Republic expired in November, 2012. From time-to-time, Centerra assesses the costs and beneﬁ ts of maintaining such insurance. Recent increases in the political risk in the Kyrgyz Republic combined with adverse insurance market conditions for political risk insurance for this region resulted in conditions whereby continuing political risk insurance coverage was not feasible. There can be no assurance that political risk insurance would continue to be available at any time or that particular losses Centerra may suffer with respect to its foreign investments will be covered by any insurance that it may obtain in the future. Any such losses could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition if not adequately covered by insurance. 62 CENTERRA GOLD INC. Centerra_Financials.indd 62 Apr/01/2013 1:28 PM Resource nationalism could adversely impact Centerra’s business As governments continue to struggle with deﬁ cits and concerns over the effects of depressed economies, the continuing strength in commodity prices has resulted in companies in the mining and metals sector being targeted to raise government revenue. Governments are continually assessing the ﬁ scal terms of the economic rent for mining companies to exploit resources in their countries. Numerous countries, including the Kyrgyz Republic and Mongolia, have in the past introduced changes to their respective mining regimes that reﬂ ect increased government control or participation in the mining sector, including, but not limited to, changes of law affecting foreign ownership, mandatory government participation, taxation and royalties, working conditions, exchange rates, exchange controls, exploration licensing, export and import duties, repatriation of income or return of capital, environmental protection, as well as requirements for employment of local staff or contractors or other beneﬁ ts to be provided to local residents. There can be no assurance that industries deemed of national or strategic importance like mineral production will not be nationalized. Government policy may change to discourage foreign investment, renationalization of mining industries may occur or other government limitations, restrictions or requirements not currently foreseen may be implemented. There can be no assurance that Centerra’s assets will not be subject to nationalization, requisition or conﬁ scation, whether legitimate or not, by any authority or body. While there are often provisions for compensation and reimbursement of losses to investors under such circumstances, there is no assurance that such provisions would effectively restore the value of Centerra’s original investment. Similarly, Centerra’s operations may be affected in varying degrees by government regulations with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, environmental legislation, labour legislation, mine safety, and annual fees to maintain mineral properties in good standing. There can be no assurance that the laws in these countries protecting foreign investments will not be amended or abolished or that these existing laws will be enforced or interpreted to provide adequate protection against any or all of the risks described above. Furthermore, there can be no assurance that the agreements Centerra has with the governments of these countries will prove to be enforceable or provide adequate protection against any or all of the risks described above. The Kumtor project has, in the past year, been threatened with nationalization. During 2012, a Parliamentary Commission proposed to the Kyrgyz Parliament a Draft Decree which called for the cancellation of the current Kumtor project agreements and the creation of a new state-owned Kyrgyz Republic entity to assume control over Kumtor. If the Draft Decree had been approved and given full effect by the Kyrgyz Government, it would have, in substance, resulted in the nationalization of Kumtor. In late June 2012, the Kyrgyz Parliament met to consider the Parliamentary Report from the Parliamentary Commission, but voted against the Draft Decree and instead adopted an alternative resolution (2117-V). See below for further discussion on Resolution 2117-V. Although the Draft Decree was not adopted by the Kyrgyz Parliament, there can be no assurance that subsequent resolutions will be brought before, or adopted by, the Kyrgyz Parliament to nationalize Kumtor. Changes in, or more aggressive enforcement of, laws, regulations and government practices could adversely impact Centerra’s business Mining operations and exploration activities are subject to extensive laws and regulations, both in the countries where mining operations and exploration activities are conducted and in the mining company’s home jurisdiction. These relate to production, development, exploration, exports, imports, taxes and royalties, labour standards, occupational health, waste disposal, protection and remediation of the environment, mine decommissioning and reclamation, mine safety, toxic substances, transportation safety and emergency response, social responsibilities and sustainability, and other matters. Compliance with these laws and regulations increases the costs of exploring, drilling, developing, constructing, operating and closing mines and other facilities. It is possible that the costs, delays and other effects associated with these laws and regulations may impact Centerra’s decision as to whether to continue to operate existing mines, ore reﬁ ning and other facilities or whether to proceed with exploration or development of properties. Since legal requirements change frequently, are subject to interpretation and may be enforced to varying degrees in practice, Centerra is unable to predict the ultimate cost of compliance with these requirements or their effect on operations. If the laws and regulations relating to the Company’s operations were to change, or the enforcement of such laws and regulations were to become more rigorous, the Company could be required to incur signiﬁ cant capital and operating expenditures to comply, which could have a material adverse effect on the Company’s ﬁ nancial position and its ability to achieve operating and development targets. 2012 ANNUAL REPORT 63 Centerra_Financials.indd 63 Apr/01/2013 1:28 PM The Kyrgyz Government and Parliament may take actions in connection with the State Commission Report On February 15, 2012, the Kyrgyz Parliament established an interim Parliamentary Commission to inspect and review: (i) Kumtor’s compliance with Kyrgyz operational and environmental laws, as well as community standards, and (ii) state regulation over the Kumtor project’s activities. The Parliamentary Commission issued a Parliamentary Report on June 18, 2012 and made a number of assertions regarding the operation of the Kumtor project, including: • challenging the legal validity of the project agreements that govern the Kumtor project (the “Kumtor Project Agreements”); • alleging non-compliance by Kumtor with Kyrgyz environmental and other laws, particularly at Kumtor’s tailings facility, the Davidov glacier and the Sarychat-Ertash State Reserve which is in the vicinity of the Kumtor project. The Parliamentary Commission alleges that the violations have resulted in substantial monetary damages; and • alleging inefﬁ cient or improper management of Kumtor, particularly with respect to customs practices, tax and Social Fund payments, operational decisions, procurement practices and mill efﬁ ciencies (gold recoveries), the latter of which is alleged by the Parliamentary Commission to result in very substantial losses. The Kyrgyz Parliament met in late June 2012 to consider the Parliamentary Report and adopted Resolution 2117-V, which took note of the Parliamentary Report and declared the current Kumtor Project Agreements to be contrary to the interests of the Kyrgyz Republic. Resolution 2117-V also: (i) called for the formation of a state commission to “assess the environmental, industrial and social damage” caused by the Kumtor project and to initiate the renegotiation of the current Kumtor Project Agreements “in order to protect economic and environmental interests”; (ii) called for the cancellation of various government decrees and orders, including Government Decree #168 dated March 25, 2010 which provided land use rights over the surface of the Kumtor concession area; and (iii) recommended that the State Agency for Geology and Mineral Resources cancel certain licenses granted to Kumtor, including the exploration license for the Koendy licensed area. In response to Resolution 2117-V, the Kyrgyz Government established a state commission (the State Commission) for the purpose of reviewing the Parliamentary Report as well as inspecting and reviewing Kumtor’s compliance with Kyrgyz operational and environmental laws and community standards. The State Commission is comprised of three working groups with responsibility for environmental and mining matters, legal matters (including a review of all prior and current agreements relating to the Kumtor project) and socio-economic matters (including a review of ﬁ nancial, taxation, procurement and employment related issues). Since its formation on July 3, 2012, the State Commission’s working groups have visited the Kumtor mine site and made numerous requests for information on a wide variety of matters. The State Commission was provided with an extension until mid-November 2012 to complete its review and produce a report. In December 2012, the State Commission issued its ﬁ nal report (the “State Commission Report”), which included a large number of allegations in regard to prior transactions relating to the Kumtor Project and the Kumtor Project’s operations and management, including (i) that the Kumtor Project violated Kyrgyz Republic legislation relating to corporate, environment, and subsoil legislation at various times since project activities began in 1993, including allegations relating to the tender process for the deposit in 1993, the approval process for the initial development of the Kumtor Project, the placing of waste rock on glaciers, and causing environmental damage to water and land resources in the area of the Kumtor Project; (ii) that the Kumtor management is ineffective; (iii) that incorrect valuation of assets occurred during the 2003/2004 restructuring process, which purportedly led to signiﬁ cant losses sustained by the Kyrgyz Republic; and (iv) that the Kumtor Project Agreements adopted in 2009 were improperly approved and violate the Kyrgyz Republic constitution. The State Commission Report recommends that the Kyrgyz Government open negotiations under which the Kumtor Project is governed, including requiring Kumtor to accept the current tax regime and pay higher environmental charges; changes in the management of Kumtor and Centerra including greater representation by Kyrgyzaltyn on the Centerra board of directors and greater representation of Kyrgyz citizens in management of the Kumtor Project; and recommendations for additional charges and fees to be paid by the Kumtor Project including for land use, and for those items raised by SIETS. See “Other Corporate Developments – Kyrgyz Republic – State Commission Activities – Kumtor Has Received Claims from Kyrgyz Authorities for Alleged Environmental Violations”. 64 CENTERRA GOLD INC. Centerra_Financials.indd 64 Apr/01/2013 1:28 PM The Kyrgyz Government received the State Commission Report and issued a decree dated January 24, 2013, #34 (“Decree #34”), accepting the State Commission Report and sending it to the Kyrgyz Parliament. Pursuant to Decree #34, the Kyrgyz Government also established a working group to hold discussions on the revisions of terms governing the Kumtor Project, particularly on revisions to the tax regime and other matters identiﬁ ed in the State Commission Report. On February 20, 2013, the Parliament of the Kyrgyz Republic debated the State Commission Report and discussed a draft resolution (the “Draft Resolution”) that endorses the State Commission Report and calls on the Government to hold negotiations with Centerra with a view to revising the Kumtor Project Agreements in the interests of the Kyrgyz Republic. The Company understands that the Draft Resolution further recommends that if mutually advantageous terms cannot be agreed, the Government should take a number of steps including the following: (i) annul the legislation enacted by Parliament in 2009 approving the Kumtor Project Agreements; (ii) terminate the Kumtor Project Agreements, including the Restated Investment Agreement and Restated Concession Agreement dated June 6, 2009; (iii) initiate legal proceedings with a view to implementing a Government decree of July 5, 2012 “On Cancellation of the Government’s Decree on granting land plots to Kumtor Gold Company CJSC dated as of March 25, 2010. (Such March 25, 2010 decree granted Kumtor certain surface rights in relation to the project. See Centerra’s news release dated July 6, 2012.); (iv) review Government decisions issued between 1992 and 2012 which granted areas for carrying out exploration, mining operations and construction of facilities for the Kumtor Project; and (v) develop and submit amendments to laws on biosphere territories and prevention of damage to glaciers. The Draft Resolution also recommends that the Government review allegations that Kumtor has understated reserves of silver, tellurium and other elements. The Draft Resolution calls for the Government to report on the fulﬁ llment of the recommendations contained in the State Commission Report and the Parliamentary resolution by June 1, 2013. While it is not certain that Parliament will pass the Draft Resolution in its current form, Centerra is reviewing the provisions of the Draft Resolution and will respond to any ﬁ nal Parliamentary resolution accordingly. While Centerra believes that the ﬁ ndings of the State Commission Report are without merit and that the Kumtor Project Agreements between Centerra and the Kyrgyz Republic are legal, valid and enforceable obligations, there can be no assurance that the Company will be able to successfully resolve any or all of these matters currently affecting the Kumtor Project. There can also be no assurances that the Kyrgyz Republic Government and/or Parliament will not take actions that are inconsistent with the Kyrgyz Republic obligations under the Kumtor Project Agreements or cancel government decrees, orders or licenses under which Kumtor currently operates. Any such actions could have a material adverse impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. See “Other Corporate Developments – Kyrgyz Republic – State Commission Activities” for additional information regarding the State Commission. The purported cancellation of Kumtor’s land use rights could adversely impact the Kumtor operations As contemplated in Resolution 2117-V, on July 5, 2012 the Kyrgyz Government cancelled Government Decree #168, which provided Kumtor with land use rights over the surface of the Kumtor concession area for the duration of the Restated Concession Agreement. A related land use certiﬁ cate issued by the local land ofﬁ ce was also cancelled. In the third quarter of 2012, Kumtor requested the issuance of a new land use certiﬁ cate pursuant to the Restated Investment Agreement dated June 6, 2009 between Centerra and the Kyrgyz Republic. Under the Restated Investment Agreement, the Kumtor project is guaranteed all necessary access to the Kumtor concession area, including all surface lands as is necessary or desirable for the operation of the Kumtor project. The Restated Investment Agreement also provides that the Kyrgyz Government shall use its best efforts to reserve or cancel any action that conﬂ icts with the Company’s rights under that agreement. Although Centerra believes, based on advice from Kyrgyz legal counsel, that the purported cancellation of Kumtor’s land rights is in violation of the Kyrgyz Republic Land Code and the Restated Investment Agreement, there can be no assurance that cancellation of Kumtor’s land rights will not be upheld and enforced by the Kyrgyz Government. If Kumtor’s land rights are cancelled, it could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. 2012 ANNUAL REPORT 65 Centerra_Financials.indd 65 Apr/01/2013 1:28 PM The Water and Forest Law could result in the revocation of the Company’s mineral licenses in Mongolia In July 2009, the Mongolian Parliament passed the Water and Forest Law, which would have the effect of revoking any issued licenses covering such areas. The legislation provides a speciﬁ c exemption for “mineral deposits of strategic importance”, and accordingly, the Company expects that the main Boroo mining licenses will not be subject to the Water and Forest Law. The Company’s Gatsuurt licenses and its other exploration license holdings in Mongolia including the ARO licenses are currently not so exempt. The revocation of the Company’s mining or exploration licenses in Mongolia under the Water and Forest Law could have a signiﬁ cant material adverse effect on Centerra’s future cash ﬂ ows, earnings, results of operations, stated mineral reserves and ﬁ nancial conditions. The government of Mongolia has the right to take up to a 51% interest in certain mineral deposits In 2006, the Mongolian Parliament passed the Minerals Law that, among other things, empowers Parliament to designate mineral deposits that have a potential impact on national security, economic and social development or deposits that have a potential of producing above 5% of the country’s GDP as deposits of strategic importance. The state may take up to a 51% interest in the exploitation of a minerals deposit of strategic importance where state funded exploration was used to determine proven mineral reserves and up to a 34% interest in an investment to be made by a license holder in a mineral deposit of strategic importance where proven reserves were determined through funding sources other than the state budget. The designation of any of the Company’s mineral deposits in Mongolia as deposits of strategic importance under the Minerals Law and a decision by the Mongolian Government to take an interest in any of Centerra’s deposits could have a signiﬁ cant material adverse effect on Centerra’s future cash ﬂ ows, earnings, results of operations, stated reserves and ﬁ nancial conditions. The royalty payment for Centerra’s Mongolian operations may increase signiﬁ cantly In November 2010, the Mongolian Parliament also passed amendments to the Minerals Law of Mongolia that modiﬁ ed the existing royalty structure on mineral projects. Pursuant to the amended royalty structure, the royalty rate is no longer a ﬁ xed percentage but is graduated and dependent upon the commodity price in US dollars. In the case of gold, there is a basic 5% royalty fee that applies while gold is less than $900 per ounce. For any increase of $100 to the price of gold, there is a corresponding 1% increase to the royalty fee. Accordingly, at $900 per ounce, the royalty fee increases to 6%, at $1,000 per ounce, the royalty increases to 7%, at $1,100 per ounce, the royalty increases to 8%, and at $1,200, the royalty increases to 9%. The highest royalty fee rate is 10% when the price of gold is $1,300 per ounce and above. The graduated royalty became effective as of January 1, 2011 for all mining projects in Mongolia. On January 19, 2011, the Standing Committee of the State Great Hural of Mongolia issued a Direction to the Government which, among other things, resolved to direct the Mongolian Government to enter into negotiations to have the graduated royalty structure apply to business entities that have already entered into a stability agreement and/or an investment agreement. This would include the Company’s Boroo project which is currently operating pursuant to a stability agreement entered with the Mongolian government. The Company is of the opinion that the Boroo stability agreement provides, among other things, legislative stabilization for its Boroo operations and accordingly the graduated royalty fee is not applicable to Boroo’s remaining operations. The Company is of the opinion that the Boroo Stability Agreement (which remains in effect until July 2013) affords Boroo protection against the new laws described above (until July 2013), but Centerra’s Gatsuurt project and its ATO deposit do not have any such beneﬁ ts. Centerra was previously in discussions with the Government of Mongolia to obtain an investment agreement for the development and mining of the Gatsuurt project which would stabilize the tax regime applicable to Gatsuurt, and including whether such new mineral laws will apply to Gatsuurt. However, in April 2010, the MMRE indicated to Centerra that further discussions and negotiations with respect to any investment agreement would be postponed until the MMRE received clariﬁ cation on the application of the Water and Forest Law on the Gatsuurt project. Even if the Water and Forest Law matters were resolved, there can be no assurance that any negotiations will be successful. In addition, Centerra holds other exploration and mining licenses in Mongolia which are not subject to the Boroo Stability Agreement and which may not be subject to any investment agreement to be entered into for Gatsuurt, and therefore these exploration and mining licenses may become subject to such new Mongolian mining laws. 66 CENTERRA GOLD INC. Centerra_Financials.indd 66 Apr/01/2013 1:28 PM The imposition of the new graduated royalty regime on any of the Company’s operations in Mongolia could have a signiﬁ cant material adverse effect on Centerra’s future cash ﬂ ows, earnings, results of operations, stated mineral reserves and ﬁ nancial conditions. The Company’s operations at the Boroo project have been subject to scrutiny from Mongolian regulatory authorities On June 12, 2009, the main operating licenses at the Company’s Boroo project were suspended by the MRAM following extensive inspections of the Boroo mine operation conducted by the SSIA. In its report, the SSIA expressed its view that a number of deﬁ ciencies existed at the Boroo project. After discussions with both the MRAM and the SSIA, the suspension of the operating licenses was lifted on July 27, 2009. Despite the lifting of the suspension, several issues arising from the inspections continue to be discussed by Centerra and the Mongolian regulatory authorities. In January 2012, these issues were resolved and Centerra paid a settlement of approximately $2.6 million in response to claims for compensation received by the SSIA. The SSIA inspections in 2009 also raised a concern about the production and sale of gold from the Boroo heap leach facility. The heap leach facility was operated under a temporary permit from June 2008 until the expiry of the temporary permit in April, 2009 and paid all relevant royalties and taxes with respect to gold produced from the heap leach facility during that period. Mongolian regulatory approval for the mine plan for Boroo’s heap leach facility was not granted until September 19, 2012, at which time heap leach operations resumed at Boroo. Although issues arising from the SSIA inspections in 2009 have been resolved and Mongolian regulatory approvals have been received for Boroo’s heap leach facility, there can be no assurance that future scrutiny from Mongolian regulatory authorities, or delay in permitting or licensing aspects of the Boroo project, will not occur. Such developments could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations, stated mineral reserves and ﬁ nancial condition. If the environmental laws and regulations relating to the Company’s operations were to change, or the enforcement of such laws and regulations were to become more rigorous, the Company could be required to incur signiﬁ cant capital and operating expenditures The Company is subject to environmental regulation in connection with the Company’s exploration, development and operation activities in each of the jurisdictions in which it operates. The ﬁ nancial and operational effects of the Company’s environmental protection requirements relate primarily to the Company’s operations in the Kyrgyz Republic, where it operates the Kumtor project, and in Mongolia, where it operates the Boroo project, and has a 100% interest in the both the Gatsuurt, ATO and Ulaan Bulag exploration and development properties. Local regulatory regimes in the Kyrgyz Republic and Mongolia may be inﬂ uenced by increased local community concern in respect of the environmental footprint of mining operations as well as concerns over the management of water resources. If the environmental laws and regulations relating to the Company’s operations, including its operations in the Kyrgyz Republic and Mongolia, were to change, or the enforcement of such laws and regulations were to become more rigorous, the Company could be required to incur signiﬁ cant capital and operating expenditures to comply, which could have a material adverse effect on the Company’s ﬁ nancial position. See “Other Corporate Developments – Kyrgyz Republic – State Commission Activities” for recent environmental claims in respect of the Kumtor Project. Centerra may not be able to successfully negotiate an investment agreement for Gatsuurt There can be no assurance that Centerra will be able to successfully negotiate with the Government of Mongolia a mutually acceptable investment agreement for the development and operation of the Gatsuurt project. While there is no legal requirement for an investment agreement to be executed before Centerra commences development and mining operations at Gatsuurt, management of the Company believes that it is important for the viability of the project. Negotiations in 2010 regarding the Gatsuurt investment agreement were stopped in April 2010 when the Company received a letter from the MMRE indicated that the Gatsuurt licenses were within the area designated, on a preliminary basis, as land where mineral mining is prohibited under the Water and Forest Law, and that the MMRE would communicate with the Company further on negotiations with respect to an investment agreement for the Gatsuurt project once the MMRE received additional clarity on the impact of the Water and Forest Law on the Gatsuurt project. 2012 ANNUAL REPORT 67 Centerra_Financials.indd 67 Apr/01/2013 1:28 PM Centerra may not be able to obtain all necessary permits and commissions for Gatsuurt Mining activities at Gatsuurt is subject to Centerra obtaining from the Government of Mongolia the necessary permits and commissions. There are no assurances that the Mongolian Government will grant such permits and commissions to Centerra in a timely manner or at all, and on terms acceptable to Centerra. While the Company did receive several permits during the course of 2010 in relation to the Gatsuurt project, in November 2010, the Company received a letter from Mongolia’s Ministry of Finance indicating that operations at the Gatsuurt project cannot be commenced while the implementation of the Water and Forest Law is being resolved. Accordingly, further approvals and commissioning of Gatsuurt will be delayed as a result of the Water and Forest Law. Centerra’s inability to develop and operate the Gatsuurt project could have an adverse effect on its future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. OPERATIONAL Centerra may experience further ground movements at the Kumtor project On July 8, 2002, a highwall ground movement at the Kumtor project resulted in the death of one of Centerra’s employees and the temporary suspension of mining operations. The movement led to a considerable shortfall in 2002 gold production because the high-grade Stockwork Zone was rendered temporarily inaccessible. Consequently, Centerra milled lower grade ore and achieved lower recovery rates. In February 2004, movement was also detected in the southeast wall of the open pit and a crack was discovered at the crest of the wall. In February 2006, there was further movement detected in the southeast wall of the open pit. In July 2006, there was ground movement in the northeast wall of the open pit that required the adoption of a new mining sequence at Kumtor and resulted in lower than anticipated gold production in 2006. In the ﬁ rst quarter of 2007, minor slope movement was detected in the waste dump above the SB Zone highwall in the Central pit. Deformation cracks in the waste rock above the till focused attention on wall instability seated in the glacial till between the waste dumps and the underlying bedrock. Drilling has indicated that further push backs of the Central pit will encounter unfrozen, water saturated till. The outer face of the till is frozen and hence the water behind the slope face is pressurized. The depressurization and dewatering programs which were established at the mine in 2008 and continuously operated since, have reduced the hydrological content of the waste dump and the till. Although extensive efforts are employed by Centerra to prevent further ground movement, there is no guarantee against such movements. A future ground movement could result in a signiﬁ cant interruption of operations. Centerra may also experience a loss of mineral reserves or a material increase in costs, if it is necessary to redesign the open pit as a result of a ground movement. The consequences of a ground movement will depend upon the magnitude, location and timing of any such movement. If mining operations are interrupted to a signiﬁ cant magnitude or the mine experiences a signiﬁ cant loss of mineral reserves or materially higher costs of operation, this would have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra will experience further waste and ice movement at the Kumtor project Continued movement of waste and ice from the Southeast Ice Wall into the Kumtor Central pit above the high grade SB Zone section requires the mining of ice and waste to maintain Centerra’s planned production of ore. While management has developed a plan to manage this movement (which plans have seen positive results in 2011 and in 2012), there is no guarantee that these efforts will avert further negative impact on the Company’s expected production, costs and earnings. During 2012, a substantial acceleration of ice and waste movement, which was exacerbated by a 10-day illegal strike which occurred in early February 2012, required Centerra to revise its mine plan to maintain safe access to the Kumtor Central pit. Under the new mine plan, mining of cut-back 12B, where ore for the second quarter of 2012 was to be released, was stopped to permit stripping of ice and waste in the southwest portion of the pit (cut-back 14B) and unloading of ice and waste material from the High Movement Area to provide access to the southeast section of the Kumtor Central pit. The changes to the mine plan and the delayed release of ore from cut-back 12B resulted in a seven week shutdown of the Kumtor mill and required Centerra to revise its 2012 production and cost guidance. 