Rising Production profile

Centerra Gold (CG, TSX) is an emerging gold producer with robust growth prospects. The company produces gold from two existing mines in central Asia and the former Soviet Union. In addition, it has stakes in two other highly promising advanced projects. While political risk may be relatively high, we believe