68 CENTERRA GOLD INC. Centerra_Financials.indd 68 Apr/01/2013 1:28 PM Although extensive efforts are being employed by Centerra to manage further waste and ice movements, there is no guarantee that such efforts will be successful or that further waste and ice movements will not adversely affect operations at the Kumtor project. Future movements could result in a signiﬁ cant interruption of operations or impede access to ore deposits. Centerra may also experience a loss of mineral reserves or a material increase in costs if it is necessary to redesign the open pit and surrounding infrastructure as a result of waste and ice movements. The consequences of further waste and ice movement into the Kumtor Central pit will depend upon the extent, location and timing of any such movement. If mining operations are interrupted to a signiﬁ cant magnitude or the mine experiences a signiﬁ cant loss of mineral reserves or materially higher costs of operation, this would have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra’s future exploration and development activities may not be successful Exploration for and development of gold properties involve signiﬁ cant ﬁ nancial risks and may be subject to political risks that even a combination of careful evaluation, experience and knowledge may not eliminate. While the discovery of an orebody may result in substantial rewards, few properties that are explored are ultimately developed into producing mines. Major expenses may be required to establish mineral reserves by drilling, constructing mining and processing facilities at a site, connecting to a reliable infrastructure, developing metallurgical processes and extracting gold from ore. Centerra cannot ensure that its current exploration and development programs will result in proﬁ table commercial mining operations or replacement of current production at existing mining operations with new mineral reserves. Also, substantial expenses may be incurred on exploration projects that are subsequently abandoned due to poor exploration results or the inability to deﬁ ne mineral reserves that can be mined economically. Centerra’s ability to sustain or increase present levels of gold production is dependent on the successful acquisition or discovery and development of new orebodies and/or expansion of existing mining operations. The economic feasibility of development projects is based upon many factors, including the accuracy of mineral reserve estimates; metallurgical recoveries; capital and operating costs; government regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting and environmental protection; and gold prices, which are highly volatile. Development projects are also subject to the successful completion of feasibility studies, issuance of necessary governmental permits and availability of adequate ﬁ nancing. Development projects have no operating history upon which to base estimates of future cash ﬂ ow. Estimates of proven and probable mineral reserves and cash operating costs are, to a large extent, based upon detailed geological and engineering analysis. Centerra also conducts feasibility studies that derive estimates of capital and operating costs based upon many factors, including anticipated tonnage and grades of ore to be mined and processed; the conﬁ guration of the orebody; ground and mining conditions; expected recovery rates of the gold from the ore; and anticipated environmental and regulatory compliance costs. It is possible that actual costs and economic returns of current and new mining operations may differ materially from Centerra’s best estimates. It is not unusual for new mining operations to experience unexpected problems during the start-up phase and to require more capital than anticipated. These uncertainties could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Gold mining is subject to a number of operational risks Centerra’s business is subject to a number of risks and hazards, including: • environmental pollution, accidents or spills; • industrial and transportation accidents; • unexpected labour shortages, disputes or strikes; • cost increases for contracted and/or purchased goods and services; • shortages of required materials and supplies; • supply chain disruptions; • electrical power interruptions; • mechanical and electrical equipment failure; • changes in the regulatory environment; Centerra_Financials.indd 69 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 69 • natural phenomena, such as inclement weather conditions, ﬂ oods, earthquakes, pit wall failures, tailings dam failures and cave-ins; • encountering unusual or unexpected climatic conditions that may or may not result from global warming; and • encountering unusual or unexpected geological conditions. While Centerra takes measures to mitigate the foregoing risks and hazards, there is no assurance that these risks and hazards will not result in damage to, or destruction of, Centerra’s gold properties, personal injury or death, environmental damage, delays in or interruption of or cessation of production from Centerra’s mines or in its exploration or development activities, costs, monetary losses and potential legal liability and adverse community and/or governmental action, all of which could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra may not be adequately insured for certain risks Although Centerra maintains insurance to cover some of the operational risks and hazards in amounts it believes to be reasonable, insurance may not provide adequate coverage in all circumstances. No assurance can be given that insurance will continue to be available at economically feasible premiums or that it will provide sufﬁ cient coverage for losses related to these or other risks and hazards. Centerra may also be subject to liability or sustain losses in relation to certain risks and hazards against which it cannot insure or for which it may elect not to insure. The occurrence of operational risks and/or a shortfall or lack of insurance coverage could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra may experience mechanical breakdowns Centerra’s gold production operations at Kumtor and Boroo use expensive, large mining and processing equipment that requires a long time to procure, build and install. Although Centerra conducts extensive maintenance programs at Kumtor and Boroo, there can be no assurance that it will not experience mechanical breakdowns of mining and processing equipment. In the past, Centerra has experienced such mechanical breakdowns. In February 2008, an unplanned shutdown of the ball mill at Kumtor was required to temporarily repair the ring gear which had failed. The repair was completed in late March 2008 and the ball mill returned to full operation. A new gear was ordered from the original supplier of the mill. In order to limit the impact which a shutdown would have on production, the installation of the new gear was carried out in April 2010 when only low-grade mill feed was being processed. In February 2009, the SAG mill at the Kumtor mill also experienced a similar mechanical breakdown of the girth gear with the failure of two teeth. A spare girth gear was installed immediately. A replacement for the damaged quadrant of the girth gear was manufactured and returned to Kumtor stock in October 2010. In May 2011, Boroo experienced a failure of the SAG mill exciter that resulted in interruption to production for a period of nine days and reduced production for a further three weeks. Equipment specialists were brought in to assist in repairs, and spare components were purchased. In December 2012, Boroo experienced a failure of the SAG mill motor resulting in a two-day interruption to production before a plan to bypass the SAG mill was implemented. Boroo is continuing to work on risk prevention and mitigation actions in this regard. Any extended breakdown in mining or processing equipment could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial conditions. There is currently a capacity shortfall of the tailings management facility at Kumtor The Kumtor tailings dam design is currently approved by the Kyrgyz authorities to elevation 3,670.5 metres. The dam crest is presently at elevation 3,664 metres. Kumtor is required to apply and obtain permits from the Kyrgyz Government from time-to-time to address interim raising and construction activities. The next tailings dam raising is scheduled for 2013. In addition, the currently permitted tailings management facility does not have sufﬁ cient capacity to store the entire approximate 93 million tonnes of ore to be processed in the current life-of-mine plan. The capacity shortfall of approximately 50 million tonnes of ore or 33 million cubic metres of tailings will require further raising of the existing tailings dam beyond the 3,670.5 metres elevation, or the construction of an additional tailings facility to be completed prior to 2020. 70 CENTERRA GOLD INC. Centerra_Financials.indd 70 Apr/01/2013 1:28 PM While the Company has obtained the necessary permits and authorizations in the past in connection with tailings dam raises, there are no assurances that such permits and authorizations can be obtained in the future or obtained in the timeframe required by the Company. If all necessary permits and authorizations are not obtained, delays in, or interruptions or cessation of Centerra’s production from the Kumtor project may occur, which may have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations or ﬁ nancial condition. Centerra may also be subject to liability or sustain losses in relation to certain risks and hazards against which it cannot insure or for which it may elect not to insure. The occurrence of operational risks and/or a shortfall or lack of insurance coverage could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra’s mineral reserves may not be replaced The Kumtor and Boroo projects are currently Centerra’s only sources of gold production. Based on the current life-of-mine plan, Kumtor will be depleted by 2023, with milling operations concluding in 2026. At Boroo, mining ceased as of the end of November 2010, and at the current reserve gold price assumption of US$1,350 per ounce, the Boroo operation can continue to feed the mill from stockpiles for approximately 2 more years and operate and recover gold from the heap leach through 2014. If Centerra’s existing mineral reserves (including mineral reserves at the Gatsuurt deposit in Mongolia) are not replaced either by the development or discovery of additional reserves and/or extension of the life-of-mine at Kumtor or Boroo or through the acquisition or development of an additional producing mine, this could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition, including as a result of requirements to expend funds for reclamation and decommissioning. Although Centerra is actively engaged in programs to increase mineral reserves and expand the life-of-mine at Kumtor, as well as to develop and mine the Gatsuurt and ATO deposits in Mongolia, there can be no assurance that these programs will be successful. Both the Kumtor Project and the Boroo Projects are unionized and may be subject to labour disturbances Non-management employees at Kumtor and Boroo (including those in head ofﬁ ce) are unionized and subject to collective agreements. At Kumtor, the current collective bargaining agreement will continue in effect until December 31, 2014. At Boroo, the collective bargaining agreement expires on June 30, 2014. There can be no assurance that, when such agreements expire, there will not be any delays in the renewal process, that negotiations will not prove difﬁ cult or that Centerra will be able to renegotiate the collective agreement on satisfactory terms, or at all. The renewal of the collective agreement could result in higher on-going labor costs, which could have a material adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra could be subject to labour unrest or other labour disturbances including strikes as a result of any failure of negotiations which could, while ongoing, have a material adverse impact on Centerra, including the achievement of any annual production guidelines and costs estimates. On February 6, 2012, unionized employees at the Kumtor Project began a 10-day illegal strike during which operations at the mine were suspended. The illegal work stoppage related to a dispute regarding social fund deductions, which resulted in higher labour costs of approximately $2 million (for 2012). Existing collective agreements may not prevent a strike or work stoppage, and any such work stoppage could have a material adverse impact on Centerra. Centerra’s operations in the Kyrgyz Republic and Mongolia are located in areas of seismic activity The areas surrounding both Centerra’s Kumtor project and Boroo project are seismically active. While the risks of seismic activity were taken into account when determining the design criteria for Centerra’s Kumtor and Boroo operations, there can be no assurance that Centerra’s operations will not be adversely affected by this kind of activity, all of which could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra_Financials.indd 71 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 71 Centerra’s properties are located in remote locations and require a long lead time for equipment and supplies Centerra operates in remote locations and depends on an uninterrupted ﬂ ow of materials, supplies and services to those locations. In addition, each of Kumtor and Boroo use expensive, large equipment that requires a long time to procure, build and install. Any interruptions to the procurement of equipment, or the ﬂ ow of materials, supplies and services to Centerra’s properties could have an adverse impact on its future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Access to the Kumtor project has been restricted on several occasions by illegal roadblocks. Centerra’s operations may be impacted by supply chain disruptions Centerra operations depend on uninterrupted supply of key consumables, equipment and components. Both the Kyrgyz and Mongolian operations are limited with respect to alternative suppliers of fuel, and any disruption at supplier facilities could result in curtailment or suspension of operations. In addition, major equipment and components and certain key consumables are imported, and any disruption in the transportation of these goods or the imposition of customs clearance requirements may result in production delays. Illegal mining has occurred and may continue to occur, on Centerra’s Mongolian properties Illegal mining is widespread in Mongolia. Illegal miners have and may continue to trespass on Centerra’s properties and engage in very dangerous practices, including climbing inside caves and old exploration shafts without any safety devices. Centerra is unable to continuously monitor the full extent of its exploration and operating properties. The presence of illegal miners could also lead to project delays and disputes regarding the development or operation of commercial gold deposits, including disputes with Mongolian governmental authorities regarding reporting of reserves and mine production. The illegal activities of these miners could cause environmental damage (including environmental damage from the use of mercury by these miners) or other damage to Centerra’s properties or personal injury or death, for which Centerra could potentially be held responsible, all of which could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra faces substantial decommissioning and reclamation costs At each of Centerra’s mine sites, Centerra is required to establish a decommissioning and reclamation plan. Provision must be made for the cost of decommissioning and reclamation. These costs can be signiﬁ cant and are subject to change. Centerra cannot predict what level of decommissioning and reclamation may be required in the future by regulators. If Centerra is required to comply with signiﬁ cant additional regulations or if the actual cost of future decommissioning and reclamation is signiﬁ cantly higher than current estimates, this could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra’s success depends on its ability to attract and retain qualiﬁ ed personnel Recruiting and retaining qualiﬁ ed personnel is critical to Centerra’s success. The number of persons skilled in the acquisition, exploration and development of mining properties is limited and competition for such persons is intense. As Centerra’s business activity grows, it will require additional key ﬁ nancial, administrative and mining personnel as well as additional operations staff. The Restated Concession Agreement relating to Centerra’s Kumtor operations also requires two thirds of all administrative or technical personnel to be citizens of the Kyrgyz Republic. However, it has been necessary to engage expatriate workers for Centerra’s operations in Mongolia and, to a lesser extent, the Kyrgyz Republic because of the shortage of locally trained personnel. Although Centerra believes that it will be successful in attracting, training and retaining qualiﬁ ed personnel, there can be no assurance of such success. If Centerra is not successful in attracting and training qualiﬁ ed personnel, the efﬁ ciency of its operations could be affected, which could have an adverse impact on its future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Further, the uncertainty surrounding Centerra’s ability to develop the Gatsuurt deposit and prolong operations in Mongolia has increased the risk of personnel departures. This risk is heightened by the increased presence of new companies in the country seeking qualiﬁ ed personnel. 72 CENTERRA GOLD INC. Centerra_Financials.indd 72 Apr/01/2013 1:28 PM Centerra’s future prospects may suffer due to enhanced competition for mineral acquisition opportunities Signiﬁ cant and increasing competition exists for mineral acquisition opportunities throughout the world. As a result of this competition, some of which is with large, better established mining companies with substantial capabilities and greater ﬁ nancial and technical resources, Centerra may be unable to acquire rights to exploit additional attractive mining properties on terms it considers acceptable. Accordingly, there can be no assurance that Centerra will acquire any interest in additional operations that would yield mineral reserves or result in commercial mining operations. Centerra’s inability to acquire such interests could have an adverse impact on its future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Even if Centerra does acquire such interests, the resultant business arrangements may not ultimately prove beneﬁ cial to Centerra’s business. Centerra may experience difﬁ culties with its joint venture partners Centerra has a number of joint venture partners and it may in the future enter into additional joint ventures. Centerra is subject to the risks normally associated with the conduct of joint ventures. These risks include disagreement with a joint venture partner on how to develop, operate and ﬁ nance a project and possible litigation between Centerra and a joint venture partner regarding joint venture matters. This may be particularly the case when we are not operating the joint venture. These matters may have an adverse effect on Centerra’s ability to pursue the projects subject to the joint venture, which could affect its future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. FINANCIAL Centerra’s business is sensitive to the volatility of gold prices Centerra’s revenue is largely dependent on the world market price of gold. Gold prices are subject to volatile movements over time and are affected by numerous factors beyond Centerra’s control. These factors include: global supply and demand; central bank lending, sales and purchases; expectations for the future rate of inﬂ ation; the level of interest rates; the strength of, and conﬁ dence in, the U.S. dollar; market speculative activities; and global or regional political and economic events, including the performance of Asia’s economies. If the market price of gold falls and remains below production costs of any of Centerra’s mining operations for a sustained period, losses would be sustained, and, under certain circumstances, there may be a curtailment or suspension of some or all of Centerra’s mining and exploration activities. Centerra would also have to assess the economic impact of any sustained lower gold prices on recoverability and, therefore, the cutoff grade and level of Centerra’s gold mineral reserves and resources. These factors could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations, stated mineral reserves and ﬁ nancial condition. Centerra’s mineral reserve and resource estimates may be imprecise Mineral reserve and resource ﬁ gures are estimates and no assurances can be given that the indicated levels of gold will be produced or that Centerra will receive the price assumed in determining its mineral reserves. These estimates are expressions of judgment based on knowledge, mining experience, analysis of drilling results and industry practices. Valid estimates and the assumptions such estimates rely on made at a given time may signiﬁ cantly change when new information becomes available. While Centerra believes that the mineral reserve and resource estimates included are well established and reﬂ ect management’s best estimates, by their nature mineral reserve and resource estimates are imprecise and depend, to a certain extent, upon analysis of drilling results and statistical inferences that may ultimately prove unreliable. Furthermore, ﬂ uctuations in the market price of gold, as well as increased capital or production costs or reduced recovery rates may render ore reserves uneconomic and may ultimately result in a reduction of reserves. The extent to which mineral resources may ultimately be reclassiﬁ ed as proven or probable mineral reserves is dependent upon the demonstration of their proﬁ table recovery. The evaluation of mineral reserves or resources is always inﬂ uenced by economic and technological factors, which may change over time. No assurances can be given that any mineral resource estimate will ultimately be reclassiﬁ ed as proven or probable mineral reserves. If Centerra’s mineral reserve or resource ﬁ gures are inaccurate or are reduced in the future, this could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. 2012 ANNUAL REPORT 73 Centerra_Financials.indd 73 Apr/01/2013 1:28 PM Centerra’s production and cost estimates may be inaccurate Centerra prepares estimates of future production and future production costs for particular operations. No assurance can be given that production and cost estimates will be achieved. These production and cost estimates are based on, among other things, the following factors: the accuracy of mineral reserve estimates; the accuracy of assumptions regarding ground conditions and physical characteristics of ores, such as hardness and presence or absence of particular metallurgical characteristics; equipment and mechanical availability; labour availability; access to the mine; facilities and infrastructure; sufﬁ cient materials and supplies on hand; and the accuracy of estimated rates and costs of mining and processing, including the cost of human and physical resources required to carry out Centerra’s activities. Failure to achieve production or cost estimates, or increases in costs, could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra’s estimates on production and costs are, where applicable, based on historical costs and productivity experience. Despite this, actual production and costs may vary from estimates for a variety of reasons, including actual ore mined varying from estimates of grade, tonnage, dilution and metallurgical and other characteristics; short-term operating factors relating to the ore reserves, such as the need for sequential development of ore bodies and the processing of new or different ore grades; risks and hazards associated with mining; natural phenomena, such as inclement weather conditions, ﬂ oods, earthquakes, pit wall failures and cave-ins; and unexpected labour shortages or strikes, and civil action. Costs of production may also be affected by a variety of factors, including: changing waste-to-ore ratios, ore grade metallurgy, labour costs, costs of supplies and services (such as, for example, fuel and power), general inﬂ ationary pressures and currency exchange rates. Failure to achieve production estimates could have an adverse impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Restrictive covenants in Centerra’s revolving credit facility may prevent the Company from pursuing business activities Pursuant to Centerra’s Credit Facility, the Company must maintain certain ﬁ nancial ratios and satisfy other non- ﬁ nancial maintenance covenants. The Company and its material subsidiaries are also subject to other restrictive and afﬁ rmative covenants in respect of their respective operations. Compliance with these covenants and ﬁ nancial ratios may impair the Company’s ability to ﬁ nance its future operations or capital needs or to take advantage of other favourable business opportunities. The Company’s ability to comply with these covenants and ﬁ nancial ratios will depend on its future performance, which may be affected by events beyond the control of the Company. The Company’s failure to comply with any of these covenants or ﬁ nancial ratios will result in a default under the Credit Agreement and may result in the acceleration of any indebtedness under the Credit Agreement. In the event of a default and Centerra is unable to repay any amounts then outstanding, the lender, EBRD may be entitled to take possession of the collateral securing the Credit Facility, including certain mobile equipment used in the operations at Kumtor to the extent required to repay those borrowings. Centerra may experience reduced liquidity and difﬁ culty in obtaining future ﬁ nancing The further development and exploration of mineral properties in which Centerra holds or acquires interests may depend upon its ability to obtain ﬁ nancing through joint ventures, debt ﬁ nancing, equity ﬁ nancing or other means. While the Company successfully negotiated a three-year $150 million revolving credit facility in 2010, there is no assurance that Centerra will be successful in obtaining required ﬁ nancing as and when needed in the future. Volatile gold markets and/or capital markets, reduced global ﬁ nancial liquidity, and increased restrictions on capital reserves of ﬁ nancial institutions, may make it difﬁ cult or impossible for Centerra to obtain further debt ﬁ nancing or equity ﬁ nancing on favourable terms or at all. Centerra’s principal operations are located in, and its strategic focus is on, Asia and the former Soviet Union, developing areas that have experienced past economic and political difﬁ culties and may be perceived as unstable. This may make it more difﬁ cult for Centerra to obtain further debt ﬁ nancing. Failure to obtain additional ﬁ nancing on a timely basis may cause Centerra to postpone development plans, forfeit rights in its properties or joint ventures or reduce or terminate its operations. Reduced liquidity or difﬁ culty in obtaining future ﬁ nancing could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. 74 CENTERRA GOLD INC. Centerra_Financials.indd 74 Apr/01/2013 1:28 PM Global ﬁ nancial conditions The ﬁ nancial crisis which began in the latter part of 2007 has resulted in global ﬁ nancial conditions which are characterized by continued high volatility, and ﬁ nancial institutions are still recovering from signiﬁ cant losses. Access to public ﬁ nancing and bank credit has been negatively impacted by both the rapid decline in value of sub-prime mortgages and the resulting liquidity crisis as ﬁ nancial institutions saw their balance sheet impaired. Notwithstanding some improvement in the ﬁ nancial health of major ﬁ nancial institutions, global ﬁ nancial conditions may affect Centerra’s ability to obtain equity or debt ﬁ nancing in the future on favourable terms. Additionally, these factors, as well as other related factors, may cause decreases in Centerra’s asset values that may be other than temporary, which may result in impairment losses. These factors may also increase the Company’s exposure to ﬁ nancial counterparty risk. If such increased levels of volatility and market turmoil continue, or if more extensive disruptions of the global ﬁ nancial markets occur, Centerra’s operations could be adversely impacted and the trading price of Centerra’s common shares may be adversely affected. Currency ﬂ uctuations Centerra’s earnings and cash ﬂ ow may also be affected by ﬂ uctuations in the exchange rate between the U.S. dollar and other currencies, such as the Kyrgyz som, the Mongolian tugrik, the Canadian dollar and the Euro. Centerra’s consolidated ﬁ nancial statements are expressed in U.S. dollars. Its sales of gold are denominated in U.S. dollars, while production costs and corporate administration costs are, in part, denominated in Kyrgyz soms, Mongolian tugriks, Canadian dollars, Euros and other currencies. Fluctuations in exchange rates between the U.S. dollar and other currencies may give rise to foreign exchange currency exposures, both favourable and unfavourable, which may materially impact Centerra’s future ﬁ nancial results. Although Centerra from time to time enters into short-term forward contracts to purchase Canadian dollars and Euros, Centerra does not utilize a hedging program to limit the adverse effects of foreign exchange rate ﬂ uctuations in other currencies. In the case of the Kyrgyz som and the Mongolian tugrik, Centerra cannot hedge currency exchange risk because such currencies are not freely traded. Short-term investment risks The Company may from time to time invest excess cash balances in short-term instruments. Recent market conditions affecting certain types of short-term investments of some North American and European issuers as well as certain ﬁ nancial institutions have resulted in heightened risk in holding some of these investments. There can be no guarantee that further market disruptions affecting various short-term investments or the potential failure of ﬁ nancial institutions will not have a negative effect on the liquidity of investments made by the Company. As a holding company, Centerra’s ability to make payments depends on the cash ﬂ ows of its subsidiaries Centerra is a holding company that conducts substantially all of its operations through subsidiaries, many of which are incorporated outside North America. Centerra has no direct operations and no signiﬁ cant assets other than the shares of its subsidiaries. Therefore, Centerra is dependent on the cash ﬂ ows of its subsidiaries to meet its obligations, including payment of principal and interest on any debt Centerra incurs. The ability of Centerra’s subsidiaries to provide it with payments may be constrained by the following factors: (i) the cash ﬂ ows generated by operations, investment activities and ﬁ nancing activities; (ii) the level of taxation, particularly corporate proﬁ ts and withholding taxes, in the jurisdiction in which they operate and in Canada; and (iii) the introduction of exchange controls and repatriation restrictions or the availability of hard currency to be repatriated. If Centerra is unable to receive sufﬁ cient cash from its subsidiaries, it may be required to reﬁ nance its indebtedness, raise funds in a public or private equity or debt offering or sell some or all of its assets. Centerra can provide no assurances that an offering of its debt or equity or a reﬁ nancing of its debt can or will be completed on satisfactory terms or that it would be sufﬁ cient to enable it to make payment with respect to its debt. The foregoing events could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra_Financials.indd 75 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 75 ENVIRONMENT, HEALTH AND SAFETY Centerra is subject to environmental, health and safety risks Centerra expends signiﬁ cant ﬁ nancial and managerial resources to comply with a complex set of environmental, health and safety laws, regulations, guidelines and permitting requirements (for the purpose of this paragraph, “laws”) drawn from a number of different jurisdictions. Centerra believes it is in material compliance with these laws. Centerra anticipates that it will be required to continue to do so in the future as the historical trend toward stricter laws is likely to continue. The possibility of more stringent laws or more rigorous enforcement of existing laws exists in the areas of worker health and safety, the disposition of wastes, the decommissioning and reclamation of mining sites, restriction of areas where exploration, development and mining activities may take place and other environmental matters, each of which could have a material adverse effect on Centerra’s exploration activities, operations and the cost or the viability of a particular project. Centerra’s facilities operate under various operating and environmental permits, licenses and approvals that contain conditions that must be met and Centerra’s right to continue operating its facilities is, in a number of instances, dependent upon compliance with these conditions. Failure to meet certain of these conditions could result in interruption or closure of exploration, development or mining operations or material ﬁ nes or penalties, all of which could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra is unable to quantify the costs of such a failure. The Kumtor project is subject to signiﬁ cant claims of environmental damage In December 2012, Centerra received ﬁ ve claims from SEITS, the State Inspectorate Ofﬁ ce for Environmental and Technical Safety under the Government of the Kyrgyz Republic, relating to alleged environmental damages at the Kumtor project. The claims are for an aggregate amount of approximately $152 million and include: • a claim for approximately $142 million for alleged damages in relation to the placement on waste dumps of waste rock from mining operations (2000 to date) • a claim for approximately $4 million for use of water resources for the period of 2000 to date • a claim for approximately $2.8 million for waste placed in the tailings management facility and for emissions for 2009–2011, which claim has since been withdrawn; and • a claim for approximately $2.3 million for alleged damages caused to land resources at the time of initial construction of Kumtor. In addition, Centerra also received a directive from SEITS requiring that actions be taken to correct various alleged environmental and technical violations discovered in its review. While Centerra believes that the allegations contained in SEITS’ claims are exaggerated or without foundation and are subject to the Release Agreement between Centerra and the Kyrgyz Republic dated June 6, 2009, there can be no assurance that the claims of environmental damage from SEITS will not be upheld and enforced. If such claims should be upheld and enforced against Centerra, it could have an adverse impact on our future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. In addition, additional claims for alleged environmental violations may be forthcoming. Centerra’s heap leach operations could unintentionally discharge hazardous materials, such as sodium cyanide, into the environment The Kumtor and Boroo operations employ sodium cyanide, which is a hazardous material, to extract gold from ore. In addition, the Boroo operation uses heap leaching as a means of applying sodium cyanide to gold-bearing ore and collecting the resulting gold-bearing solution. There is inherent risk of unintended discharge of hazardous materials in the operation of leach pads. Should sodium cyanide escape from the leach pad and collection infrastructure at Boroo, otherwise be detected in the downstream surface and ground water points, or be spilled during transport, Centerra may become subject to liability for remediation costs, which could be signiﬁ cant and may not be insured against. In addition, production could be delayed or halted to allow for remediation, resulting in a reduction or loss of cash ﬂ ow for the Company. While Centerra takes appropriate steps to prevent discharges and spills of sodium cyanide and other hazardous materials into the ground water, surface water and the downstream environment, there is inherent risk in the operation of leach pads and there can be no assurance that a release of hazardous materials will not occur. 76 CENTERRA GOLD INC. Centerra_Financials.indd 76 Apr/01/2013 1:28 PM LEGAL AND OTHER Current and future litigation may impact the revenue and proﬁ ts of the Company The Company may, currently or in the future, be subject to claims (including the proceeding commenced by Sistem, class action claims and claims from government regulatory bodies) based on allegations of negligence, breach of statutory duty, public nuisance or private nuisance or otherwise in connection with its operations or investigations relating thereto. While the Company is presently unable to quantify its potential liability under any of the above categories of damage, such liability may be material to the Company and may materially adversely affect its ability to continue operations. In the proceeding commenced by Sistem, for example, Sistem is seeking to collect approximately US$11.2 million (plus interest) owed to it by the Kyrgyz Republic, by looking to enforce against the shares of Centerra held by Kyrgyzaltyn. See “Other Corporate Developments – Corporate Matters”. Centerra’s properties, including the Gatsuurt project, may be subject to defects in title Centerra has investigated its rights to explore and exploit all of its material properties, and, except as described below, to the best of its knowledge, those rights are in good standing. However, no assurance can be given that such rights will not be revoked or signiﬁ cantly altered to Centerra’s detriment. There can also be no assurance that Centerra’s rights will not be challenged or impugned by third parties, including local governments. On July 5, 2012, the Kyrgyz Government cancelled Government Decree #168, which provided Kumtor with land use (surface) rights over the Kumtor Concession Area for the duration of the Restated Concession Agreement. At the same time, the related land use certiﬁ cate issued by the local land ofﬁ ce was also cancelled. Based on advice from Kyrgyz legal counsel, Centerra believes that the purported cancellation of our land use rights is in violation of the Kyrgyz Republic Land Code, because the Land Code provides that land rights can only be terminated by court decision and on the listed grounds set out in the Land Code. To the extent that the land use rights are considered invalid (which we do not accept), the Company would seek to enforce its rights under the Restated Investment Agreement to obtain the reissuance of its land use rights, which are guaranteed pursuant to the Restated Investment Agreement. On December 6, 2006, Gatsuurt LLC commenced arbitration before the Mongolian National Arbitration Court (“MNAC”) alleging non-compliance by Centerra’s subsidiary, CGM, with its obligation to complete a feasibility study on the Gatsuurt property by December 31, 2005 and seeking the return of the license. Centerra believed that Gatsuurt LLC’s position was without merit. CGM challenged the MNAC’s jurisdiction and the independence and impartiality of the Gatsuurt LLC nominee to the arbitration panel. Centerra and Gatsuurt LLC have reached an agreement to terminate arbitration proceedings. Further to that agreement CGM paid $1.5 million to Gatsuurt LLC. On signing of a deﬁ nitive agreement, but subject to CGM having entered into an investment agreement with the Government of Mongolia in respect of the development of the Gatsuurt project, CGM will make a further non- refundable payment to Gatsuurt LLC in the amount of $1.5 million. Final settlement with Gatsuurt LLC is subject to the negotiation and signing of a deﬁ nitive settlement agreement. Although Centerra is not currently aware of any existing title uncertainties with respect to any of its properties except as discussed in the preceding paragraphs, there is no assurance that such uncertainties will not result in future losses or additional expenditures, which could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra may be unable to enforce its legal rights in certain circumstances In the event of a dispute arising at Centerra’s foreign operations, Centerra may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in Canada. Centerra may also be hindered or prevented from enforcing its rights with respect to a governmental entity or instrumentality because of the doctrine of sovereign immunity. The dispute resolution provisions of: (i) the Restated Investment Agreement and (ii) the Boroo Stability Agreement stipulate that any dispute between the parties thereto is to be submitted to international arbitration. However, there can be no assurance that a particular governmental entity or instrumentality will either comply with the provisions of these or any other agreements or voluntarily submit to arbitration. Centerra’s inability to enforce its rights could have an adverse effect on its future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. 2012 ANNUAL REPORT 77 Centerra_Financials.indd 77 Apr/01/2013 1:28 PM Centerra’s largest shareholder is a state-owned entity of the Kyrgyz Government Centerra’s largest shareholder is Kyrgyzaltyn, which is a state-owned entity, owns approximately 33% of the common shares of Centerra. Pursuant to the terms of the Restated Investment Agreement, Kyrgyzaltyn has two nominees on the board of directors of Centerra. There can be no assurance that the Kyrgyz Government, through its ownership and control of Kyrgyzaltyn, will not use its inﬂ uence to materially change the direction of the Company. This concentration of ownership may have the effect of delaying or preventing a change in control of Centerra, which may deprive Centerra’s shareholders of a control premium that might otherwise be offered in connection with such a change of control. The Company is aware that Kyrgyzaltyn has in the past received inquiries regarding the potential acquisition of some or all of its common shares and the sale by Kyrgyzaltyn of its shareholdings to a third party could result in a new purchasing shareholder obtaining a considerable interest in the Company. Should Kyrgyzaltyn sell some or all of its interest in Centerra, there can be no assurance that an offer would be made to the other shareholders of Centerra or that the interests of such a shareholder would be consistent with the plans of the Company or that such a sale would not decrease the value of the common shares. Centerra’s directors may have conﬂ icts of interest Certain of Centerra’s directors also serve as directors and/or ofﬁ cers of other companies involved in natural resource exploration, development and production and consequently there exists the possibility for such directors to be in a position of conﬂ ict. CAUTION REGARDING FORWARD-LOOKING INFORMATION Information contained in this Annual MD&A 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, the successful resolution of matters in the Kyrgyz Republic relating to the State Commission Report, including discussions with the Government working group formed to open negotiations on the Kumtor Project Agreements, the Kyrgyz Republic Parliament consideration of the Draft Resolution referred to under the heading “Other Corporate Developments – Kyrgyz Republic – State Commission Activities – Parliament Review and Draft Resolution”, the resolution of environmental claims for the aggregate amount of $152 million; statements made under the heading, “Gold Industry, Key Economics and Recent Market Uncertainty” regarding expectations in the gold industry, investor demand, and global ﬁ nancial markets; statements made under the heading “2013 Outlook”, including the Company’s future production, estimates of operating cash costs and all-in unit cash costs, exploration expenditures and the success thereof, capital expenditures; mining plans at each of the Company’s operations; the continued success with the management of the ice, waste and water movements at Kumtor; the outcome of discussions with the new Mongolian government on the way forward for the Company’s Gatsuurt deposit, the impact of the Water and Forest Law on the Company’s Mongolian activities; the Company’s business and political environment and business prospects; and the timing and development of new deposits. Forward-looking information is necessarily based upon a number of estimates and assumptions that, while considered reasonable by Centerra, are inherently subject to signiﬁ cant 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. Material assumptions used to forecast production and costs include those described under the heading “2013 Outlook”. Factors that could cause actual results or events to differ materially from current expectations include, among other things: (A) political and regulatory risks, including the political risks associated with the Company’s principal operations in the Kyrgyz Republic and Mongolia, resource nationalism, 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, the impact of any actions taken by the Kyrgyz Republic Government and Parliament as a result of the Kyrgyz State Commission on 78 CENTERRA GOLD INC. Centerra_Financials.indd 78 Apr/01/2013 1:28 PM Kumtor, any impact on the purported cancellation of Kumtor’s land use rights at the Kumtor Project, the effect of the Water and Forest Law on the Company’s operations in Mongolia, the effect of the 2006 Mongolian Minerals Law on the Company’s Mongolian operations, the effect of the November 2010 amendments to the 2006 Mongolian Minerals Law on the royalties payable in connection with the Company’s Mongolian operations, the impact of continued scrutiny from Mongolian regulatory authorities on the Company’s Boroo project, the impact of changes to, or the increased enforcement of, environmental laws and regulations relating to the Company’s operations, the Company’s ability to successfully negotiate an investment agreement for the Gatsuurt project to complete the development of the mine and the Company’s ability to obtain all necessary permits and commissions needed to commence mining activity at the Gatsuurt project; (B) risk related to operational matters, including the waste and ice movement at the Kumtor Project and the Company’s continued ability to successfully manage it, the occurrence of further ground movements at the Kumtor Project, the success of the Company’s future exploration and development activities, including the ﬁ nancial and political risks inherent in carrying out exploration activities, 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 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, 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 the Company’s 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 qualiﬁ ed personnel, competition for mineral acquisition opportunities, and risks associated with the conduct of joint ventures; (c) risks relating to ﬁ nancial matters including the 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 ﬁ nancing, the impact of global ﬁ nancial conditions, the impact of currency ﬂ uctuations, 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 ﬂ ow of its subsidiaries; and (d) risks related to environmental and safety matters, including the ability to continue obtaining necessary operating and environmental permits, licenses and approvals, the impact of the signiﬁ cant environmental claims made in December 2012 relating to the Kumtor Project, inherent risks associated with using sodium cyanide in the mining operations; legal and other factors such as litigation, defects in title in connection with the Company’s properties, the Company’s ability to enforce its legal rights, risks associated with having a signiﬁ cant shareholder, and possible director conﬂ icts of interest. There may be other factors that cause results, assumptions, performance, achievements, prospects or opportunities in future periods not to be as anticipated, estimated or intended. See “Risk Factors” in the Company’s most recently ﬁ led AIF available on SEDAR at www.sedar.com. Furthermore, market price ﬂ uctuations 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 reclassiﬁ ed as proven or probable reserves is dependent upon the demonstration of their proﬁ table recovery. Economic and technological factors which may change over time always inﬂ uence the evaluation of reserves or resources. Centerra has not adjusted mineral resource ﬁ gures in consideration of these risks and, therefore, Centerra can give no assurances that any mineral resource estimate will ultimately be reclassiﬁ ed as proven and probable reserves. Reserve and resource ﬁ gures included in this MD&A are estimates and Centerra can provide no assurances that the indicated levels of gold will be produced or that Centerra will receive the gold price assumed in determining its reserves. Such estimates are expressions of judgment based on knowledge, mining experience, analysis of drilling results and industry practices. Valid estimates made at a given time may signiﬁ cantly change when new information becomes available. While Centerra believes that these reserve and resource estimates are well established and the best estimates of Centerra’s management, by their nature reserve and resource estimates are imprecise and depend, to a certain extent, upon analysis of drilling results and statistical inferences which may ultimately prove unreliable. 2012 ANNUAL REPORT 79 Centerra_Financials.indd 79 Apr/01/2013 1:28 PM Centerra has not adjusted resource ﬁ gures included herein in consideration of these risks and, therefore, Centerra can give no assurances that any resource estimate will ultimately be reclassiﬁ ed as proven and probable reserves or incorporated into future production guidance. If Centerra’s reserve or resource estimates or production guidance for its gold properties are inaccurate or are reduced in the future, this could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Centerra estimates the future mine life of its operations and provides production guidance in respect of its mining operations. Centerra can give no assurance that mine life estimates will be achieved or that actual production will not differ materially from its guidance. Failure to achieve estimates or production guidance could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. 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 sufﬁ ciently well deﬁ ned 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 sufﬁ cient 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 February 20, 2013. Centerra assumes no obligation to update or revise forward-looking information to reﬂ ect changes in assumptions, changes in circumstances or any other events affecting such forward-looking information, except as required by applicable law. 80 CENTERRA GOLD INC. Centerra_Financials.indd 80 Apr/01/2013 1:28 PM Report of Management’s Accountability The Consolidated Financial Statements have been prepared by the management of the Company. Management is responsible for the integrity, consistency and reliability of all such information presented. The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The preparation of the Consolidated Financial Statements involves the use of estimates and assumptions based on management’s judgment, particularly when transactions affecting the current accounting period cannot be ﬁ nalized with certainty until future periods. Estimates and assumptions are based on historical experience, current conditions and various other assumptions believed to be reasonable in the circumstances, with critical analysis of the signiﬁ cant accounting policies followed by the Company as described in Note 3 to the Consolidated Financial Statements. The preparation of the Consolidated Financial Statements includes information regarding the estimated impact of future events and transactions. Actual results in the future may differ materially from the present assessment of this information because future events and circumstances may not occur as expected. In meeting its responsibility for the reliability of ﬁ nancial information, management maintains and relies on a comprehensive system of internal controls and internal audit checks to see if the controls are operating as designed. The system of internal controls includes a written corporate conduct policy; implementation of a risk management framework; effective segregation of duties and delegation of authorities; and sound and conservative accounting policies that are regularly reviewed. This structure is designed to provide reasonable assurance that assets are safeguarded and that reliable information is available on a timely basis. In addition internal and disclosure controls have been documented, evaluated, tested and identiﬁ ed consistent with National Instrument 52-109. An internal audit function independently evaluates the effectiveness of these internal controls on an ongoing basis and reports its ﬁ ndings to management and the Audit Committee of the Company’s Board of Directors. The Consolidated Financial Statements have been audited by KPMG LLP, independent external auditors appointed by the Company’s shareholders. The external auditors’ responsibility is to express their opinion on whether the Consolidated Financial Statements are fairly presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. KPMG LLP, whose report appears on page 82, outlines the scope of their examination and their opinion. The Company’s Directors, through its Audit Committee, are responsible for ensuring that management fulﬁ lls its responsibilities for ﬁ nancial reporting and internal controls. The Audit Committee met periodically with management, the internal auditors, and the external auditors to satisfy itself that each group had properly discharged its respective responsibility and to review the Consolidated Financial Statements before recommending approval by the Board of Directors. The external auditors had direct and full access to the Audit Committee, with and without the presence of management, to discuss their audit and their ﬁ ndings as to the integrity of the ﬁ nancial reporting. The Company’s President and Chief Executive Ofﬁ cer and the Company’s Vice President and Chief Financial Ofﬁ cer have certiﬁ ed the design and effectiveness of related internal controls over ﬁ nancial reporting pursuant to National Instrument 52-109. Original signed by: Original signed by: Ian Atkinson President and Chief Executive Ofﬁ cer Jeffrey S. Parr Vice President and Chief Financial Ofﬁ cer February 20, 2013 Centerra_Financials.indd 81 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 81 Independent Auditors’ Report To the Shareholders of Centerra Gold Inc. We have audited the accompanying consolidated ﬁ nancial statements of Centerra Gold Inc., which comprise the consolidated statements of ﬁ nancial position as at December 31, 2012 and December 31, 2011 the consolidated statements of earnings (loss) and comprehensive income (loss), shareholders’ equity and cash ﬂ ows for the years ended December 31, 2012 and December 31, 2011, and notes, comprising a summary of signiﬁ cant accounting policies and other explanatory information. Management’s responsibility for the consolidated ﬁ nancial statements Management is responsible for the preparation and fair presentation of these consolidated ﬁ nancial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated ﬁ nancial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated ﬁ nancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁ nancial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated ﬁ nancial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated ﬁ nancial statements. We believe that the audit evidence we have obtained in our audits is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁ nancial statements present fairly, in all material respects, the consolidated ﬁ nancial position of Centerra Gold Inc. as at December 31, 2012 and December 31, 2011 and its consolidated ﬁ nancial performance and its consolidated cash ﬂ ows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards. Toronto, Canada February 20, 2013 Original signed by: KPMG LLP Chartered Accountants, Licensed Public Accountants 82 CENTERRA GOLD INC. Centerra_Financials.indd 82 Apr/01/2013 1:28 PM Consolidated Statements of Financial Position (Expressed in Thousands of United States Dollars) NOTES December 31 2012 December 31 2011 Assets Current assets Cash and cash equivalents Short-term investments Current portion of restricted cash Amounts receivable Inventories Prepaid expenses Property, plant and equipment Goodwill Restricted cash Other assets Long-term inventories Total assets Liabilities and Shareholders’ Equity Current liabilities Accounts payable and accrued liabilities Short-term debt Revenue-based taxes payable Taxes payable Current portion of provisions Dividend payable Provisions Deferred income tax liability Shareholders’ equity Share capital Contributed surplus Retained earnings Total liabilities and shareholders’ equity Commitments and contingencies (note 27) 6 7 8 9 10 12 6 13 8 14 15 16(a) 16(b) 17 28 17 16(c) 26 $ 334,115 47,984 – 75,338 289,012 49,317 795,766 589,209 129,705 6,087 23,270 10,094 758,365 $ 1,554,131 $ 63,940 74,617 18,643 5,180 5,257 167,637 5,949 49,911 1,808 57,668 660,420 36,243 632,163 1,328,826 $ 1,554,131 $ 195,539 372,667 179 56,749 279,944 26,836 931,914 590,151 129,705 – 24,674 12,174 756,704 $ 1,688,618 $ 76,385 – 15,178 1,074 1,848 94,485 – 53,777 1,897 55,674 660,117 33,994 844,348 1,538,459 $ 1,688,618 The accompanying notes form an integral part of these consolidated ﬁ nancial statements. Approved by the Board of Directors Original signed by: Stephen Lang Director Richard Connor Director Centerra_Financials.indd 83 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 83 Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) For the years ended December 31, (Expressed in Thousands of United States Dollars, except per share amounts) Revenue from Gold Sales Cost of sales Abnormal mining costs Mine standby costs Regional ofﬁ ce administration Earnings from mine operations Revenue based taxes Other operating expenses Loss on de-recognition of underground assets Exploration and business development Corporate administration Earnings (loss) from operations Other (income) and expenses Finance costs Earnings (loss) before income tax Income tax expense NOTES 18 19 20 16(a) 21 10 22 23 24 25 16(b) Net Earnings (loss) and comprehensive income (loss) Basic and diluted earnings (loss) per common share 26 The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 2012 $ 660,737 387,470 60,881 4,585 21,042 186,759 74,697 34,280 180,673 38,531 27,046 (168,468) (132) 3,978 (172,314) 11,684 $ (183,998) $ (0.78) 2011 $ 1,020,344 382,295 – 213 21,321 616,515 131,750 15,471 – 42,894 44,902 381,498 (1,055) 3,545 379,008 8,130 $ 370,878 $ 1.57 84 CENTERRA GOLD INC. Centerra_Financials.indd 84 Apr/01/2013 1:28 PM Consolidated Statements of Cash Flows For the years ended December 31, (Expressed in Thousands of United States Dollars) NOTES 2012 2011 Operating activities Net (loss) earnings Items not requiring (providing) cash: Depreciation, depletion and amortization Finance costs Loss on disposal of equipment Compensation expense on stock options De-recognition of underground assets Change in provisions Income tax expense Other operating items Change in operating working capital Change in long-term inventory Revenue-based taxes advanced Income taxes paid Cash provided by operations 10 26(d) 10 17 32(a) 16(a) Investing activities Additions to property, plant and equipment Net redemption (purchase) of short-term investments 32(b) Increase in restricted cash Increase in other assets Proceeds from disposition of ﬁ xed assets Cash used in investing Financing activities Dividends paid Payment of borrowing costs Proceeds from short-term debt Proceeds from common shares issued for cash Cash provided by (used in) ﬁ nancing (Decrease) increase in cash during the year Cash and cash equivalents at beginning of the year $ (183,998) $ 370,878 152,869 3,978 1,403 2,335 180,673 614 11,684 (673) 168,885 1,593 2,080 (30,000) (7,838) 134,720 (366,423) 324,683 (5,908) (1,070) 79 (48,639) (22,238) (1,416) 76,000 149 52,495 138,576 195,539 98,840 3,545 1,305 1,759 – – 8,130 (2,430) 482,027 (44,150) 703 – (3,657) 434,923 (175,155) (290,389) (616) (7,375) 19 (473,516) (99,322) (630) – 3,347 (96,605) (135,198) 330,737 Cash and cash equivalents at end of the year $ 334,115 $ 195,539 Cash and cash equivalents consist of: Cash Cash equivalents $ 51,675 282,440 $ 334,115 $ 75,193 120,346 $ 195,539 The accompanying notes form an integral part of these consolidated ﬁ nancial statements. Centerra_Financials.indd 85 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 85 Consolidated Statements of Shareholders’ Equity (Expressed in Thousands of United States Dollars, except share information) Balance at January 1, 2011 Share-based compensation expense Shares issued on exercise of stock options Dividend declared Net earnings for the period Balance at December 31, 2011 Share-based compensation expense Shares issued on exercise of stock options Shares issued on redemption of restricted share units Dividend declared Net loss for the period Number of Common Shares 235,869,397 – 469,644 – – Share Capital Amount $ 655,178 – 4,939 – – 236,339,041 – 30,752 $ 660,117 – 235 Contributed Surplus Retained Earnings Total $ $ 33,827 1,759 (1,592) – – 33,994 2,335 (86) $ 572,792 – – (99,322) 370,878 $ 1,261,797 1,759 3,347 (99,322) 370,878 $ 844,348 – – $ 1,538,459 2,335 149 6,218 – – 68 – – – – – – (28,187) (183,998) 68 (28,187) (183,998) Balance at December 31, 2012 236,376,011 $ 660,420 $ 36,243 $ 632,163 $ 1,328,826 The accompanying notes form an integral part of these consolidated ﬁ nancial statements. 86 CENTERRA GOLD INC. Centerra_Financials.indd 86 Apr/01/2013 1:28 PM Notes to the Consolidated Financial Statements For the years ended December 31, 2012 and December 31, 2011 (Expressed in thousands of United States Dollars) 1. GENERAL BUSINESS DESCRIPTION Centerra Gold Inc. (“Centerra” or the “Company”) was incorporated under the Canada Business Corporations Act on November 7, 2002. Centerra’s common shares are listed on the Toronto Stock Exchange (“TSX”). The Company is domiciled in Canada and the registered ofﬁ ce is located at 1 University Avenue, Suite 1500, Toronto, Ontario, M5J 2P1. The Company is engaged in the production of gold and related activities including exploration, development, mining and processing in the Kyrgyz Republic, Mongolia, Turkey, China and the Russian Federation. 2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE a. Statement of Compliance These consolidated ﬁ nancial statements of the Company and its subsidiaries are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). These ﬁ nancial statements were authorized for issuance by the Board of Directors of the Company on February 20, 2013. b. Basis of measurement These ﬁ nancial statements were prepared under the historical cost basis, except for available for sale ﬁ nancial assets and derivative ﬁ nancial instruments, which are measured at fair value, liabilities for cash settled share-based compensation, which are measured at fair value and inventories which are measured at the lower of cost or net realizable value. These ﬁ nancial statements are presented in U.S. dollars with all amounts rounded to the nearest thousands, except for share and per share data, or as otherwise noted. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The signiﬁ cant accounting policies summarized below have been applied consistently to all periods presented in these consolidated ﬁ nancial statements. a. Consolidation principles These consolidated ﬁ nancial statements include the accounts of Centerra, its subsidiaries, and its proportionate ownership of joint ventures. Subsidiaries are entities over which the Company has control, where control is deﬁ ned as the power to govern ﬁ nancial and operating policies. Subsidiaries are fully consolidated from the date control is transferred to the Company, and are de-consolidated from the date control ceases. Inter-company transactions between subsidiaries are eliminated on consolidation. Joint ventures are entities over whose activities the Company has joint control under a contractual agreement. These consolidated ﬁ nancial statements include the Company’s proportionate share of the entity’s assets, liabilities, revenues and expenses with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. The Company’s signiﬁ cant subsidiaries and joint ventures include its wholly-owned Kumtor Gold Company (“KGC” operating as “Kumtor”), Boroo Gold LLC (“BGC” operating as “Boroo”), Centerra Gold Mongolia LLC (“CGM”) (owner of the Gatsuurt property and ATO property), seventy percent interest in the Kara Beldyr Russian joint venture and seventy percent interest in the Öksüt Turkish joint venture. Centerra_Financials.indd 87 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 87 b. Foreign currency The functional currency of the Company and each of its subsidiaries is the U.S. dollar, which is also the presentation currency of the consolidated ﬁ nancial statements. Foreign currency transactions are translated into the entity’s functional currency using the exchange rate prevailing on the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Non-monetary assets and liabilities, arising from transactions denominated in foreign currencies, are translated at the historical exchange rates prevailing at each transaction date. Translation differences on ﬁ nancial assets and liabilities carried at fair value are recognized in foreign exchange gain (loss) in the Statements of Earnings (Loss) and Comprehensive Income (Loss). c. Cash and cash equivalents Cash and cash equivalents comprise cash balances and short-term investments with original maturities of 90 days or less. Bank overdrafts that are repayable on demand and form an integral part of Centerra’s cash management are included as a component of cash and cash equivalents for the purpose of the Statements of Cash Flows. Cash and cash equivalents are classiﬁ ed as ﬁ nancial instruments carried at fair value through proﬁ t or loss. d. Restricted Cash Cash which is subject to legal or contractual restrictions on its use is classiﬁ ed separately as restricted cash. e. Short-term investments Short-term investments consist of marketable securities with original maturities of more than 90 days, but no longer than 12 months, from the date of purchase. Short-term investments consist mostly of U.S. federal and Canadian federal and provincial government treasury bills and notes, agency notes, foreign sovereign issues, term deposits, bankers’ acceptances, bearer deposit notes, and highly-rated, highly-liquid corporate direct credit. Short-term investments are classiﬁ ed as ﬁ nancial instruments carried at fair value through proﬁ t or loss. f. Inventories Inventories of stockpiled ore, heap leach ore, in-circuit gold, heap leach gold in-circuit and gold doré are valued at the lower of average production cost and net realizable value, based on contained ounces of gold. The production cost of inventories is determined on a weighted-average basis and includes direct materials, direct labour, mine-site overhead expenses and depreciation, depletion and amortization of mining assets. Stockpiled ore and heap leach ore are ore that has been extracted from the mine and is available for further processing. Costs are added to the cost of stockpiles based on the current mining cost per ounce mined and removed at the average cost per ounce of the stockpiled ore. Costs are added to the costs of ore on the heap leach pads based on average cost per ounce of stockpiled ore plus additional costs incurred to place ore on the heap leach pad. Costs of ore on the heap leach pads are transferred to in-circuit inventories as ounces are recovered based on the average cost per recoverable ounce of gold on the leach pad. Ore in stockpiles not expected to be processed in the next twelve months is classiﬁ ed as long-term. In-circuit inventories represent materials that are in the process of being converted to a gold doré. Variances between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write downs to net realizable value (“NRV”) are accounted for on a prospective basis. When inventories are sold, the carrying amount is recognized as an expense in the period in which the related revenue is recognized. Any write-down of inventories to NRV or reversals of previous write-downs are recognized in income in the period the write-down or reversal occurs. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs to sell. Consumable supplies and spare parts are valued at the lower of weighted-average cost and NRV, which is the approximate replacement cost. Replacement cost includes expenditures incurred to acquire the inventories and bring them to their existing location and condition. Any provision for obsolescence is determined by reference to speciﬁ c stock items identiﬁ ed as obsolete. A regular and ongoing review is undertaken to establish the extent of surplus items and a provision is made for any potential loss on their disposal. 88 CENTERRA GOLD INC. Centerra_Financials.indd 88 Apr/01/2013 1:28 PM g. Property, plant and equipment i. General Property, plant and equipment are recorded at cost less accumulated depreciation, depletion and impairment charges. Where an item of plant and equipment comprises major components with different useful lives, the components are depreciated separately but are grouped for disclosure purposes as plant and equipment. Major overhaul expenditures and the cost of replacement of a component of plant and mobile equipment are capitalized and amortized over the average expected life between major overhauls. All other replacement spares and other costs relating to maintenance of mobile equipment are charged to the cost of production if it is not probable that signiﬁ cant future economic beneﬁ ts generated by the item overhauled will ﬂ ow to the Company. Directly attributable costs incurred for major capital projects and site preparation are capitalized until the asset is in a location and condition necessary for operation as intended by management. These costs include dismantling and site restoration costs to the extent these are recognized as a provision. Management annually reviews the estimated useful lives, residual values and depreciation methods of the Company’s property, plant and equipment and also when events and circumstances indicate that such a review should be made. Changes to estimated useful lives, residual values or depreciation methods resulting from such review are accounted for prospectively. All direct costs related to the acquisition of mineral property interests are capitalized at their cost at the date of acquisition. An item of property, plant and equipment is de-recognized upon disposal or when no further future economic beneﬁ ts are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated as the difference between any proceeds received and the carrying amount of the asset) is included in proﬁ t or loss in the year the asset is de-recognized. ii. Exploration, evaluation and pre-development expenditure All exploration and evaluation expenditures of the Company within an area of interest are expensed until management concludes that the technical feasibility and commercial viability of extracting a mineral resource are demonstrable and that future economic beneﬁ ts are probable. In making this determination, the extent of exploration, as well as the degree of conﬁ dence in the mineral resource is considered. Once a project has been established as commercially viable and technically feasible, further expenditures are capitalized as pre- development costs. Exploration and evaluation assets acquired in a business combination are initially recognized at fair value as exploration rights within tangible assets. Pre-development assets are tested for impairment when there is an indicator of impairment. iii. Development properties (underground and open pit) A property, either open pit or underground, is classiﬁ ed as a development property when a mine plan has been prepared and a decision is made to commercially develop the property. Development expenditure is accumulated separately for each area of interest for which economically recoverable mineral reserves and resources have been identiﬁ ed. All expenditure incurred prior to the commencement of commercial levels of production from each development property is capitalized. In addition, capitalized costs are assessed for impairment when there is an indicator of impairment. Development properties are not amortized until they are reclassiﬁ ed as mine property assets following the achievement of commercial levels of production. iv. Mine properties After a mine property has been brought into commercial production, costs of any additional mining, in-pit drilling and related work on that property are expensed as incurred. Mine development costs incurred to expand operating capacity, develop new ore bodies or develop mine areas in advance of current production, including the stripping of waste material, are deferred and then amortized on a unit-of-production basis. 2012 ANNUAL REPORT 89 Centerra_Financials.indd 89 Apr/01/2013 1:28 PM v. Deferred Stripping costs Stripping costs incurred in the production phase of a mining operation are accounted for as production costs and are included in the costs of inventory produced, unless the stripping activity can be shown to be a betterment of the mineral property, in which case the stripping costs are capitalized. Betterment occurs when the stripping activity increases future output of the mine by providing access to additional reserves. Capitalized stripping costs are amortized on a unit-of-production basis over the economically recoverable proven and probable reserve ounces of gold to which they relate. h. Goodwill Goodwill represents the difference between the sum of the cost of a business acquisition and the fair value of the identiﬁ able net assets acquired and is not amortized. Subsequently, goodwill is measured at cost less accumulated impairment losses. For non-wholly-owned subsidiaries, the Company has a choice for each business acquisition to record non-controlling interests at either fair value or at the non-controlling interest’s proportionate share of the recognized amounts of the identiﬁ able net assets recognized at acquisition. Goodwill, upon acquisition, is allocated to the cash-generating units (“CGU”) expected to beneﬁ t from the related business combination. A CGU, in accordance with IAS 36, Impairment of Assets, is identiﬁ ed as the smallest identiﬁ able group of assets that generates cash inﬂ ows, which are largely independent of the cash inﬂ ows from other assets. The Company evaluates, on at least an annual basis, the carrying amount of a CGU to which goodwill is allocated, for potential impairment. To accomplish this, the Company compares the recoverable amount (which is the greater of value-in-use and fair value less costs to sell (“FVLCS”)) of the CGU to its carrying amount. If the carrying amount of a CGU was to exceed its recoverable amount, the Company would ﬁ rst apply the difference to reduce goodwill and then any further excess is applied to the CGU’s other long-lived assets. Assumptions, such as gold price, discount rate, and expenditures underlying the fair value estimates are subject to risks and uncertainties. The best evidence of fair value is the value obtained from an active market or binding sale agreement. Where neither exists, fair value is based on the best information available to reﬂ ect the amount the Company could receive for the CGU in an arm’s length transaction which the Company typically estimates using discounted cash ﬂ ow techniques. Where the recoverable amount is assessed using discounted cash ﬂ ow techniques, the resulting estimates are based on detailed mine and/or production plans. For value-in-use, recent cost levels are considered together with expected changes in costs that are compatible with the current condition of the business. The cash ﬂ ow forecasts are based on best estimates of expected future revenues and costs, including the future cash costs of production, sustaining capital expenditure, closure, restoration and environmental clean-up. Expected future cash ﬂ ows reﬂ ect long term mine plans, which are based on detailed research, analysis and iterative modeling to optimize the level of return from investment, output and sequence of extraction. The mine plan takes account of all relevant characteristics of the ore body, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used. The mine plan is therefore the basis for forecasting production output in each future year and for forecasting production costs. The Company’s cash ﬂ ow forecasts are based on estimates of future commodity prices which are derived from the general consensus gathered from third-party ﬁ nancial analysts’ expectations. These assessments can differ from current price levels and are updated periodically. The discount rates applied to the future cash ﬂ ow forecasts represent an estimate of the rate the market would apply having regard to the time value of money and the risks speciﬁ c to the asset for which the future cash ﬂ ow estimates have not been adjusted. The Company’s weighted-average cost of capital is used as a starting point for determining the discount rates, with appropriate adjustments for the risk proﬁ le of the countries in which the individual CGUs operate. 90 CENTERRA GOLD INC. Centerra_Financials.indd 90 Apr/01/2013 1:28 PM i. Impairment Long-term assets are reviewed for impairment if there is any indication that the carrying amount may be impaired. Impairment is assessed for an individual asset unless the asset does not generate cash inﬂ ows that are independent of those generated from other assets or groups of assets, in which case, the individual assets are grouped together into CGUs for impairment testing purposes. An impairment loss is recognized for any excess of carrying amount over the recoverable amount. j. Income taxes Tax expense comprises current and deferred tax. Current tax and deferred tax is recognized in proﬁ t or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends, withholding taxes payable and sales tax payable. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for: • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable proﬁ t or loss; • temporary differences related to investments in subsidiaries, associates and jointly controlled entities to the extent that the group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and • taxable temporary differences arising on the initial recognition of goodwill. The measurement of deferred tax reﬂ ects the tax consequences that would follow the manner in which the group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable proﬁ ts will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax beneﬁ t will be realized. k. Provisions Provisions are recorded when a legal or constructive obligation exists as a result of past events where it is probable that an outﬂ ow of resources embodying economic beneﬁ ts will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation estimated at the end of each reporting period, taking into account the risks and uncertainties surrounding the obligation. A provision is measured using the present value of cash ﬂ ows estimated to settle the present obligation. Centerra_Financials.indd 91 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 91 l. Environmental protection and reclamation costs Closure and restoration costs include the dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas. Estimated closure and restoration costs are provided in the accounting period when the obligation arising from the related disturbance occurs based on the net present value of estimated future costs. The amount of any provision recognized is estimated based on the risk-adjusted costs required to settle present obligations, discounted using a pre-tax risk-free discount rate consistent with the time period of expected cash ﬂ ows. When the liability is initially recorded, a corresponding asset is recognized. At each reporting date the restoration and rehabilitation provisions are re-measured in line with changes in discount rates and timing or amounts of the costs to be incurred. Changes in the liability relating to mine rehabilitation and restoration obligations, which are not the result of current production of inventory, are added to or deducted from the related asset. The accretion of the discount is recognized as a ﬁ nance cost in the Statements of Earnings (Loss) and Comprehensive Income (Loss). m. Depreciation and depletion Mine buildings, plant and equipment used in production and mineral properties are depreciated or depleted using the unit-of-production method over proven and probable ore reserves, or if their estimated useful lives are shorter, on a straight-line basis over the useful lives of the particular assets. Under this process, depreciation commences when the ore is extracted from the ground. The depreciation charge is allocated to inventory throughout the production process from the point at which ore is extracted from the pit until the ore is processed into its ﬁ nal form, gold doré. Where a change in estimated recoverable gold ounces contained in proven and probable ore reserves is made, adjustments to depreciation are accounted for prospectively. Mobile equipment and other assets, such as offsite roads, buildings, ofﬁ ce furniture and equipment are depreciated using the straight-line method based on estimated useful lives which range from two years to seven years, but do not exceed the related estimated mine life based on proven and probable ore reserves. n. Earnings per share Basic net earnings (loss) per share is computed by dividing the net earnings (loss) applicable to common shares by the weighted average number of common shares outstanding during the year. Diluted net earnings (loss) per share is computed by dividing the net earnings (loss) applicable to common shares by the weighted average number of common shares outstanding during the year, plus the effects of dilutive common share equivalents such as stock options, performance share units and restricted share units. Diluted net earnings (loss) per share is calculated using the treasury method, where the exercise of stock options, performance share units and restricted share units are assumed to be at the beginning of the period, and the proceeds from the exercise of stock options, performance share units and restricted share units and the amount of compensation expense measured but not yet recognized in income are assumed to be used to purchase common shares of the Company at the average market price during the period. The incremental number of common shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) is included in the denominator of the diluted earnings (loss) per share computation. In periods where the Company incurs a loss, diluted loss per share equals basic loss per share, as the inclusion of any potentially dilutive instruments would be anti-dilutive. o. Revenue recognition Revenue associated with the sale of gold is recognized when all signiﬁ cant risks and rewards of ownership are transferred to the customer. Usually the transfer of risks and rewards associated with ownership occurs when the customer has taken delivery and the consideration received, or to be received, in respect of the sale can be reliably measured. p. Share-based compensation The Company has ﬁ ve share-based compensation plans: the Share Option Plan, Performance Share Units Plan, Annual Performance Share Units Plan, Deferred Share Units Plan, and Restricted Share Unit Plan, which are all described in note 26. 92 CENTERRA GOLD INC. Centerra_Financials.indd 92 Apr/01/2013 1:28 PM Stock Option Plan Stock options are equity-settled share-based compensation awards. The fair value of stock options at the grant date is estimated using the Black-Scholes option pricing model. Compensation expense is recognized over the stock option vesting period based on the number of units estimated to vest. This expense is recognized as share-based compensation expense with a corresponding increase in equity. When options are exercised, the proceeds received by the Company, together with the amount in contributed surplus, are credited to common shares. Performance Share Units Plan and Annual Performance Share Units Plan Under these two plans, performance share units granted by Centerra to eligible employees that are intended to be settled in cash are accounted for under the liability method using the Monte Carlo simulated option pricing model. Under this method, a portion of the fair value of the performance share units is recognized at each reporting period based on the pro-rated number of days the eligible employees are employed by the Company compared to the vesting period of each series granted. The consideration paid to employees on exercise of these performance share units is recorded as a reduction of the accrued obligation. Deferred Share Units Plan Deferred share units granted to eligible members of the Board of Directors are settled in cash and are therefore accounted for under the liability method. The deferred share units vest immediately upon granting. A liability is recorded at grant date equal to the fair value of the deferred share units. The liability is adjusted to fair value at each reporting period and any resulting adjustment to the accrued obligation is recognized as an expense or, if negative, a recovery. The cash paid to eligible members of the Board of Directors on exercise of these deferred share units is recorded as a reduction of the accrued obligation. Restricted Share Units Plan Restricted share units (“RSU”) granted to eligible members of the Board of Directors and designated ofﬁ cers and employees of Centerra can be settled in cash or equity at the option of the holder. The restricted share units vest immediately upon grant and are redeemed on a date chosen by the participant (subject to certain restrictions as set out in the plan). The units granted are accounted for under the liability method whereby a liability is recorded at grant date equal to the fair value of the RSU. The liability is adjusted to fair value at each reporting period and any resulting adjustment to the accrued obligation is recognized as an expense or, if negative, a recovery. The cash paid on exercise of these restricted share units is recorded as a reduction of the accrued obligation. q. Financial Instruments Financial assets are classiﬁ ed as either ﬁ nancial assets at fair value through proﬁ t or loss, loans and receivables, held-to-maturity investments, or available-for-sale ﬁ nancial assets. The Company determines the classiﬁ cation of its ﬁ nancial assets at initial recognition. Where, as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held-to-maturity, the investment is reclassiﬁ ed into the available-for-sale category. All ﬁ nancial liabilities are initially recognized at their fair value and designated upon inception as either ﬁ nancial liabilities measured at fair value through proﬁ t or loss or other ﬁ nancial liabilities. Transaction costs associated with ﬁ nancial assets and ﬁ nancial liabilities carried at fair value through proﬁ t or loss are expensed as incurred, while transaction costs associated with all other ﬁ nancial assets and other ﬁ nancial liabilities are included in the initial carrying amount of the asset or the liability. i. Financial assets Financial assets recorded at fair value through proﬁ t or loss Financial assets classiﬁ ed as fair value if they are acquired for the purpose of selling in the near term. Gains or losses on these items are recognized in proﬁ t or loss. The Company’s cash and cash equivalents, restricted cash, reclamation trust fund and short-term investments are classiﬁ ed as ﬁ nancial assets measured at fair value through proﬁ t or loss. Loans and receivables Loans and receivables are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through proﬁ t or loss or available-for-sale. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in proﬁ t or loss when the loans and receivables are de-recognized or impaired. 2012 ANNUAL REPORT 93 Centerra_Financials.indd 93 Apr/01/2013 1:28 PM The Company’s amounts receivable and long-term receivables are classiﬁ ed as loans and receivables. A provision is recorded when the estimated recoverable amount of the loan or receivable is lower than the carrying amount. The Company believes the carrying values of amounts receivable and long-term receivables approximate their fair values. ii. Financial liabilities Financial liabilities at fair value through proﬁ t or loss Financial liabilities classiﬁ ed as fair value through proﬁ t or loss include ﬁ nancial liabilities designated as held-for-trading and ﬁ nancial liabilities designated upon initial recognition as a fair value through proﬁ t or loss ﬁ nancial liability. Derivatives, including separable embedded derivatives are classiﬁ ed as held for trading unless they are designated as effective hedging instruments. Fair value changes on ﬁ nancial liabilities classiﬁ ed as fair value through proﬁ t or loss are recognized in proﬁ t or loss. The Company utilizes forward foreign exchange contracts to economically hedge certain anticipated cash ﬂ ows. Furthermore, the Company enters into “good until cancelled” contract to sell gold at a speciﬁ c price; these are short-term contracts that are normally closed before the end of the reporting date. These contracts are classiﬁ ed and accounted for as instruments “held for trading” because they do not qualify as hedges, or are not designated as hedges and are classiﬁ ed as fair value through proﬁ t or loss. The contracts are recorded at fair value at the reporting date with the resulting gain or loss recognized in the Statements of Earnings and Comprehensive Income. The Company’s contracts are classiﬁ ed as ﬁ nancial liabilities at fair value through proﬁ t or loss. Other ﬁ nancial liabilities Borrowings and other ﬁ nancial liabilities, excluding derivative liabilities, are recognized initially at fair value, net of transaction costs incurred and are subsequently stated at amortized cost. Any difference between the amounts originally received net of transaction costs and the redemption value is recognized in proﬁ t or loss immediately, or capitalized if directly attributable to a qualifying asset, over the period to maturity using the effective interest method. Borrowings and other ﬁ nancial liabilities are classiﬁ ed as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the date of the consolidated statement of ﬁ nancial position date. The Company’s trade and other payables and short-term debt are classiﬁ ed as other ﬁ nancial liabilities. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of consolidated ﬁ nancial statements in accordance with the requirements of IFRS requires management to make judgments, estimates and assumptions that affect the application of the Company’s accounting policies, which are described in note 3, the reported amounts of assets and liabilities and disclosure of commitments and contingent liabilities at the date of the ﬁ nancial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, current and expected economic conditions, and in some cases actuarial techniques. Actual results could differ from those estimates. Management’s estimates and underlying assumptions are reviewed on an ongoing basis. Any changes or revisions to estimates and underlying assumptions are recognized in the period in which the estimates are revised and in any future periods affected. The key sources of estimation uncertainty and judgments used in the preparation of these consolidated ﬁ nancial statements that have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities and earnings within the next ﬁ nancial year, are discussed below: i. Share-based Compensation Cash and equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined using the Black-Scholes option pricing model or Monte Carlo simulation model, is based on signiﬁ cant assumptions such as volatility, expected life, expected dividends, risk-free interest rate and expected forfeiture rates. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability of the instruments and employees’ behavioral considerations. 94 CENTERRA GOLD INC. Centerra_Financials.indd 94 Apr/01/2013 1:28 PM A change in any or a combination of the key assumptions used to determine the fair value of the issued share-based compensation at grant date and at the reporting date, could have a material impact on the share-based compensation cost expensed and the carrying value of the share-based compensation liabilities. Total share-based compensation cost (recovery) recorded in the Statement of Earnings (Loss) and Comprehensive Income (Loss) for the year ended December 31, 2012 was $3.0 million (December 31, 2011 – charge of $19.1 million) and carrying amount of the associated liabilities was $5.2 million as at December 31, 2012 (December 31, 2011 – $42.0 million). ii. Asset retirement obligation Amounts recorded for asset retirement obligations and the related accretion expense require the use of estimates of the future costs the Company will incur to complete the reclamation and remediation work required to comply with existing laws and regulations at each mine site, as well as the timing of the reclamation activities and estimated discount rate. The Company assesses and revises its asset retirement obligations on an annual basis or when new material information becomes available. Actual costs incurred may differ from those amounts estimated. Also, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required to be performed by the Company. Increases in future costs could materially impact the amounts charged to operations for reclamation and remediation. The provision represents management’s best estimate of the present value of the future reclamation and remediation costs. A change in any or a combination of the key assumptions used to determine the provisions could have a material impact on the carrying value of the provisions (see note 17). Changes to the estimated future reclamation costs for operating sites are recognized in the Statement of Financial Position by adjusting both the retirement asset and provision, and will impact earnings as these amounts are respectively amortized and accreted over the life of the mine. The carrying amount of the asset retirement obligations as at December 31, 2012, was $55.2 million (2011 – $55.6 million). iii. Depreciation, depletion and amortization period for property plant and equipment All mining assets (except for mobile equipment and buildings) are amortized using the units-of-production method where the mine operating plan calls for production from well-deﬁ ned ore reserves over proven and probable reserves. For mobile and other equipment, the straight-line method is applied over the estimated useful life of the asset which does not exceed the estimated mine life based on proven and probable ore reserve as the useful lives of these assets are considered to be limited to the life of the relevant mine. The calculation of the units-of-production rate of amortization could be impacted to the extent that actual production in the future is different from current forecast production based on proven and probable ore reserve. This would generally arise when there are signiﬁ cant changes in any of the factors or assumptions used in estimating ore reserve. Changes to these estimates, which can be signiﬁ cant, could be caused by a variety of factors, including future production differing from current forecasts, expansion of mineral reserves through exploration activities, differences between estimated and actual costs of mining and other factors impacting mineral reserves or the expected life of the mining operation. iv. Impairment of long-term assets The Company reviews and tests the carrying amounts of long-term assets and intangible assets with deﬁ nite lives when an indicator of impairment is considered to exist. The Company considers both external and internal sources of information in assessing whether there are any indications that long-term assets and goodwill are impaired. External sources of information that the Company considers include changes in the market, economic and legal environment in which the Company operates that are not within its control and affect the recoverable amounts of long-term assets and goodwill. Internal sources of information that the Company considers include the manner in which long-term assets are being used or are expected to be used and indications of economic performance of the assets. Centerra_Financials.indd 95 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 95 For the purposes of determining whether an impairment of assets, including goodwill, has occurred, and the amount of any impairment or its reversal, management uses key assumptions in estimating the recoverable value of a CGU which is calculated as the higher of the CGU’s value-in-use and fair value less costs to sell. Management performed a goodwill impairment test for the Kumtor CGU as at September 1, 2012 and calculated the fair value less cost to sell using a discounted cash ﬂ ow model which required management to estimate the future cash ﬂ ows, future operating plans, gold prices, discount rates and exchange rates. Expected gold production levels, which comprise proven and probable reserves and a conversion estimate of resources, are used to estimate expected future cash ﬂ ows. Management also estimates future operating and capital costs based on the most recently approved life of mine plan. The discount rate applied is reviewed annually, although it has been stable in recent years. While management believes that estimates of future cash ﬂ ows are reasonable, different assumptions regarding such cash ﬂ ows could materially affect the recoverable value of the CGU. Please see Note 12 for additional information on the basis for management’s estimates. Changes in these estimates which decrease the estimated recoverable value of the CGU could affect the carrying amounts of assets and result in an impairment charge. The carrying amount of goodwill in the consolidated ﬁ nancial statements at December 31, 2012 and December 31, 2011 was $129.7 million. The carrying amount of long-term assets (Property plant and equipment and long-term receivables and others), other than goodwill at December 31, 2012 was $622.6 million (December 31, 2011: $627.0 million). v. Deferred income taxes The Company operates in a number of tax jurisdictions and is therefore required to estimate its income taxes in each of these tax jurisdictions in preparing its ﬁ nancial statements. In calculating the income taxes, the Company considers factors such as tax rates in the different jurisdictions, non-deductible expenses, changes in tax law, and management’s expectations of future results. The Company estimates deferred income taxes based on temporary differences between the income and losses reported in its ﬁ nancial statements and its taxable income and losses as determined under the applicable tax laws. The tax effects of these temporary differences are recorded as deferred tax assets or liabilities in the ﬁ nancial statements. The Company does not recognize deferred tax assets where management does not expect such assets to be realized based upon current forecasts. In the event that actual results differ from these estimates, adjustments are made to future periods in these estimates, and changes in the amount of the deferred tax assets recognized may be required, which could materially impact the ﬁ nancial position and the income for the period. At December 31, 2012, the total deductible temporary differences for which a deferred tax asset is not recognized amounted to $285.1 million (December 31, 2011 – $264.1 million). Most of the unrecognized amount relates to unused loss carry forwards. Deferred tax assets of $5.5 million (December 31, 2011 – $5.2 million) were recognized in the Company’s statement of ﬁ nancial position. vi. Inventories of stockpiled ore, in-circuit and gold doré Management makes estimates of recoverable quantities of gold in stockpiled ore, ore stacked on heap leach pads and in process to determine the average costs of ﬁ nished goods sold during the period and the value of the inventoried asset in the Company’s Statements of Financial Position. Costs that are incurred in or beneﬁ t the mine and mill production process are accumulated as stockpiles of ore, ore on leach pads, heap leach in circuit and gold-in circuit. Net realizable value tests are performed at least annually based on the estimated future sales price of the gold doré, based on prevailing and long-term gold prices, less estimated costs to complete production and bring the gold to selling condition. The recoverable quantity of ore on stockpiles is estimated based on tonnage added and removed from the stockpiles, the amount of contained gold ounces based on assay data, and the estimated recovery percentage based on the historical recoveries obtained in the expected processing method. Stockpiled ore tonnage is veriﬁ ed by periodic surveys. Estimates of the recoverable gold on the leach pads are calculated from the quantities of ore placed on the pads based on tonnage added to the leach pads, the grade of ore placed on the leach pads based on assay data and a recovery percentage based on metallurgical testing and ore type. 96 CENTERRA GOLD INC. Centerra_Financials.indd 96 Apr/01/2013 1:28 PM Although the quantities of recoverable metal are reconciled by comparing the grades of ore to the quantities of gold actually recovered, the nature of the process inherently limits the ability to precisely monitor recoverability levels. As a result, the metallurgical reconciliation process is constantly monitored and engineering estimates are reﬁ ned based on actual results over time. As at December 31, 2012 the carrying amount of inventories (excluding gold doré and supplies inventories) was $116.1 million (December 31, 2011 – $125.3 million) vii. Ore reserve estimation The Company estimates its ore reserves and mineral resources based on information compiled by qualiﬁ ed persons as deﬁ ned in accordance with the Canadian Securities Administrators’ National Instrument 43-101 Standards of Disclosure for Mineral Projects requirements. The estimation of ore reserves requires judgment to interpret available geological data then select an appropriate mining method and establish an extraction schedule. It also requires assumptions about future commodity prices, exchange rates, production costs, recovery rates and discount rates and, in some instances, the renewal of mining licenses. There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change signiﬁ cantly when new information becomes available. New geological data as well as changes in the above assumptions may change the economic status of reserves and may, ultimately, result in the reserves being restated. Estimates of mineral reserves and resources impact the following items in the ﬁ nancial statements: • useful lives of assets depreciated on a straight-line basis, where those lives are limited to the life of the mine. • Depreciation and depletion of assets using the units-of-production method • Estimate of recoverable value of the CGU • Estimated timing of reclamation activities • Expected future economic beneﬁ t of expenditures, including stripping and development activities viii. Litigation and contingency On an ongoing basis the Company is subject to various claims and other legal disputes described in note 27, the outcomes of which cannot be assessed with a high degree of certainty. A liability is recognized where, based on the Company’s legal views and advice, it is considered probable that an outﬂ ow of resources will be required to settle a present obligation that can be measured reliably. By their nature, these contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of signiﬁ cant judgment of the potential outcome of future events. Disclosure of other contingent liabilities is made unless the possibility of a loss arising is considered remote. 5. FUTURE CHANGES IN ACCOUNTING POLICIES Recently issued but not adopted accounting guidance are as follows: IFRS 7 Financial Instruments – Disclosures (“IFRS 7”) was amended by the IASB in October 2011 and provides guidance on identifying transfers of ﬁ nancial assets and continuing involvement in transferred assets for disclosure purposes. The amendments introduce new disclosure requirements for transfers of ﬁ nancial assets including disclosures for ﬁ nancial assets that are not de-recognized in their entirety, and for ﬁ nancial assets that are de-recognized in their entirety but for which continuing involvement is retained. The Company intends to adopt IFRS 7 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 7 to have a material impact on its ﬁ nancial statements. The IASB has issued IFRS 9 Financial Instruments (“IFRS 9”) which proposes to replace IAS 39 Financial Instruments Recognition and Measurement. The replacement standard has the following signiﬁ cant components: establishes two primary measurement categories for ﬁ nancial assets — amortized cost and fair value; establishes criteria for classiﬁ cation of ﬁ nancial assets within the measurement category based on business model and cash ﬂ ow characteristics; and eliminates existing held to maturity, available-for-sale and loans and receivable categories. Centerra_Financials.indd 97 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 97 This standard is effective for the Company’s annual period beginning January 1, 2015 (as amended from January 1, 2013 by the IASB in December 2012). The Company will evaluate the impact of the change to its consolidated ﬁ nancial statements based on the characteristics of its ﬁ nancial instruments at the time of adoption. IFRS 10 Consolidated Financial Statements (“IFRS 10”), which replaces parts of IAS 27, Consolidated and Separate Financial Statements (“IAS 27”) and all of SIC-12 Consolidation – Special Purpose Entities, changes the deﬁ nition of control which is the determining factor in whether an entity should be consolidated. Under IFRS 10, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company intends to adopt IFRS 10 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 10 to have a material impact on its ﬁ nancial statements. IFRS 11 Joint Arrangements (“IFRS 11”), which replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities – Non-monetary Contributions by Venturers, requires a venturer to classify its interest in a joint arrangement as either a joint operation or a joint venture. For a joint operation, the joint operator will recognize its assets, liabilities, revenue and expenses, and/or its relative share thereof. For a joint venture, the joint venturer will account for its interest in the venture’s net assets using the equity method of accounting. This is a change from the existing standards, under which the Company chose to proportionally consolidate joint ventures. The Company intends to adopt this standard effective January 1, 2013. The impact of these changes on the Company ﬁ nancial statements is currently under review in preparation of the ﬁ rst quarter 2013 ﬁ nancial reporting. IFRS 12 Disclosure of Interests in Other Entities (“IFRS 12”) is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance sheet vehicles. The required disclosures aim to provide information in order to enable users to evaluate the nature of, and the risks associated with, an entity’s interest in other entities, and the effects of those interests on the entity’s ﬁ nancial position, ﬁ nancial performance and cash ﬂ ows. The Company intends to adopt IFRS 12 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company expect IFRS 12 to result in additional disclosure regarding its interests in subsidiaries and joint arrangements in its ﬁ nancial statements. IFRS 13 Fair Value Measurement (“IFRS 13”) replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It deﬁ nes fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables ﬁ nancial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use signiﬁ cant unobservable inputs (Level 3), the effect of the measurements on proﬁ t or loss or other comprehensive income. The Company intends to adopt IFRS 13 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The Company does not expect IFRS 13 to have a material impact on its ﬁ nancial statements. IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (“IFRIC 20”) sets out the accounting for overburden waste removal (stripping) costs in the production phase of a mine. The new interpretation clariﬁ es when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. It considers when and how to account separately for beneﬁ ts arising from the stripping activity and how to measure these beneﬁ ts both initially and subsequently. It prescribes that the costs of stripping activity be accounted for in accordance with the principles of IAS 2 Inventories to the extent that the beneﬁ t from the stripping activity is realized in the form of inventory produced. On the other hand, the costs of stripping activity which provides a beneﬁ t in the form of improved access to ore in future periods is recognized as a non-current ‘stripping activity asset’ when speciﬁ ed criteria are met. The Company intends to adopt IFRIC 20 in its ﬁ nancial statements for the annual period beginning on January 1, 2013. The impact of these changes on the Company ﬁ nancial statements is currently under review in preparation of the ﬁ rst quarter 2013 ﬁ nancial reporting. 98 CENTERRA GOLD INC. Centerra_Financials.indd 98 Apr/01/2013 1:28 PM 6. RESTRICTED CASH (Thousands of U.S. Dollars) Current: Boroo escrow account Non current: Dividend trust account Other Total restricted cash 2012 2011 $ $ – – $ 179 179 5,938 149 6,087 6,087 – – – $ 179 The Boroo escrow bank account was created in compliance with a memorandum of understanding agreed to with the Ministry of Health of Mongolia. The cash deposited was used to fund the design and construction of a maternity hospital in Ulaanbaatar. Funding for the hospital was completed before December 31, 2012 and the hospital is due to be commissioned in early 2013. Pursuant to an Ontario court decision dated September 5, 2011, Kyrgyzaltyn’s portion of the Centerra dividends declared on August 1, 2012 and November 7, 2012 of $6.3 million net of withholding taxes of $0.4 million ($5.9 million net) is held in trust to the credit of the Sistem court proceedings (see note 27). The dividend payable and restricted cash held in trust have been classiﬁ ed as long-term since the timing of the resolution of the court proceedings is unknown. 7. AMOUNTS RECEIVABLE (Thousands of U.S. Dollars) Gold sales receivable from related party (note 28) Gold sales receivable from third party Other receivables The aging of the gross amounts receivable at each reporting date was as follows: (Thousands of U.S. Dollars) Less than 1 month 1 to 3 months Over 3 months 2012 48,325 17,906 9,107 75,338 2012 68,203 884 6,251 75,338 $ $ $ $ 2011 $ 47,366 – 9,383 $ 56,749 2011 $ 49,817 5,642 1,290 $ 56,749 The Company has not recorded any allowance for credit losses for the periods presented above. 8. INVENTORIES (Thousands of U.S. Dollars) Stockpiles of ore Gold in-circuit Heap leach in-circuit Gold doré Supplies Total Inventories (net of provisions) Less: Long-term inventory (heap leach stockpiles) Total Inventories – current portion 2012 2011 $ 90,735 19,140 6,189 7,612 123,676 175,430 299,106 (10,094) $ 289,012 $ 105,635 16,343 3,359 10,645 135,982 156,136 292,118 (12,174) $ 279,944 The provision for mine supplies obsolescence was increased for the year ended December 31, 2012 by $0.8 million (December 31, 2011 – $0.9 million) which was charged to cost of sales, as disclosed in note 18. 2012 ANNUAL REPORT 99 Centerra_Financials.indd 99 Apr/01/2013 1:28 PM The Company de-recognized underground supplies inventories of $14.0 million as part of the $180.7 million de-recognition of the underground development costs and underground assets resulting from the new mine plan for Kumtor announced on November 7, 2012 (see note 10). The table below summarizes inventories adjusted for the provision for obsolescence: (Thousands of U.S. Dollars) Total inventories Less : Provisions for supplies obsolescence Total Inventories (net of provisions) Less: Long-term inventory (heap leach stockpiles) Total Inventories – current portion 9. PREPAID EXPENSES (Thousands of U.S. Dollars) Revenue based taxes (note 16a) Insurance Rent Others Total 2012 2011 $ 302,079 (2,973) 299,106 (10,094) $ 289,012 $ 294,319 (2,201) 292,118 (12,174) $ 279,944 2012 30,000 6,120 586 12,611 49,317 $ $ $ 2011 – 6,697 440 19,699 $ 26,836 10. PROPERTY, PLANT AND EQUIPMENT The following is a summary of the carrying value of property, plant and equipment: (Thousands of U.S. Dollars) buildings equipment properties costs Equipment (“CIP”) Total Mine Plant and Mineral stripping Mobile in progress Capitalized Construction Cost January 1, 2011 Additions Disposals Reclassiﬁ cation $ 53,915 $ 310,919 $ 169,187 $ 71,351 $ 264,786 $ 149,484 $ 1,019,642 310 12,244 18,247 44,847 102,426 30,415 208,489 (389) (1,049) – 661 – – – – (20,588) 303 (394) (964) (22,420) – Balance December 31, 2011 $ 53,836 $ 322,775 $ 187,434 $ 116,198 $ 346,927 $ 178,541 $ 1,205,711 Additions De-recognition of underground assets Disposals Reclassiﬁ cation – (1,131) – – 7,422 (2,932) (1,032) 3,556 2,288 198,316 146,371 55,091 409,488 – (829) – – – – (18,521) (155,613) (178,197) (26,650) – (28,511) 4,517 (8,073) – Balance December 31, 2012 $ 52,705 $ 329,789 $ 188,893 $ 314,514 $ 452,644 $ 69,946 $ 1,408,491 Accumulated depreciation January 1, 2011 Charge for the year Disposals $ 32,255 $ 196,826 $ 116,357 $ 40,272 $ 114,913 $ 2,367 12,331 7,556 35,475 78,304 (384) (701) (3) – (20,008) Balance December 31, 2011 $ 34,238 $ 208,456 $ 123,910 $ 75,747 $ 173,209 $ Charge for the year De-recognition of underground assets Disposals 1,406 (388) – 8,267 (1,733) (832) 9,381 126,737 96,446 – (726) – – (9,366) (25,470) Balance December 31, 2012 $ 35,256 $ 214,158 $ 132,565 $ 202,484 $ 234,819 $ – – – – – – – – $ 500,623 136,033 (21,096) $ 615,560 242,237 (11,487) (27,028) $ 819,282 Net book Value Balance December 31, 2011 Balance December 31, 2012 $ 19,598 $ 114,319 $ 63,524 $ 40,451 $ 173,718 $ 178,541 $ 590,151 $ 17,449 $ 115,631 $ 56,328 $ 112,030 $ 217,825 $ 69,946 $ 589,209 100 CENTERRA GOLD INC. Centerra_Financials.indd 100 Apr/01/2013 4:25 PM The following is an analysis of the depreciation, depletion and amortization charge for the year recorded in the Statements of Financial Position and Statements of Earnings (Loss) and Comprehensive Income (Loss): (Thousands of U.S. Dollars) Amount recorded in cost of sales Amount recorded in corporate administration Amount recorded in abnormal mining costs Amount recorded in mine standby costs Amount recorded in other operating expenses Total included in Statements of Earnings (Loss) and Comprehensive Income (Loss) Amount recorded in inventory Amount capitalised in PP&E Total 2012 2011 $ 142,198 248 7,035 2,151 1,237 152,869 35,036 54,332 $ 242,237 $ 98,378 462 – – – 98,840 18,564 18,629 $ 136,033 De-recognition of underground development costs and underground assets On November 7, 2012, the Board of Directors approved an updated reserves estimate and new mine plan for Kumtor. Under the new mine plan, the existing underground development infrastructure at Kumtor will no longer be used. As a result, the Company de-recognized the capitalized cost of the underground development, underground equipment and the underground supplies inventories and recorded a charge of $180.7 million during the year ended December 31, 2012. The following is a summary of the $180.7 million charge: (Thousands of U.S. Dollars) Development costs Underground mobile equipment Total de-recognized underground development and equipment costs Underground development consumable inventory (note 8) Net Amount $ 155,613 11,097 166,710 13,963 $ 180,673 11. JOINT VENTURES The Company proportionately consolidates its 70% interest (2011 – 50% interest) in the Kara Beldyr Russian joint venture and seventy percent interest (2011 – 50% interest) in the Öksüt Turkish joint venture which the Company jointly-controls. On January 24, 2013, the Company acquired the remaining 30% interest in the Öksüt Gold Project (see note 33). Included in the consolidated ﬁ nancial statements are the following items that represent the Company’s proportionate interest in the assets and liabilities and expenses of these joint ventures: (Thousands of U.S. Dollars) Current assets Non-current assets Current liabilities Net assets Exploration expenses 12. GOODWILL $ 2012 861 1,415 (2,180) 96 $ 2011 151 246 (129) 268 6,423 1,470 The Company has two CGUs, one in the Kyrgyz Republic and one in Mongolia, of which only the Kyrgyz CGU has been allocated goodwill. The carrying value of goodwill for the Kyrgyz Republic remained unchanged at $129.7 million as at December 31, 2012 and December 31, 2011. Annual Test as at September 1, 2012: The Company performed its annual test for goodwill impairment as at September 1, 2012 in accordance with its policy described in note 3. 2012 ANNUAL REPORT 101 Centerra_Financials.indd 101 Apr/01/2013 1:28 PM The net asset value (“NAV”) of the Kyrgyz CGU is determined based on a discounted cash ﬂ ow analysis and the recoverable amount is determined using a market multiple of the NAV as public gold companies typically trade at a market capitalization that is based on a multiple of their underlying NAV. As an industry participant would include the future use, including any expansion projects over the life-of-mine (“LOM”) in determining fair value, the Company has included future conversion of resources into production and the associated capital and development expenditure in the discounted cash ﬂ ow estimates. As part of the Company’s annual reserve estimation process, each CGU updates its LOM plan which optimizes the production of its proven and probable reserves. The LOM is enhanced with the inclusion of resource conversion based on management’s best estimate of convertibility. The resulting valuation model includes the cash ﬂ ows which management expects to generate over the mine’s life, using various business and economic assumptions. Key assumptions used in the discounted cash ﬂ ow model and for calculating the Kyrgyz CGU recoverable value used in the September 1, 2012 impairment test were as follows: i. Gold price per ounce was $1,695 per ounce for the balance of 2012, $1,727 per ounce for 2013, $1,626 per ounce for 2014, $1,510 per ounce for 2015 and $1,249 per ounce for 2016 onwards. Management determined gold prices based on the average of the most recent market commodity price forecasts consensus up to September 1, 2012 from a number of recognized ﬁ nancial analysts. For the September 1, 2011 impairment test, gold price per ounce used was $1,700 per ounce for the balance of 2011, $1,545 per ounce for 2012, $1,450 per ounce for 2013, $1,300 per ounce for 2014 and $1,100 per ounce for 2015 onwards. ii. Total production over the life of the Kumtor mine of 7.4 million ounces (2011 – 6.9 million ounces) includes 2.6 million ounces (2011 – 2.4 million ounces) of converted resources. Management expects the Kyrgyz CGU to continue mining and processing ore (including converted resources) through 2025. Management determined its planned production proﬁ le and total life of mine production based on its development activity and its mine and processing plans as at September 1, 2012. iii. The real after tax discount rate of 11.5% (2011–11.5%) based on the Company’s estimated weighted-average cost of capital adjusted for the risks associated with the Kyrgyz cash ﬂ ows. As a result of the size of the excess of FVLCS as compared to the carrying amount of the Kyrgyz CGU as at September 1, 2012, management believes no reasonably possible change in assumptions would cause the carrying amount of the CGU to exceed its current recoverable amount. As a result, management concluded that current circumstances did not indicate that the carrying value of the Kyrgyz reporting unit exceeded its recoverable value and thus no impairment of its goodwill was required at this time. 13. OTHER ASSETS (Thousands of U.S. Dollars) Reclamation trust fund (note 17) Other long-term receivables Deferred ﬁ nancing fees (note 15) (a) Other assets (b) Total 2012 11,328 263 – 11,679 23,270 $ $ 2011 $ 9,081 4 2,474 13,115 $ 24,674 (a) The carrying value of the deferred ﬁ nancing fees was off-set against the balance of the short-term debt for the year ended December 31, 2012. (b) Includes $7.4 million (December 31, 2011 – $12.9 million) of deposits for the purchase of mobile equipment. 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Thousands of U.S. Dollars) Trade creditors and accruals Liability for share-based compensation Total 2012 58,704 5,236 63,940 $ $ 2011 $ 34,411 41,974 $ 76,385 102 CENTERRA GOLD INC. Centerra_Financials.indd 102 Apr/01/2013 1:28 PM 15. SHORT-TERM DEBT On November 16, 2010 the Company entered into a Credit Agreement with the European Bank for Reconstruction and Development (“EBRD”) which provides for a $150 million, three-year revolving credit facility (the “Facility”). On August 8, 2012, the Company borrowed $76 million under the facility for a six month term to be used for general corporate purposes. The amounts drawn on the Facility bear interest at six-month LIBOR rate of 0.72% plus 2.9%. Interest is payable at the end of the loan term. A commitment (standby) fee is also payable on the undrawn amount of the Facility. A commitment fee of 0.75% is applied to the undrawn portion of the Facility where less than 50% of the Facility amount is drawn, or 0.50% where more than 50% of the facility amount is drawn. The terms of the Facility requires the Company to pledge certain mobile equipment at Kumtor as security and maintain compliance with speciﬁ ed covenants, including ﬁ nancial covenants. The Company was in compliance with the covenants for the years ended December 31, 2012 and December 31, 2011. On February 5, 2013, the Company rolled over the $76 million for an additional six month term (repayable August 8, 2013). The amount of the short-term debt is net of deferred ﬁ nancing fees as shown below: (Thousands of U.S. Dollars) Revolving credit facility Deferred ﬁ nancing fees Total 16. TAXES 2012 76,000 (1,383) 74,617 $ $ 2011 – – – $ $ a. Revenue Based Taxes – Kumtor Kumtor pays taxes on revenue, at a rate of 13% of gross revenue, with an additional contribution of 1% of gross revenue payable to the Issyk-Kul Oblast Development Fund. During the period ended December 31, 2012, the 13% revenue-based tax expense recorded by Kumtor was $69.4 million ($122.3 million in 2011), while payments to the Issyk-Kul Oblast Development Fund of 1% of gross revenue totaled $5.3 million ($9.4 million in 2011). As at December 31, 2012, $18.6 million of revenue-based tax is payable to the Kyrgyz Government (December 31, 2011 – $15.2 million). On May 28, 2012, a tax advance agreement was signed by Kumtor and the Kyrgyz Government and $30 million of future revenue-based taxes were advanced to the government. This interest-free advance will be applied against revenue-based taxes otherwise payable during 2013 and was included in prepaid expenses at December 31, 2012 (note 9). In December 2012, at the request of the Kyrgyz Government, Kumtor advanced $8.3 million of 2012 revenue- based taxes otherwise payable in January 2013. As at December 31, 2012, the amount advanced of $8.3 million was used to reduce the amount of revenue-based taxes payable. Similarly, revenue-based taxes were also advanced at the request of the Kyrgyz Government in the fourth quarter of 2011 totalling $2 million. This advance was outstanding as at December 31, 2011 and was fully applied against Kumtor’s 2011 revenue-based taxes payable in January 2012. b. Income Tax Expense (Thousands of U.S. Dollars) Current tax Deferred tax Total Income Tax Expense 2012 11,734 (50) 11,684 $ $ 2011 2,856 5,274 8,130 $ $ No entities, other than those in the Mongolian segment, recorded an income tax expense during the years ended December 31, 2012 and December 31, 2011. Centerra_Financials.indd 103 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 103 The provision for income tax differs from the amount that would arise using the weighted average tax rate applicable to proﬁ ts of the consolidated entities as follows: (Thousands of U.S. Dollars) Earnings (loss) before income tax Income tax calculated at Canadian tax rates if applicable to earnings (loss) in the respective countries Income tax effects of: Difference between Canadian rate and rates applicable to subsidiaries in other countries Change in unrecognized deductible temporary differences Impact of foreign currency movements Non-deductible employee costs Other non-deductible expenses or non-taxable items c. Deferred Income Tax The signiﬁ cant components of deferred income tax assets and liabilities are as follows: (Thousands of U.S. Dollars) Deferred income tax assets: Inventory Provisions – asset retirement obligation Total deferred tax assets Deferred income tax liabilities: Cash and cash equivalents Short-term investments Property plant and equipment Other Total deferred tax liabilities Net deferred tax assets/(liabilities) 2012 2011 $ (172,314) (45,663) $ 379,008 107,070 41,070 8,040 298 1,339 6,600 11,684 (121,621) 11,555 2,032 1,200 7,894 8,130 $ 2012 2011 1,530 4,009 5,539 (848) (930) (5,569) – (7,347) (1,808) $ $ $ $ $ 2,487 2,682 5,169 (685) (930) (5,229) (222) (7,066) (1,897) $ $ $ $ $ $ The Company had the following positions in respect of which no deferred income tax asset has been recognized: (Thousands of U.S. Dollars) income capital Exploration Reserves Other Total Tax losses Tax losses Non Deductibles December 31, 2012 Expiring within one to ﬁ ve years Expiring after ﬁ ve years No expiry date December 31, 2011 Expiring within one to ﬁ ve years Expiring after ﬁ ve years No expiry date $ 23,120 191,592 260 $ 214,972 $ $ – – $ – – $ – – – – 32,458 26,772 3,679 7,177 $ 23,120 191,592 70,346 $ 32,458 $ 26,772 $ 3,679 $ 7,177 $ 285,058 $ 15,889 $ 142,499 $ – – $ – – – – 386 31,629 23,433 43,443 $ 158,774 $ 31,629 $ 23,433 $ 43,443 $ $ – – 6,854 6,854 $ 15,889 142,499 105,745 $ 264,133 No deferred tax liabilities have been recognized in respect of the aggregate amount of $1,092 million ($1,319 million as at December 31, 2011) of taxable temporary differences associated with investments in subsidiaries and interests in joint ventures, as the Company controls the timing and circumstances of the reversal of these differences, and the differences are not anticipated to reverse in the foreseeable future. 104 CENTERRA GOLD INC. Centerra_Financials.indd 104 Apr/01/2013 1:28 PM 17. PROVISIONS (Thousands of U.S. Dollars) Asset retirement obligations Other provision Total provisions Less: current portion (a) Asset Retirement Obligations (Thousands of U.S. Dollars) Kumtor gold mine Boroo gold mine Total asset retirement obligations Less: current portion (a) (b) 2012 2011 $ 54,554 614 55,168 (5,257) $ 49,911 $ 55,625 – 55,625 (1,848) $ 53,777 2012 30,986 23,568 54,554 (4,643) 49,911 $ $ 2011 $ 30,378 25,247 55,625 (1,848) $ 53,777 Centerra’s estimates of future asset retirement obligations are based on reclamation standards that meet regulatory requirements. Elements of uncertainty in estimating these amounts include potential changes in regulatory requirements, reclamation plans and cost estimates, discount rates and timing of expected expenditures. The Company estimates its total undiscounted future decommissioning and reclamation costs at December 31, 2012 to be $61.6 million (December 31, 2011 – $62.9 million). The following is a summary of the key assumptions on which the carrying amount of the asset retirement obligations is based: i. Expected timing of payment of the cash ﬂ ows is based on the LOM plans. ii. Ongoing reclamation spending continues at Boroo, while at Kumtor reclamation is expected to start at the end of its mine life. iii. Risk-free discount rates of 2% at Kumtor and 1.3% at Boroo at December 31, 2012 (December 31, 2011 – 2% at Kumtor and 0.6% at Boroo). The following is a reconciliation of the total discounted liability for asset retirement obligations (Thousands of U.S. Dollars) Balance at January 1 Liabilities paid Revisions in estimated timing and amount of cash ﬂ ows Impact of revisions in estimated timing and amount of cash ﬂ ows recorded in earnings Accretion expense Total asset retirement obligations Less: current portion Balance at December 31 2012 55,625 (702) (1,129) – 760 54,554 (4,643) 49,911 $ $ 2011 $ 40,433 (2,446) 15,942 494 1,202 55,625 (1,848) $ 53,777 In 1998, a Reclamation Trust Fund was established to cover the future costs of reclamation at the Kumtor gold mine, net of salvage values. This restricted cash is funded on the units of production method, annually in arrears, over the life of the mine and on December 31, 2012 was $11.3 million (December 31, 2011 – $9.1 million). In December 2012, the Company revised the closure plan at Boroo resulting in an extension of the reclamation spending by an additional two years, ending in 2020. As a result of extending the reclamation spending and an increase in the discount rate, the present value of the obligation at Boroo decreased by $1.1 million with an offsetting decrease in the related reclamation asset. In December 2011, the Company revised the closure plan at Boroo resulting in an extension of the reclamation spending to 2018 and updated the closure cost plans for Kumtor and Boroo. As a result of extending the reclamation spending, a decrease in the discount rate and an update to the closure cost plan, the present value of the obligation at Boroo increased by $8.9 million with an offsetting increase in the related reclamation asset. A similar update to Kumtor’s closure cost plan and a decrease in the discount rate resulted in an increase in the obligation of $7.5 million, with $0.5 million of the increase charged to earnings and $7.0 million recorded as an increase in the related reclamation asset, included as part of property plant and equipment. 2012 ANNUAL REPORT 105 Centerra_Financials.indd 105 Apr/01/2013 1:28 PM The next regular update to the closure costs estimates at Kumtor is scheduled in 2013, at which time the asset retirement obligation for Kumtor will be updated for the new closure cost estimates. The last closure cost update at Boroo was completed in 2012 and its asset retirement obligation was updated at that time. (b) Other provision On February 27, 2012, the Company announced that it would close its exploration ofﬁ ce in Reno, Nevada USA as of June 30, 2012. As a result, a $0.95 million provision was recorded by the Company. The provision is based on current estimates of the likely amounts to be incurred and include termination beneﬁ ts that affected employees will be entitled to receive. During the year ended December 31, 2012, the Company made a payment of $0.33 million to settled part of the provision. The remaining balance of the provision will be settled over the next fourteen months. 18. COST OF SALES (Thousands of U.S. Dollars) Operating costs: Salaries and beneﬁ ts (a) Consumables Third party services Other operating costs Royalties, levies and production taxes Changes in inventories Inventories obsolescence (Note 8) Depreciation, depletion and amortization 2012 2011 $ 72,251 96,790 5,789 18,236 6,500 44,934 244,500 772 142,198 $ 387,470 $ 80,520 212,240 5,055 16,221 4,321 (35,336) 283,021 897 98,377 $ 382,295 (a) Included in the amounts shown for the year ended December 31, 2011 is $14.1 million recorded for the settlement of the Kyrgyz Social Fund assessment between Kumtor and the Kyrgyz Government, in respect of the base wages of Kumtor’s national employees, for the ﬁ rst nine months of 2011 and the full year of 2010. In late 2010, the Social Fund notiﬁ ed the Company of its position that the Company should pay contributions to the Social Fund not only in respect of base wages but also in respect of the premium compensation that the Company is required to pay employees for work at high-altitude. As a result of the revised basis for calculation of the Company’s social fund contributions including the high altitude premium, the Company paid $6.2 million in 2012 as the Company’s contributions to the Social Fund. 19. ABNORMAL MINING COSTS (Thousands of U.S. Dollars) Abnormal mining costs (a) Unloading of abnormal waste (b) 2012 36,112 24,769 60,881 $ $ 2011 – – – $ $ (a) The original mining plan at Kumtor for the year ended 2012 included stripping of waste material in the SB Zone and the continued normal mining of ice and waste in the southeast section of the pit to allow access to and mining of ore. The Company announced on March 27, 2012 its decision to re-sequence the Kumtor mine plan and delay the mining of ore in the SB zone due to concerns created by the acceleration of ice and waste movement in the high movement area above the southeast portion of the SB zone. The resulting stripping activity in the southwest portion of the SB zone under the revised mine plan during a period where little ore was mined resulted in a signiﬁ cant amount of costs which did not relate to the production of inventory in the period and were expensed. (b) The revised mining plan for 2012 required that a signiﬁ cant area of ice and waste be removed, primarily located outside of the current pit limits, the costs of which have been expensed. 20. MINE STANDBY COSTS Over a period of ten days ending February 16, 2012 the Company’s operations at Kumtor were temporarily suspended due to a labour dispute initiated by unionized workers at Kumtor. The Company incurred and expensed $4.6 million in labour, maintenance and mine support costs directly as a result of the labour dispute at Kumtor. 106 CENTERRA GOLD INC. Centerra_Financials.indd 106 Apr/01/2013 1:28 PM 21. OTHER OPERATING EXPENSES (Thousands of U.S. Dollars) Social development contributions (a) Claim settlement (b) Net alluvial production (income) expenses Project care and maintenance (c) Project closure (d) 2012 26,163 – (48) 369 7,796 34,280 $ $ 2011 $ 12,641 2,587 (129) 372 – $ 15,471 (a) During the year ended December 31, 2012, the Company, through its subsidiary Kumtor, contributed $21 million to a national micro-credit ﬁ nancing program, whose objective is to provide ﬁ nancing for small sustainable development projects throughout the Kyrgyz Republic. The Company also accrued a further $1.1 million for the construction and equipping of a maternity hospital in Ulaanbaatar through the Boroo Community Development Initiatives program in Mongolia. During the year ended December 31, 2011, the Company, through its subsidiary Kumtor, contributed $10 million to be used for the refurbishment of schools through the subsidiary’s Community Development and Initiatives program in the Kyrgyz Republic. On-going spending on social development programs were $4.0 million in 2012 and $2.6 million in 2011. (b) During the year ended December 31, 2011, the Company accrued $2.6 million relating to the settlement of a claim for compensation that it received from the Mongolian General Department of Specialized Inspection (“SSIA”) in October 2009 following the June 2009 inspection at the Boroo project. The claim related to certain mineral reserves, including state alluvial reserves covered by the Boroo project licenses that are recorded in the Mongolian state reserves registry, but for which there are no or incomplete records or reports of mining activity. (c) Project care and maintenance costs of $0.4 million for the year ended December 31, 2012 (December 31, 2011 – $0.4 million) were incurred to maintain the site at the Gatsuurt development project. (d) Project closure costs of $7.8 million in 2012 were expensed (December 31, 2011 – Nil) following the decision on August 1, 2012 to place the underground project at Kumtor on hold and ultimately decommissioned following the change in mine plan announced on November 7, 2012 (Note 10). Closure costs include employee severance payments, ground condition monitoring, remedial work, water control and ventilation. 22. EXPLORATION AND BUSINESS DEVELOPMENT COSTS (Thousands of U.S. Dollars) Exploration: Mine site exploration Advanced projects Generative exploration and other projects Exploration administration Total exploration Business development 23. CORPORATE ADMINISTRATION (Thousands of U.S. Dollars) Administration and ofﬁ ce Professional fees Salaries and beneﬁ ts Share-based compensation (recovery) Depreciation and amortization 24. OTHER (INCOME) AND EXPENSES (Thousands of U.S. Dollars) Interest income Loss on disposal of assets Bank charges Miscellaneous income Foreign exchange loss /(gain) 2012 2011 11,446 9,302 13,880 3,311 37,939 592 38,531 2012 7,574 7,186 15,099 (3,061) 248 27,046 $ 12,715 12,889 10,595 3,399 39,598 3,296 $ 42,894 $ 2011 7,876 4,835 14,396 17,333 462 $ 44,902 2012 (728) 556 67 (119) 92 (132) 2011 $ (1,175) 484 71 (343) (92) $ (1,055) $ $ $ $ $ $ 2012 ANNUAL REPORT 107 Centerra_Financials.indd 107 Apr/01/2013 1:28 PM 25. FINANCE COSTS (Thousands of U.S. Dollars) Revolving credit facility: Amortization of deferred ﬁ nancing costs Interest expense (Note 15) Commitment fees and other revolving credit facility costs Accretion expense and impact of revisions on asset retirement obligations (Note 17) 2012 2011 $ $ 1,091 1,117 1,010 760 3,978 $ 772 – 1,077 1,696 3,545 $ 26. SHAREHOLDERS’ EQUITY a. Share Capital Centerra is authorized to issue an unlimited number of common shares, class A non-voting shares and preference shares with no par value. b. Earnings (loss) per Share All potentially dilutive securities were excluded from the calculation of diluted loss per share for the year ended December 31, 2012 as they would have been anti-dilutive as a result of the net loss recorded for the period. For the year ended December 31, 2011 certain potentially dilutive securities were excluded from the calculation of diluted earnings per share due to the exercise prices of certain stock options being greater than the average market price of the Company’s ordinary shares for the period and the effect of the assumed potential conversion of the performance share units and restricted share units to equity which was anti-dilutive. (Thousands of U.S. Dollars) Net earnings (loss) attributable to shareholders Weighted average number of common shares outstanding (thousands) Effect of potential dilutive securities: Stock options (thousands) Restricted share units (thousands) Diluted weighted average number of common shares outstanding (thousands) Basic and diluted earnings (loss) percommon share 2012 2011 $ (183,998) 236,369 $ 370,878 236,088 – – 236,369 248 18 236,354 $ (0.78) $ 1.57 Potentially dilutive securities, including stock options, restricted share units, performance share units (PSUs) and annual performance share units (annual PSUs), summarized below were excluded in the calculation of the diluted earnings (loss) per share: (Thousands of units) Stock options Restricted share units PSUs and Annual PSUs (1) 2012 597 92 150 839 2011 215 – 1,903 2,118 (1) After the impact of the estimated adjustment factor which represents the relative performance of Centerra’s share as compared to the S&P/TSX Global Gold Index Return Value during the applicable period. c. Dividends Dividends are declared in Canadian dollars and paid in Canadian dollars. At December 31, 2012, dividends payable to Kyrgyzaltyn of $5.9 million was outstanding (see note 28). The details of dividends distribution in 2012 and 2011 are as follows: (Thousands of U.S. Dollars) Dividends declared (Thousands of U.S. Dollars) Dividends declared (Canadian Dollar per share amount) Special Dividends declared (Canadian Dollar per share amount) 108 CENTERRA GOLD INC. 2012 2011 28,187 $ 99,322 0.12 – 0.12 $ $ 0.10 0.30 0.40 $ $ $ Centerra_Financials.indd 108 Apr/01/2013 1:28 PM d. Share-Based Compensation The impact of Share-Based Compensation is summarized as follows: (Millions of U.S. dollars except as indicated) (i) Stock options (ii) PSUs (iii) Annual PSUs (iv) Deferred share units (v) Restricted share units (i) Stock Options Number outstanding Dec 31/12 1,674,194 603,126 76,474 209,690 112,397 Expense/(Income) Liability Dec 31/12 Dec 31/11 Dec 31/12 Dec 31/11 $ $ 2.3 (3.3) – (2.5) 0.5 (3.0) $ $ 1.8 15.2 1.9 (0.7) 0.9 19.1 $ $ – 2.3 – 1.9 1.0 5.2 $ – 33.0 1.9 6.2 0.9 $ 42.0 Centerra has established a stock option plan under which options to purchase common shares may be granted to ofﬁ cers and employees of the Company. Options granted under the plan have an exercise price of not less than the weighted average trading price of the common shares where they are listed for the ﬁ ve trading days prior to the date of the grant. The options issued prior to 2006 vest over ﬁ ve years while options issued in or after 2006 vest over 3 years, except for special grants issued in 2010 and 2012 which vest under terms ranging from 9 months to 2 years. All issued options expire after eight years from the date granted. Options may be granted with a related share appreciation right. In these circumstances, the participant can either elect to receive shares by exercising the stock option or to receive payment in cash equal to the equivalent gain in the stock price. Centerra, at its discretion, can require any holder who has exercised a share appreciation right to exercise their option instead, or can elect to satisfy the cash amount owing upon exercise of a share appreciation right with common shares. There are currently no stock option grants with a share appreciation right outstanding. A maximum of 18,000,000 common shares are available for issuance upon the exercise of options granted under the plan. Certain restrictions on grants apply, including that the maximum number of shares that may be granted to any individual within a 12-month period can not exceed 5% of the outstanding common shares. Average exercise award price for options granted in the year (Cdn $/share) Weighted average exercise price on outstanding options (Cdn $/share) Centerra’s stock options transactions during the year were as follows: 2012 11.50 11.88 $ $ 2011 18.42 12.31 $ $ Balance, January 1 Granted Cancelled Exercised Balance, December 31 2012 2011 Weighted Average Exercise Price-Cdn $ $ $ 12.31 11.50 (16.42) (4.81) 11.88 Number of Weighted Average Exercise Options Price-Cdn $ 903,986 318,106 – (469,644) 752,448 $ 7.45 18.42 – (7.09) $ 12.31 Number of Options 752,448 989,953 (37,455) (30,752) 1,674,194 The weighted average share price at the date of exercise for share options exercised in 2012 was Cdn $19.56 (2011 – Cdn $20.07). Centerra_Financials.indd 109 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 109 The Black-Scholes model was used to estimate the fair value of stock options. In determining the fair value of these employee stock options, the following weighted average assumptions were used for the series issued in 2012: • On March 6, 2012, Centerra granted 333,861 stock options at an exercise price of Cdn $19.48 per share. The fair value of the stock options was determined using the Black-Scholes valuation model, assuming a weighted average expected life of 3 years, 49.03% historical volatility of the Company’s share price, dividend yield of 2.26% and a risk-free rate of return of 1.18%. The resulting weighted average fair value per option granted was Cdn $4.68. The estimated fair value of the options is expensed over their graded vesting periods, which range from 1 year to 3 years. • On August 14, 2012, Centerra granted 106,092 stock options at an exercise price of Cdn $7.29 per share. The fair value of the stock options was determined using the Black-Scholes valuation model, assuming a weighted average expected life of 3 years, 67.18% historical volatility of the Company’s share price, dividend yield of 2.03% and a risk-free rate of return of 1.23%. The resulting weighted average fair value per option granted was Cdn $2.58. The estimated fair value of the options is expensed over their graded vesting periods, which range from 1 year to 3 years. • On August 14, 2012, Centerra granted 500,000 stock options at an exercise price of Cdn $7.29 per share. The fair value of the stock options was determined using the Black-Scholes valuation model, assuming a weighted average expected life of 2.5 years, 70.89% historical volatility of the Company’s share price, dividend yield of 2.03% and a risk-free rate of return of 1.16%. The resulting weighted average fair value per option granted was Cdn $2.54. The estimated fair value of the options is expensed over their graded vesting periods, which range from 1 year to 2 years. • On November 19, 2012, Centerra granted 50,000 stock options at an exercise price of Cdn $9.31 per share. The fair value of the stock options was determined using the Black-Scholes valuation model, assuming average expected life of 10 months, 73.89% historical volatility of the Company’s share price, dividend yield of 1.87% and a risk-free rate of return of 1.10%. The resulting weighted average fair value per option granted was Cdn $2.47. The estimated fair value of the options is expensed over a ten months period. The terms of the options outstanding at December 31, 2012 are as follows: Award Date 2008 2009 2010 2011 2011 2012 2012 2012 2012 Award Price $14.29 (Cdn) $4.81 (Cdn) $14.37 (Cdn) $18.31 (Cdn) $22.28 (Cdn) $19.48 (Cdn) $7.29 (Cdn) $7.29 (Cdn) $9.31 (Cdn) Expiry Date March 18, 2016 February 17, 2017 August 19, 2018(a) March 7, 2019 September 14, 2019 March 6, 2020 August 14, 2020 August 14, 2020(a) November 19, 2020(b) Number of Options Outstanding 38,030 265,560 100,000 299,499 9,107 314,410 102,588 495,000 50,000 Number of Options Vested 38,030 265,560 100,000 99,824 3,034 – – – – (a) These grants have a different vesting schedule whereby 50% vests on the ﬁ rst anniversary and the remaining 50% vest on the secondary anniversary (b) The grant carries a 100% vesting on the earlier of August 19, 2013 and the achievement of speciﬁ c objectives 1,674,194 506,448 In 2012, $2.3 million ($1.8 million in 2011) of compensation expense was recorded related to stock options. (ii) Performance share unit plan Centerra has established a performance share unit plan for employees and ofﬁ cers of the Company. A performance share unit represents the right to receive the cash equivalent of a common share or, at the Company’s option, a common share purchased on the market. Performance share units issued before 2010 vest two years after December 31 of the year in which they were granted. Performance share units granted in 2010 and thereafter vest 50% at the end of the year after grant and the remaining 50% the following year. The number of units which will vest is determined based on Centerra’s total return performance (based on the preceding sixty-one trading days volume weighted average share price) relative to the S&P/TSX Global Gold Index Total Return Index Value during the applicable period. The number of units that vest is determined by 110 CENTERRA GOLD INC. Centerra_Financials.indd 110 Apr/01/2013 1:28 PM multiplying the number of units granted to the participant by the adjustment factor, which ranges from 0 to 1.5 for units granted before 2010 or 0 to 2.0 for units granted in 2010 and onwards. Therefore, the number of units that will vest and are paid out may be higher or lower than the number of units originally granted to a participant. In 2010 “special” performance share units were granted in lieu of stock options. The “special” units vest one third at the end of each year of their three-year term and have a ﬁ xed adjustment factor of 1.0. If dividends are paid, each participant will be allocated additional performance share units equal in value to the dividend paid on the number of common shares equal to the number of performance share units held by the participant, based on the sixty-one trading days volume weighted average share price on the date of the dividend. Centerra’s performance share unit plan transactions during the year were as follows: Balance, January 1 Granted Exercised Cancelled Balance, December 31 2012 2011 1,314,134 227,505 (903,534) (34,979) 603,126 1,528,209 219,211 (421,964) (11,322) 1,314,134 The Monte Carlo simulated option pricing model was used in estimating the fair value of performance share units that are not vested as at year end. The model requires the use of subjective assumptions, including expected stock-price volatility, risk-free rate of return and forfeiture rate. Historical data has been considered in setting the assumptions. In determining the fair value of these units, the principal assumptions used in applying the Monte Carlo simulated option pricing model were as follows: Share price – Cdn $ S&P/TSX Global Gold Index – Cdn $ Expected life (years) Expected volatility – Centerra’s share price Expected volatility – S&P/TSX Global Gold Index Expected dividends Risk-free rate of return Forfeiture rate $ $ 2012 9.07 324.18 1.35 88.0% 29.4% 1.3% 1.6% 3.8% 2011 $ 20.37 $ 429.16 1.29 54.1% 33.4% 1.5% 0.4% 2.8% For the units that are fully vested as at year end, the fair value of the units were determined using the calculated sixty-one trading days volume weighted average share price multiplied by the adjustment factor. In determining the fair value of the vested units, the principal assumptions used were a share price of Cdn $10.33 and adjusted factor of 1.04 (December 31, 2011 – share price of Cdn $20.37 and adjusted factor of 1.53). The vested number of units outstanding as at December 31, 2012 are 306,328 (December 31, 2011 – 892,262). The intrinsic value of the vested units at December 31, 2012 is $2.3 million (December 31, 2011 – $27.8 million). At December 31, 2012, the total number of units outstanding (vested and unvested) was 603,126, with a related liability of $2.3 million (December 31, 2011 – 1,314,134, with a related liability of $33.0 million). In 2012, a compensation cost recovery of $3.3 million was recorded on this plan (a charge of $15.2 million in 2011) as a result of a decrease in the market price of the Company’s common shares in 2012. (iii) Annual performance share unit plan Centerra has established an annual performance share unit plan for eligible employees at its mine sites. A performance share unit represents the right to receive the cash equivalent of a common share or, at the Company’s option, a common share purchased on the market. At the start of a year, an eligible employee receives a number of performance share units based on Centerra’s preceding sixty-one trading days volume weighted average share price. The number of units which will vest at the end of the same year is determined based on Centerra’s total return performance (based on the preceding sixty-one trading days weighted average share price) relative to the S&P/TSX Global Gold Index Total Return Index Value during the applicable period. 2012 ANNUAL REPORT 111 Centerra_Financials.indd 111 Apr/01/2013 1:28 PM The number of units that vest is determined by multiplying the number of units granted to the participant by the adjustment factor, which can be as high as a factor of 2.0 or potentially result in no payout. The annual performance share units cannot be converted to shares at the option of the unit holder. If dividends are paid, each participant will be allocated additional performance share units equal in value to the dividend paid on the number of common shares equal to the number of performance share units held by the participant, based on the sixty-one trading days volume weighted average share price on the date of the dividend. Centerra’s annual performance share unit plan transactions during the year were as follows: Balance, January 1 Granted Exercised Cancelled Balance, December 31 2012 77,013 89,654 (77,013) (13,180) 76,474 2011 156,571 96,059 (159,497) (16,120) 77,013 At December 31, 2012, the number of units outstanding and fully vested was 76,474 with a related liability of $ Nil (December 31, 2011 – 77,013 with a related liability of $1.9 million). In 2012, compensation cost expense of $ Nil was recorded on this plan ($1.9 million in 2011). The fair value of the units that are fully vested as at year end was determined using the calculated sixty-one trading day volume weighted average share price multiplied by the adjustment factor. In determining the fair value of the vested units, the principal assumptions used were a share price of Cdn $10.33 and weighted average adjusted factor of Nil (December 31, 2011 – share price of Cdn $20.37 and weighted adjusted factor of 1.17). (iv) Deferred share unit plan Centerra has established a deferred share unit plan for Directors of the Company to receive all or a portion of their annual retainer as deferred share units. A similar plan was established to provide compensation in the form of deferred share units to the Company’s Vice Chair (the “Vice Chair Deferred Unit Plan”) for the duration of the Vice Chair tenure. Deferred share units are paid in full to a Director and to the Vice Chair no later than December 31 of the calendar year immediately following the calendar year of termination of service. A deferred share unit represents the right to receive the cash equivalent of a common share or, at the Company’s option, a common share purchased on the market. Deferred share units vest immediately upon grant. If dividends are paid, each Director and the Vice Chair will be allocated additional deferred share units equal in value to the dividend paid on the number of common shares equal to the number of deferred share units held. The deferred share units cannot be converted to shares at the option of the unit holder. Centerra’s deferred share unit plan transactions during the year were as follows: Balance, January 1 Granted Exercised Balance, December 31 2012 2011 354,516 12,724 (157,550) 209,690 344,728 9,788 – 354,516 At December 31, 2012, the number of units outstanding was 209,690 with a related liability of $1.9 million (December 31, 2011 – 354,516 with a related liability of $6.2 million). In 2012, a compensation cost recovery of $2.5 million was recorded on this plan (recovery of $0.7 million in 2011) as a result of a decrease in the market price of the Company’s common shares in 2012. (v) Restricted share unit plan Effective as of January 7, 2011, Centerra established a restricted share unit plan for non-executive Directors and designated employees of the Company to receive all or a portion of their annual retainer and salaries as restricted units. 112 CENTERRA GOLD INC. Centerra_Financials.indd 112 Apr/01/2013 1:28 PM The restricted share units vest immediately upon grant and are redeemed on a date chosen by the participant (subject to certain restrictions as set out in the plan). A restricted share unit represents the right to receive the cash equivalent of a common share or, at the holder’s option, a common share issued from the Company’s treasury. The plans reserves 1,000,000 shares for issuance. If dividends are paid, each participant will be allocated additional restricted share units equal in value to the dividend paid on the number of common shares equal to the number of restricted share units held. Centerra’s restricted share unit plan transactions during the year were as follows: Balance, January 1 Granted Exercised Balance, December 31 2012 49,659 94,737 (31,999) 112,397 2011 – 55,422 (5,763) 49,659 At December 31, 2012, the number of units outstanding was 112,397 with a related liability of $1.0 million and expense of $0.5 million (December 31, 2011 – 49,659 units with a related liability and expense of $0.9 million). 27. COMMITMENTS AND CONTINGENCIES Commitments As at December 31, 2012, the Company had entered into contracts to purchase capital equipment and operational supplies totalling $98.3 million (Kumtor $97.9 million and Boroo $0.4 million). These commitments are expected to be settled over the next twelve months. Leases The Company enters into operating leases in the ordinary course of business, primarily for its various ofﬁ ces and facilities around the world. Payments under these leases represent contractual obligations as scheduled in each agreement. The signiﬁ cant operating lease payments, including operating costs, are for its corporate ofﬁ ces in Toronto and in the current year 2012 were $0.7 million (2011 – $0.7 million). The future aggregate minimum lease payments for the non-cancellable operating lease of the Toronto Corporate ofﬁ ce are as follows: (Thousands of U.S. Dollars) 2012 2013 2014 2015 2016 Contingencies Kyrgyz Republic 2012 – 401 438 478 478 1,795 $ $ $ 2011 398 401 438 478 478 $ 2,193 (a) Kyrgyz Republic State Commission Report In 2012, Kyrgyz Government established a state commission for the purpose of inspecting and reviewing Kumtor’s compliance with Kyrgyz operational and environmental laws and regulations and community standards (the “State Commission”). The following developments have occurred: (i) State Commission Report In December 2012, the State Commission issued its ﬁ nal report (the “State Commission Report”), following ﬁ ve months of study and several visits to the Kumtor mine site, and over 120 written requests for information on a wide variety of matters going back to 1993 when the original agreement regarding the Kumtor Project was executed. The State Commission was comprised of three working groups with responsibility for environmental and technical matters, legal matters (including a review of all prior and current agreements relating to the Kumtor Project), and social-economic matters (including a review of ﬁ nancial, taxation, procurement and employment-related matters). 2012 ANNUAL REPORT 113 Centerra_Financials.indd 113 Apr/01/2013 1:28 PM The State Commission Report includes a large number of allegations in regard to prior transactions relating to the Kumtor Project and the Kumtor Project’s operations and management. The State Commission Report recommends that the Kyrgyz Government open negotiations under which the Kumtor Project is governed, including requiring Kumtor to accept the current tax regime and pay higher environmental charges; changes in the management of Kumtor and Centerra including greater representation by Kyrgyzaltyn on the Centerra board of directors and greater representation of Kyrgyz citizens in management of the Kumtor Project; and recommendations for additional charges and fees to be paid by the Kumtor Project including for land use, and for those items raised by SIETS. The State Commission Report also recommends various actions to be taken by Kyrgyzaltyn, by the Kyrgyz Government, including revisions to Kyrgyz law, and the Kyrgyz Republic General Prosecutor’s Ofﬁ ce with respect to investigating the personal liability of parties who were involved in negotiating previous agreements governing the Kumtor Project for violations of Kyrgyz legislation and for inﬂ icting losses to the Kyrgyz Republic’s interests. The State Commission recommended the establishment of a working group to give effect to the recommendations, in particular the opening of negotiations with Centerra and Kumtor. The Company received the ﬁ nal copy of the State Commission Report on January 18, 2013. Subsequently, the Kyrgyz Government received the State Commission Report and issued a decree, Decree of the Kyrgyz Government dated January 24, 2013, #34 (“Decree #34”), accepting the State Commission Report and sending it to the Kyrgyz Parliament. Kyrgyz Government also established a working group to hold discussions on the revisions of terms governing the Kumtor Project, particularly on revisions to the tax regime and other matters identiﬁ ed in the State Commission Report. The Company believes that the conclusions and claims in the State Commission Report are exaggerated or without merit. The Company has responded in detail in writing to such conclusions and claims. The Company believes that the agreements entered into in 2009 governing the Kumtor Project (the “Kumtor Project Agreements”) are legal, valid and enforceable obligations. The Kumtor Project Agreements were reviewed and approved by the Kyrgyz Republic Government and the Kyrgyz Republic Parliament, and were the subject of a positive decision of the Kyrgyz Republic Constitutional Court and a legal opinion by the Kyrgyz Republic Ministry of Justice. The Company intends to meet with the working group and other Kyrgyz Government ofﬁ cials, with the objective of resolving matters through constructive dialogue. However, there can also be no assurance that such discussions will result in a successful outcome for the Company, or that the Kyrgyz Government will not take actions that are inconsistent with its obligations under the Kumtor Project Agreements or cancel government decrees, orders or licenses under which the Kumtor Project currently operates. Any such actions could have a material adverse impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial conditions. (ii) Claims from Kyrgyz Authorities for Alleged Environmental Violations Kumtor received in mid-December 2012, ﬁ ve claims from the SIETS for alleged environmental violations. The claims are for an aggregate amount of approximately $152 million, including (i) a claim for approximately $142 million for alleged damages in relation to the placement on waste dumps of waste rock (unprocessed rock) from mining operations for the period from 2000 to 2011; (ii) a claim for approximately $4 million for use of water resources from Petrov Lake for the period of 2000 to 2011; and (iii) a claim for approximately $2.3 million for alleged damages caused to land resources, including in some cases from the time of initial construction of the Kumtor facilities in 1995. One claim for $2.8 million for waste placed in the tailings management facilities and for emissions for 2009– 2011 was withdrawn after discussions with the applicable Kyrgyz regulatory authorities, although there are no assurances that further claims will not be issued on this matter. The claims reference the review of the Kumtor Project carried out by the environmental and technical working group of the State Commission. Kumtor disagrees with these claims and has responded to them in detail in writing to the relevant authority. Centerra believes that the Kumtor Project operates in compliance with Kyrgyz laws on environmental, safety and health standards and that Kumtor has good defenses against these claims under Kyrgyz law and the Project Agreements, which were reviewed and approved by all relevant Kyrgyz governmental authorities, including the Kyrgyz Government, Parliament and the Constitutional Court, and subject to a legal opinion by the Kyrgyz Republic Ministry of Justice. While the Company believes that such claims are exaggerated or without merit, there can be no assurances that these claims will be successfully resolved in favour of the Company or that further claims will not be issued. 114 CENTERRA GOLD INC. Centerra_Financials.indd 114 Apr/01/2013 1:28 PM (iii) Decree #168 The Government cancelled, on July 5, 2012, Government Decree #168, which provided Kumtor with land use (surface) rights over the Kumtor concession area for the duration of the Restated Concession Agreement. Correspondingly, the related land use certiﬁ cate issued by the local land ofﬁ ce was also cancelled. Based on advice from Kyrgyz legal counsel, the Company believes that the purported cancellation of land rights is in violation of the Kyrgyz Republic Land Code because such legislation provides that land rights can only be terminated by court decision and on the listed grounds set out in the Land Code. To the extent that Kumtor’s land use rights are considered invalid (which the Company does not accept), the Company would seek to enforce its rights under the Restated Investment Agreement to obtain the rights otherwise guaranteed to it. (b) Kyrgyz Republic Social Fund Dispute The Social Fund commenced a claim in the Kyrgyz courts to invalidate documentary acts (assessments) issued by the Social Fund for the years 2004–2009. Preliminary motions regarding jurisdictional matters were argued on August 28, 2012 and subsequently determined in favour of Kumtor. Such decision was appealed by the Social Fund to the Bishkek City Court, which dismissed the appeal of the Social Fund on November 28, 2012. In early February 2013, the Social Fund appealed this decision of the Bishkek City Court to the Kyrgyz Republic Supreme Court. In addition to the court claim commenced by the Social Fund, the Company also received notices from the Social Fund in July 2012 alleging (i) the illegality of an August 23, 1994 agreement between the Social Fund and Kumtor Operating Agreement, which if found invalid, could require Kumtor to pay Social Fund contributions for all expatriate employees for the period from February 15, 1993 to date (subject to the application of Kyrgyz limitation periods and the terms of a release agreement entered into between the Government and KOC (among others) dated June 6, 2009); and (ii) that Kumtor should make Social Fund contributions on high altitude premiums paid to all Kumtor employees before 2010. The Company does not believe it is likely that the Social Fund will be successful in its claims. However, there are no assurances that the Company and Kumtor will be able to resolve the outstanding matters relating to the Social Fund without any material impact on the Company’s future cash ﬂ ows, earnings, results of operations and ﬁ nancial condition. Mongolia Gatsuurt and the Impact of the Mongolian Water and Forest Law The Mongolian Parliament enacted in July 2009 the Mongolian Law to Prohibit Mineral Exploration and Mining Operations at River Headwaters, Protected Zones of Water Reservoirs and Forested Areas (the “Water and Forest Law”) which prohibits mineral prospecting, exploration and mining in water basins and forestry areas in Mongolia. The law provides for a speciﬁ c exemption for “mineral deposits of strategic importance”, which exempts the Boroo hard rock deposit from the application of the law. Centerra’s Gatsuurt licenses are currently not exempt. Under the Mineral Laws of Mongolia, Parliament on its own initiative or, on the recommendation of the Mongolian Government, may designate a mineral deposit as strategic. Such designation could result in Mongolia receiving up to a 34% interest in the applicable project. Centerra is currently in discussions with the Mongolian Government regarding the development of the Gatsuurt property. Centerra is reasonably conﬁ dent that the economic and development beneﬁ ts resulting from its exploration and development activities will ultimately result in the Water and Forest Law having a limited impact on the Gatsuurt property, in particular, and other Company’s Mongolian activities including ATO. There can be no assurance, however, that this will be the case. Unless the Water and Forest Law is repealed or amended such that the law no longer applies to the Gatsuurt project or Gatsuurt is designated as a “mineral deposit of strategic importance” that is exempt from the Water and Forest Law, mineral reserves at Gatsuurt may have to be reclassiﬁ ed as mineral resources or eliminated entirely and the Company may be required to write-off the associated investment in Gatsuurt and Boroo. As at December 31, 2012, the Company had net assets recorded amounting to approximately $37 million related to the investment in Gatsuurt and approximately $28 million remaining capitalized for the Boroo mill facility and other surface structures which are expected to be utilized for the processing of ore from Gatsuurt. Although the Company expects to exploit the Gatsuurt deposit, should this not be the case, the Company would be required to write-off these amounts. A revocation of the Company’s mineral licenses, including the Gatsuurt mineral license, or the reclassiﬁ cation of mineral reserves or the write-off of assets could have an adverse impact on Centerra’s future cash ﬂ ows, earnings, results of operations or ﬁ nancial condition. 2012 ANNUAL REPORT 115 Centerra_Financials.indd 115 Apr/01/2013 1:28 PM Corporate Enforcement Notice by Sistem: During 2011, Centerra was served by a Turkish company, Sistem Muhenkislik Insaat Sanayi Ticaret SA (“Sistem”), with a notice of enforcement to seize any shares and dividends in Centerra held in the name of the Kyrgyz Republic, followed by a notice of garnishment in April 2011 for any debts owed by Centerra to the Kyrgyz Republic. These notices were served by Sistem as part of the enforcement proceedings brought by Sistem in the Ontario Superior Court to collect approximately US$11 million with additional interest, owed to Sistem by the Kyrgyz Republic in accordance with a judgment of the Ontario Superior Court enforcing an international arbitration award against the Kyrgyz Republic. In these Ontario proceedings, Sistem alleges that the shares in Centerra owned by Kyrgyzaltyn and any dividends paid in respect of those shares, are in fact legally and beneﬁ cially owned by the Kyrgyz Republic and are therefore subject to execution to pay the judgment. Based on legal advice received, Centerra disputes those allegations and paid to Kyrgyzaltyn its portion of Centerra dividends payable on May 18, 2011 (approximately Cdn $31 million) and on May 31, 2012 (approximately Cdn $3 million). Sistem is continuing with its claim regarding the Centerra shares owned by Kyrgyzaltyn. If this claim is successful in the Ontario court proceedings, Sistem may have a right to execute its judgment against those shares and may assert a claim against Centerra in respect of the payment of the dividends to Kyrgyzaltyn. However, Centerra believes it has a strong defense to that claim based on the facts and the law. Preliminary motions regarding jurisdictional matters have been heard in the Ontario Superior Court over the course of 2012, with the objective of setting aside the Ontario judgment enforcing the arbitration award. The lower court decision found in favour of Sistem and dismissed the motion. Kyrgyzaltyn appealed such decision to the Court of Appeal where it was not successful. At this point, the matter can either be appealed further by Kyrgyzaltyn or the trial on the substantive issue will commence. 28. RELATED PARTY TRANSACTIONS a. Kyrgyzaltyn JSC Revenues from the Kumtor gold mine are subject to a management fee of $1.00 per ounce based on sales volumes, payable to Kyrgyzaltyn JSC (“Kyrgyzaltyn”), a shareholder of the Company and a state-owned entity of the Kyrgyz Republic. The table below summarizes the management fees and concession payments paid and accrued by Kumtor Gold Company (“KGC”), a subsidiary of the Company, to Kyrgyzaltyn and the amounts paid and accrued by Kyrgyzaltyn to KGC according to the terms of a Restated Gold and Silver Sale Agreement between KGC, Kyrgyzaltyn and the Government of the Kyrgyz Republic dated June 6, 2009. The breakdown of the sales transactions and expenses with Kyrgyzaltyn are as follows: (Thousands of U.S. Dollars) Management fees to Kyrgyzaltyn Gross gold and silver sales to Kyrgyzaltyn Deduct: reﬁ nery and ﬁ nancing charges Net sales revenue received from Kyrgyzaltyn Dividend (Thousands of U.S. Dollars) Dividends declared to Kyrgyzaltyn 116 CENTERRA GOLD INC. 2012 315 $ $ 535,437 (1,883) $ 533,554 2011 $ 599 $ 944,020 (2,947) $ 941,073 2012 2011 $ 5,949 $ 29,412 Centerra_Financials.indd 116 Apr/01/2013 1:28 PM Related party balances The assets and liabilities of the Company include the following amounts with Kyrgyzaltyn: (Thousands of U.S. Dollars) Prepaid amounts Amounts receivable (note 7) Total related party assets Dividend payable (net of withholding taxes) Total related party liabilities 2012 – 48,325 48,325 5,949 5,949 $ $ $ $ 2011 $ 143 47,366 $ 47,509 $ $ – – Gold produced by the Kumtor mine is purchased at the mine site by Kyrgyzaltyn for processing at its reﬁ nery in the Kyrgyz Republic pursuant to a Gold and Silver Sale Agreement. Amounts receivable from Kyrgyzaltyn arise from the sale of gold to Kyrgyzaltyn. Kyrgyzaltyn is required to pay for gold delivered within 12 days from the date of shipment. Default interest is accrued on any unpaid balance after the permitted payment period of 12 days. The obligations of Kyrgyzaltyn are partially secured by a pledge of 2,850,000 shares of Centerra owned by Kyrgyzaltyn. Dividend payable and restricted cash held in trust Pursuant to an Ontario court decision dated September 5, 2012, Kyrgyzaltyn’s portion of the Centerra dividend declared on August 1, 2012 and November 7, 2012 of $6.3 million net of withholding taxes of $0.4 million ($5.9 million net) is held in trust to the credit of the Sistem court proceedings (see note 6). The dividend payable and restricted cash held in trust have been classiﬁ ed as long-term since the timing of the resolution of the court proceedings is unknown. b. Transactions with Directors and Key Management The Company transacts with key individuals from management and with its directors who have authority and responsibility to plan, direct and control the activities of the Company. The nature of these dealings were in the form of payments for services rendered in their capacity as director (director fees, including share-based payments) and as employees of the Company (salaries, beneﬁ ts and share-based payments). Key management personnel are deﬁ ned as the executive ofﬁ cers of the Company including the President and Chief Executive Ofﬁ cer, Vice President and Chief Financial Ofﬁ cer, Vice President and Chief Operating Ofﬁ cer, Vice President Global Exploration, General Counsel and Corporate Secretary, Vice President Business Development and Vice President Human Resources. During 2012 and 2011, remuneration to directors and key management personnel were as follows: Compensation of Directors (Thousands of U.S. Dollars) Fees earned and other compensation Share-based compensation (recovery) Total expensed (recovery) 2012 1,027 (2,880) (1,853) $ $ 2011 $ 1,055 544 $ 1,599 Fees earned and other compensation These amounts represent fees paid to the non-executive chairman and the non-executive directors during the ﬁ nancial year. Share-based compensation A portion of the directors’ compensation is settled with the Company’s share-based payment plans (Deferred Share Unit plan and Restricted Share Unit plan) according to the election of the directors. The Deferred Share Unit and Restricted Share Unit amounts granted to directors represent the intended value to settle the compensation obligations owed by the Company in satisfaction of the directors’ election. The Deferred Share Unit and Restricted Share Unit plans in which the directors participate are discussed in note 26. Centerra_Financials.indd 117 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 117 Compensation of Key Management Personnel Compensation of key management personnel comprised: (Thousands of U.S. Dollars) Salaries and beneﬁ ts Share-based compensation (recovery) Total expensed 2012 5,236 (724) 4,512 $ $ $ 2011 5,462 9,221 $ 14,683 Salaries and beneﬁ ts These amounts represent salary, supplementary executive retirement plan contributions, and beneﬁ ts earned during the year, plus cash bonuses awarded for the year. Share-based compensation This is the recognized cost to the Company of senior management’s participation in share-based payment plans, as measured by the fair value of options and performance share units granted, accounted for in accordance with IFRS 2 ‘Share-based Payments’. The main plans in which senior management have participated are the stock options plan and PSU plan. For details of these plans refer to note 26. 29. CAPITAL MANAGEMENT The Company’s primary objective with respect to its capital management is to ensure that it has sufﬁ cient cash resources to maintain its ongoing operations, to provide returns for shareholders and beneﬁ ts for other stakeholders and to pursue growth opportunities. To secure additional capital to pursue these plans, the Company may attempt to raise additional funds through borrowing and/or the issuance of equity or debt. In 2012, the Company borrowed $76 million under the revolving credit facility (see note 15). The Company’s capital structure consists of short-term debt (net of cash and cash equivalents and short-term investments) and shareholders’ equity, comprising issued common shares, contributed surplus and retained earnings as shown below: (Thousands of U.S. Dollars) Short-term debt Cash and cash equivalent Short-term investments Net assets Shareholders’ equity Total invested capital 2012 2011 $ 76,000 (334,115) (47,984) (306,099) 1,328,826 $ 1,022,727 $ – (195,539) (372,667) (568,206) 1,538,459 $ 970,253 The Company is bound by certain covenants stipulated in the revolving credit facility. These covenants place restrictions on total debt, dividend payments, and set threshold parameters for certain ﬁ nancial ratios. As at December 31, 2012 and December 31, 2011 the Company was in compliance with these requirements. 30. FINANCIAL INSTRUMENTS The Company has various ﬁ nancial instruments comprised of cash and cash equivalents, short-term investments, restricted cash, amounts receivables, a reclamation trust fund, short-term debt, accounts payable and accrued liabilities. The estimated fair values of certain ﬁ nancial instruments have been determined using available market information or other valuation methodologies that require considerable judgement in interpreting market data and developing estimates. Cash and cash equivalents, short-term investments, restricted cash and reclamation trust fund are classiﬁ ed as ﬁ nancial assets carried at fair value through proﬁ t or loss and amounts receivable are classiﬁ ed as “Loans and Receivables”, which are measured at amortized cost. 118 CENTERRA GOLD INC. Centerra_Financials.indd 118 Apr/01/2013 1:28 PM Cash and cash equivalents consist of cash on hand, with ﬁ nancial institutions, invested in term deposits, treasury bills, banker’s acceptances and corporate direct credit with original maturities of three months or less. Short-term investments consist of investments in term deposits, treasury bills, banker’s acceptances, bearer’s deposit notes and corporate direct credit with original maturities of more than three months but less than twelve months. Fair values of the cash equivalents and short-term investments are determined directly by reference to published price quotations in an active market at the reporting date. The fair value of amounts receivable approximates to the carrying value due to the short-term nature of the receivables. The Company has a credit facility available with the EBRD whereby borrowings bear interest at a ﬁ xed premium over the variable London Interbank Offered Rate (“LIBOR”). The fair value of borrowings under this facility approximate their carrying amount given the ﬂ oating component of the interest rate. Classiﬁ cation of the ﬁ nancial assets and liabilities in the statement of ﬁ nancial position were as follows: December 31, 2012 (Thousands of U.S. Dollars) Financial Assets Cash and cash equivalents Short-term investments Restricted cash Amounts receivable Reclamation trust fund Long-term receivables Financial Liabilities Accounts payable and accrued liabilities Short-term debt December 31, 2011 (Thousands of U.S. Dollars) Financial Assets Cash and cash equivalents Short-term investments Restricted cash Amounts receivable Reclamation trust fund Long-term receivables Financial Liabilities Accounts payable and accrued liabilities Loans and receivables Other ﬁ nancial at fair value liabilities through earnings Assets/liabilities $ – – – 75,338 – 263 $ 75,601 $ $ – – – $ $ – – – – – – – $ 58,703 76,000 $ 134,703 $ 334,115 47,984 6,087 – 11,328 – $ 399,514 $ $ – – – Loans and receivables Other ﬁ nancial at fair value liabilities through earnings Assets/liabilities $ $ – – – 56,749 – 4 $ 56,753 $ – – – – – – – $ $ – – $ 35,790 $ 35,790 $ 195,539 372,667 179 – 9,081 – $ 577,466 $ $ – – Centerra_Financials.indd 119 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 119 IFRS 7 Financial Instruments – Disclosures, requires that an explanation be provided about how fair value is determined for assets and liabilities measured in the ﬁ nancial statements at fair value and establishes a hierarchy for which of these assets and liabilities must be grouped based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reﬂ ect market data obtained from independent sources, while unobservable inputs reﬂ ect the Company’s assumptions. These two types of inputs create the following fair value hierarchy: Level 1: observable inputs such as quoted prices in active markets; Level 2: inputs, other than the quoted market prices in active markets, which are observable, either directly and/or indirectly; and Level 3: unobservable inputs for the asset or liability in which little or no market data exists, therefore require an entity to develop its own assumptions. The following table summarizes the fair value measurement by level at December 31, 2012, and December 31, 2011 for assets and liabilities measured at fair value on a recurring basis: (Thousands of U.S. Dollars) Financial Assets Cash and cash equivalents Short-term investments Restricted cash Reclamation trust fund Financial Liabilities Cash settled share-based compensation liabilities December 31, 2012 December 31, 2011 Level 1 Level 2 Level 1 Level 2 $ 334,115 47,984 6,087 11,328 $ 399,514 $ $ – – $ $ $ $ – – – – – 5,235 5,235 $ 195,539 372,667 179 9,081 $ 577,466 $ $ – – $ $ $ $ – – – – – 41,974 41,974 31. FINANCIAL RISK EXPOSURE AND RISK MANAGEMENT The Company is exposed in varying degrees to certain ﬁ nancial risks by virtue of its activities. The overall ﬁ nancial risk management program focuses on preservation of capital, and protecting current and future Company assets and cash ﬂ ows by reducing exposure to risks posed by the uncertainties and volatilities of ﬁ nancial markets. The Board of Directors has a responsibility to ensure that an adequate ﬁ nancial risk management policy is established and to approve the policy. Financial risk management is carried out by the Company’s Treasury department under a policy approved by the Board of Directors. The Treasury department identiﬁ es and evaluates ﬁ nancial risks, establishes controls and procedures to ensure ﬁ nancial risks are mitigated in accordance with the approved policy and programs, and risk management activities comply thereto. The Company’s Audit Committee oversees management’s compliance with the Company’s ﬁ nancial risk management policy, approves ﬁ nancial risk management programs, and receives and reviews reports on management compliance with the policy and programs. The Internal Audit department assists the Audit Committee in undertaking its oversight of ﬁ nancial risk management controls and procedures, the results of which are reported to the Audit Committee. The types of risk exposure and the way in which such exposures are managed are as follows: a. Currency Risk As the Company operates in an international environment, some of the Company’s ﬁ nancial instruments and transactions are denominated in currencies other than the U.S. Dollar. The results of the Company’s operations are subject to currency transaction risk. The operating results and ﬁ nancial position of the Company are reported in U.S. Dollars in the Company’s consolidated ﬁ nancial statements. The ﬂ uctuation of the U.S. Dollar in relation to other currencies will consequently have an impact upon the proﬁ tability of the Company and may also affect the value of the Company’s assets and the amount of shareholders’ equity. 120 CENTERRA GOLD INC. Centerra_Financials.indd 120 Apr/01/2013 1:28 PM The Company either makes purchases in foreign currencies at the prevailing spot price to fund corporate activities or enters into short-term forward contracts to purchase Canadian Dollars or Euros. During the year ended December 31, 2012, Cdn $76.5 million and Euro 29.0 million of such forward contracts were executed (December 31, 2011 – Cdn $111.7 million and Euro 8.0 million). There were no outstanding Canadian Dollar forward contracts and no outstanding Euro contracts outstanding at December 31, 2012 (December 31, 2011 – no outstanding Canadian Dollar forward contracts and Euro 2 million contracts). The exposure of the Company’s ﬁ nancial assets and liabilities to currency risk is as follows: December 31, 2012 (Thousands of U.S. Dollars) Som Tugrik Dollar Kyrgyz Mongolian Canadian Russian Rubles European Turkish Australian Euro Lira Dollar Financial Assets Cash and cash equivalents Restricted cash Amounts receivable Financial Liabilities Accounts payable and accrued liabilities December 31, 2011 $ $ 157 148 261 566 $ 559 $ 15,545 $ 389 $ 5,398 $ 2 7,317 – 216 $ 7,878 $ 15,761 $ – 137 526 – 590 $ 5,988 $ 130 $ $ 76 – 54 – – – – $ 19,956 $ 19,956 $ 5,435 $ 5,435 $ 12,307 $ 12,307 $ $ 28 28 $ $ 106 106 $ $ 531 531 $ $ 164 164 (Thousands of U.S. Dollars) Som Tugrik Dollar Kyrgyz Mongolian Canadian Russian Rubles European Turkish Australian Euro Lira Dollar Financial Assets Cash and cash equivalents Short-term investments Restricted cash Amounts receivable Financial Liabilities Accounts payable and accrued liabilities $ 650 $ 684 $ 32,572 $ – – 132 782 $ – 179 2,093 4,758 – 616 $ 2,956 $ 37,946 $ 50 – – 125 175 $ 6,313 $ – – 173 $ 6,486 $ $ 10,077 $ 10,077 $ 7,862 $ 7,862 $ $ 251 251 $ $ 254 254 $ $ 843 843 $ $ 15 – – 29 44 16 16 $ $ $ $ – – – – – – – A strengthening of the U.S. Dollar by 10% against the Canadian Dollar, the Kyrgyz Som, the Turkish Lira, the Russian Ruble, the European Euro and the Mongolian Tugrik at December 31, 2012, with all other variables held constant would have led to additional income before tax of $0.8 million (2011 – $2.9 million) as a result of a change in value of the ﬁ nancial assets and liabilities denominated in those currencies. b. Interest Rate Risk Interest rate risk is the risk borne by an interest-bearing asset or liability as a result of ﬂ uctuations in interest rates. Financial assets and ﬁ nancial liabilities with variable interest rates expose the Company to risk of changes in cash ﬂ ow as a result of the change in interest rate. The Company’s cash and cash equivalents and short-term investments include highly liquid investments that earn interest at market rates. As of December 31, 2012, the majority of the $382.1 million in cash and cash equivalents and short-term investments (December 31, 2011 – $568.2 million) were comprised of interest-bearing assets. Based on amounts as at December 31, 2012, a 100 basis point change in interest rates would change net annual interest income by approximately $3.8 million (2011 – $4.4 million). In addition, the interest on the $76 million short-term debt includes a variable rate component pegged to the London Interbank Offer Rate, or LIBOR. Based on the amount drawn as at December 31, 2012, a 100 basis point change in LIBOR would change net annual interest expenses by approximately $0.8 million (2011 – nil). 2012 ANNUAL REPORT 121 Centerra_Financials.indd 121 Apr/01/2013 1:28 PM Although the Company endeavours to maximize the interest income earned on excess funds, the Company’s policy focuses on cash preservation, while maintaining the liquidity necessary to conduct operations on a day-to- day basis. The Company’s policy limits the investing of excess funds to liquid term deposits, treasury bills, banker’s acceptances, bearer’s deposit notes and corporate direct credit having a single “A” rating or greater. c. Concentration of Credit Risk Credit risk is the risk of a ﬁ nancial loss to the Company if a gold sales customer or counterparty to a ﬁ nancial instrument fails to meet its contractual obligation. Credit risk arises principally from the Company’s receivables from customers, deposits and short-term investments. The Company’s exposure to credit risk, in respect of gold sales, is inﬂ uenced mainly by the individual characteristics of each customer. The Company’s revenues are directly attributable to sales transactions with three customers. Boroo sells the gold and silver content of its doré to Auramet Trading, LLC or Johnson Matthey Limited. The sales of gold and silver are governed by a Master Purchase Contract with Auramet Trading, LLC, and a Gold Doré Reﬁ ning Agreement with Johnson Matthey Limited’s North American precious metals division. Kyrgyzaltyn LLC, a state-owned company that operates a reﬁ nery in the Kyrgyz Republic, is Kumtor’s sole customer and is a shareholder of Centerra. To partially mitigate exposure to potential credit risk related to Kumtor sales, the Company has an agreement in place whereby Kyrgyzaltyn has pledged 2,850,000 of Centerra common shares it owns as security against unsettled gold shipments, in the event of default on payment (note 28). Based on movements of Centerra’s share price, and the value of individual or unsettled gold shipments, over the course of 2012, the maximum exposure during the year, reﬂ ecting the shortfall in the value of the security as compared to the value of any unsettled shipments, was approximately $56.7 million. The Company manages counterparty credit risk, in respect of short-term investments, by maintaining bank accounts with highly-rated U.S. and Canadian banks and investing only in highly-rated Canadian and U.S. Government bills, term deposits or banker’s acceptances with highly-rated ﬁ nancial institutions and corporate direct credit issues that can be promptly liquidated. At December 31, 2012, 21% of cash and cash equivalents were held with Bank of Nova Scotia, 13% each held in bonds issued by the Provinces of Quebec and Ontario. Another 23% were held with various other U.S. and foreign banks. This 71% of liquid assets held includes not only cash in operating bank accounts, but also term deposits and other investments where the bank is the counterparty. The remainder of the assets were held in government and agency securities, and highly-rated corporate direct credit issues. d. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its ﬁ nancial obligations as they fall due. The Company manages its liquidity risk by ensuring that there is sufﬁ cient capital to meet short and long-term business requirements, after taking into account cash ﬂ ows from operations and the Company’s holdings of cash and cash equivalents and short-term investments. In addition, $74 million of the credit facility ﬁ nancing remains available. The Company believes that these sources will be sufﬁ cient to cover its anticipated short and long-term cash requirements. At December 31, 2012, the Company had cash and cash equivalents and short-term investments totaling $382.1 million (December 31, 2011 – $568.2 million). A maturity analysis of the Company’s ﬁ nancial liabilities, contractual obligations, other ﬁ xed operating commitments and capital commitments is set out below: (Millions of U.S. Dollars) Account payable and accrued liabilities Short-term debt Reclamation trust deed Capital equipment Operation supplies Lease of premises (a) Total contractual obligations Due in Less than One year Due in 1 to 3 Years Due in 4 to 5 Years $ $ 63.9 76.0 2.2 28.9 69.4 0.6 $ 241.0 $ – – 7.4 – – 1.5 8.9 $ $ – – 5.0 – – 0.5 5.5 $ Due in After 5 Years – – 11.1 – – – $ 11.1 Total 63.9 76.0 25.7 28.9 69.4 2.6 266.5 $ $ (a) Includes leases for the Company’s ofﬁ ces in Toronto, Canada, Bishkek, Kyrgyzstan and Ulaanbaatar, Mongolia. The Company has sufﬁ cient cash and cash equivalents and short-term investments to meet its current obligations. 122 CENTERRA GOLD INC. Centerra_Financials.indd 122 Apr/01/2013 1:28 PM e. Commodity Price Risk The value of the Company’s revenues and mineral resource properties is related to the price of gold, and the outlook for this mineral. Adverse changes in the price of certain raw materials can also signiﬁ cantly affect the Company’s cash ﬂ ows. Gold prices historically have ﬂ uctuated widely and are affected by numerous factors outside of the Company’s control, including, but not limited to, industrial and retail demand, central bank reserves management, forward sales by producers and speculators, levels of worldwide production, short-term changes in supply and demand due to speculative or hedging activities, macro-economic variables, and certain other factors related speciﬁ cally to gold. The proﬁ tability of the Company’s operations is highly correlated to the market price of gold. To the extent that the price of gold increases over time, the fair value of the Company’s mineral assets increases and cash ﬂ ows will improve; conversely, declines in the price of gold will reduce the fair value of mineral assets and cash ﬂ ows. A protracted period of depressed prices could impair the Company’s operations and development opportunities, and signiﬁ cantly erode shareholder value. To the extent there are adverse changes to the price of certain raw materials (e.g. diesel fuel), the Company’s proﬁ tability and cash ﬂ ows may be impacted. If the world market price of gold was to drop and the prices realized by the Company on gold sales were to decrease by 10%, based on the number of ounces in inventory as at December 31, 2012, the Company’s proﬁ tability and cash ﬂ ow, after adjusting for any remaining conversion costs not yet incurred, would be negatively affected by an additional loss before tax of $75.1 million (2011 – $52.2 million). The Company does not enter into any ﬁ nancial instruments to mitigate commodity price risk. 32. SUPPLEMENTAL CASH FLOW DISCLOSURE a. Changes in operating working capital (Thousands of U.S. Dollars) (Increase) decrease in amounts receivable (Increase) decrease in inventory – ore and metal (Increase) decrease in inventory – supplies Increase in prepaid expenses Increase (decrease) in accounts payable and accrued liabilities Increase (decrease) in revenue-based tax payable Reduction (increase) in depreciation and amortization included in inventory (note 10) Reduction (increase) in accruals included in additions to PP&E De-recognition of underground inventory – supplies Accrued interest excluded from accrued liabilities Reclassiﬁ cation of prepaid revenue – based tax from prepaid expenses Reclassiﬁ cation of other taxes payable from income taxes payable b. Investment in property, plant and equipment (PP&E) (Thousands of U.S. Dollars) Additions to PP&E during the year ended December 31, (note 10) Impact of revision to asset retirement obligation included in PP&E (note 17) Depreciation and amortization included in additions to PP&E ( note 10) Increase in accruals included in additions to PP&E 2012 (18,589) 10,226 (19,294) (22,481) (12,445) 3,465 35,036 10,138 (13,962) (713) 30,000 212 1,593 $ $ 2011 $ 43,813 (55,521) (42,790) (4,615) 5,475 (10,311) 18,564 1,235 – – – – $ (44,150) 2012 2011 $ (409,488) (1,129) 54,332 (10,138) $ (366,423) $ (208,489) 15,942 18,627 (1,235) $ (175,155) 2012 ANNUAL REPORT 123 Centerra_Financials.indd 123 Apr/01/2013 1:28 PM 33. SUBSEQUENT EVENT On January 24, 2013, the Company purchased the remaining 30% interest in the Öksüt Gold Project, located in central Turkey, from Stratex International Plc. With the closing, the Company became the sole owner of the Öksüt Gold Project and assumed operatorship and day-to-day management of the project. Consideration for Stratex’s interest in the project consisted of $20 million paid at closing and a 1% Net Smelter Return royalty on the project, subject to a maximum of $20 million. 34. SEGMENTED INFORMATION In accordance with IFRS 8, Operating Segments, the Company’s operations are segmented on a regional basis and are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker (“CODM”). The Chief Executive Ofﬁ cer has authority for resource allocation and assessment of the Company’s performance and is therefore the CODM. Information presented in the table below is shown at the level at which it is review by the CODM in his decision making process. The Kyrgyz Republic segment involves the operations of the Kumtor Gold project and local exploration activities, and the Mongolian segment involves the operations of the Boroo Gold project, activities related to the Gatsuurt project and local exploration activities. The Corporate and other segment involve the head ofﬁ ce located in Toronto and other international exploration projects. The segments’ accounting policies are the same as those described in the summary of signiﬁ cant accounting policies in the Company’s 2012 annual ﬁ nancial statements except that inter-company loan interest income and expenses, which eliminate on consolidation, are presented in the individual operating segments where they are generated when determining earnings or loss from operations. Geographic Segmentation of Revenue The Company’s only product is gold doré, produced from mines located in the Kyrgyz Republic and Mongolia. All production from the Kumtor Gold project is sold to the Kyrgyzaltyn reﬁ nery in the Kyrgyz Republic while production from the Boroo Gold project is sold to Auramet Trading, LLC or Johnson Matthey Limited; the latter also reﬁ nes the gold for Boroo at its reﬁ nery located in Ontario, Canada. The following table reconciles segment operating proﬁ t per the reportable segment information to operating proﬁ t per the consolidated statements of earnings (loss) and comprehensive income (loss). Year ended December 31, 2012 (Millions of U.S. Dollars) Revenue from Gold Sales Cost of sales Abnormal mining costs Mine standby costs Regional ofﬁ ce administration Earnings from mine operations Revenue based taxes Other operating expenses Loss on de-recognition of underground assets Exploration and business development Corporate administration Earnings (loss) from operations Other (income) and expenses Finance costs Loss before income taxes Income tax expense Net loss and comprehensive loss Capital expenditure for the year Goodwill Assets (excluding Goodwill) 124 CENTERRA GOLD INC. Kyrgyz Corporate Republic Mongolia and other Total $ 533.5 $ 127.2 $ 311.1 60.9 4.6 15.5 141.4 74.7 31.8 180.7 11.8 1.8 (159.4) 76.4 – – 5.5 45.3 – 2.5 – 10.0 0.2 32.6 $ $ $ 399.9 129.7 889.2 $ $ $ 10.2 – 346.3 $ $ $ – – – – – – – – – 16.7 25.0 $ 660.7 387.5 60.9 4.6 21.0 186.7 74.7 34.3 180.7 38.5 27.0 (41.7) (168.5) (0.2) 4.0 (172.3) 11.7 $ (184.0) $ $ 410.6 129.7 0.5 – 188.9 $ 1,424.4 Centerra_Financials.indd 124 Apr/01/2013 1:28 PM Year ended December 31, 2011 (Millions of U.S. Dollars) Revenue from Gold Sales Cost of sales Mine standby costs Regional ofﬁ ce administration Earnings from mine operations Revenue based taxes Other operating expenses Exploration and business development Corporate administration Earnings (loss) from operations Other (income) and expenses Finance costs Earnings before income taxes Income tax expense Net earnings and comprehensive income Capital expenditure for the year Goodwill Assets (excluding Goodwill) Kyrgyz Republic Mongolia Corporate and other $ 941.1 332.6 – 15.3 593.2 131.8 11.5 13.6 2.1 434.2 $ 79.2 49.7 0.2 6.0 23.3 – 3.9 11.4 0.4 7.6 $ – – – – – – – 17.9 42.4 (60.3) $ $ 180.7 129.7 $ 1,016.6 $ $ $ 6.6 – 319.4 $ $ $ $ $ $ 0.6 – 222.9 $ 1,558.9 Total $ 1,020.3 382.3 0.2 21.3 616.5 131.8 15.4 42.9 44.9 381.5 (1.0) 3.5 379.0 8.1 370.9 187.9 129.7 Centerra_Financials.indd 125 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 125 Deﬁ nitions MINERAL RESERVE A mineral reserve is the economically mineable part of a measured or indicated mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate at the time of reporting, that economic extraction can be justiﬁ ed. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined. PROVEN MINERAL RESERVE A proven mineral reserve is the economically mineable part of a measured mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate at the time of reporting that economic extraction is justiﬁ ed. PROBABLE MINERAL RESERVE A probable mineral reserve is the economically mineable part of an indicated, and in some circumstances a measured mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate at the time of reporting that economic extraction can be justiﬁ ed. MINERAL RESOURCE A mineral resource is a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the earth’s crust in such form and quantity and of such a grade or quality that has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from speciﬁ c geological evidence and knowledge. MEASURED MINERAL RESOURCE A measured mineral resource is that part of a mineral resource for which quantity, grade or quality, density, shape and physical characteristics are so well established that they can be estimated with conﬁ dence sufﬁ cient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to conﬁ rm both geological and grade continuity. INDICATED MINERAL RESOURCE An indicated mineral resource is that part of a mineral resource for which quantity, grade or quality, density, shape and physical characteristics can be estimated with a level of conﬁ dence sufﬁ cient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed. 126 CENTERRA GOLD INC. Centerra_Financials.indd 126 Apr/01/2013 1:28 PM INFERRED MINERAL RESOURCE An inferred mineral resource is that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed but not veriﬁ ed geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. In this mineral reserves and resources statement Centerra uses a deﬁ nition of classes of mineralization taking into account a maximum number of parameters of various natures. These parameters are: • the precision of the estimate; • the economic feasibility of the project which relates not only to grades but to the volume of the reserves, the location, the chemistry of the expected ore, the price of the product, etc; and • the legal status of the project and its possible evolution in the very near future. Centerra’s mineral reserves include allowances for dilution, and mining and/or metallurgical recovery. No allowances have been applied to mineral resources. Stated mineral reserves and resources have been reported based on estimated quantities of mineralized material recoverable by established mining methods. This includes only deposits with mineral values in excess of cut-off grades used in normal mining operations. Centerra’s mineral reserves include material in place and on stockpiles. Only mineral reserves have demonstrated economic viability. There are numerous uncertainties inherent in estimating mineral reserves and resources. The accuracy of any reserve and resource estimation is the function of the quality of available data and of engineering and geological interpretation and judgement. Results from drilling, testing and production, as well as material changes in gold prices, subsequent to the date of the estimate, may justify revision of such estimates. Centerra’s classiﬁ cation of mineral reserves and resources and the subcategories of each conforms to the deﬁ nitions adopted by the CIM Council on August 20, 2000, which are incorporated by reference into NI 43-101, issued by the Canadian Securities Administrators. Centerra reports reserves and resources separately. The amount of reported resources does not include those amounts identiﬁ ed as reserves. Mineral resources which are not mineral reserves do not have demonstrated economic viability. Centerra_Financials.indd 127 Apr/01/2013 1:28 PM 2012 ANNUAL REPORT 127 Corporate Information Exploration Ofﬁ ces Centerra Gold Mongolia LLC Bodi Tower 12th Floor Sukhbaatar Square Ulaanbaatar, Mongolia 210646 Centerra Madencilik A.S. Buyukesat Mahallesi Cayhane Sokak No. 47/9 06700 Gaziosmanpasa Cankaya, Ankara, Turkey Centerra Gold Inc. Beijing Representative Ofﬁ ce 1606 Full Tower 9 Doung San Huan Zhong Lu Chaoyang District Beijing, China 100020 Operations Ofﬁ ces Kumtor Operating Company Kumtor Gold Company 24 Ibraimov Street Bishkek, Kyrgyz Republic 720031 Boroo Gold LLC P.O. Box 223 Bodi Tower 11th Floor Sukhbaatar Square Ulaanbaatar, Mongolia 210648 Transfer Agent For information on common share holdings, lost share certiﬁ cates and address changes, contact: CIBC Mellon Trust Company c/o Canadian Stock Transfer Company Inc. P.O. Box 700 Station B Montreal, QC H3B 3K3 North America phone toll free: 1.800.387.0825 or 416.682.3860 Fax: 1.888.249.6189 Email: inquiries@canstockta.com Auditors KPMG LLP 333 Bay Street Suite 4600 Toronto, Ontario Canada M5H 2S5 Stock Exchange Listing Toronto Stock Exchange Symbol: CG Investor Relations Contact John W. Pearson Vice President Investor Relations Corporate Headquarters Suite 1500 1 University Avenue Toronto, Ontario Canada M5J 2P1 T 416.204.1953 F 416.204.1954 www.centerragold.com Directors (1) Stephen A. Lang (3), (6), (7), (8) Ian Atkinson Richard W. Connor (2), (4) Raphael A. Girard (3), (4), (7) Karybek U. Ibraev (5), (6), (7) John W. Lill (5), (6), (7) Amangeldy M. Muraliev (3), (5) Sheryl K. Pressler (2), (3) Terry V. Rogers (2), (4), (6) Bruce V. Walter (5), (6), (9) (1) As of January 2, 2013 (2) Member of the Audit Committee (3) Member of the Nominating and Corporate Governance Committee (4) Member of the Human Resources and Compensation Committee (5) Member of the Safety, Health and Environmental Committee (6) Member of the Reserves Committee (7) Member of Corporate Social Responsibility Committee (8) Mr. Lang is Chair of the Board of Directors (9) Mr. Walter is Vice-Chair of the Board of Directors Ofﬁ cers and Management Ian Atkinson President and Chief Executive Ofﬁ cer Jeffrey S. Parr Vice President and Chief Financial Ofﬁ cer Gordon D. Reid Vice President and Chief Operating Ofﬁ cer David A. Groves Vice President, Global Exploration Frank H. Herbert General Counsel and Corporate Secretary Dennis C. Kwong Vice President, Business Development Anthony J. Meade Vice President, Human Resources and Administration John W. Pearson Vice President, Investor Relations Turat Usubaliev Vice President John M. Kazakoff President, Boroo Gold Company Michael M. Fischer President, Kumtor Operating Company Andrew A. Sazanov President, Kumtor Gold Company 128 CENTERRA GOLD INC. Centerra_Financials.indd 128 Apr/01/2013 1:28 PM Printed in Canada using VOC-free inks. Suite 1500 1 University Avenue Toronto, Ontario Canada m5j 2p1 T 416.204.1953 F 416.204.1954 www.centerragold.com

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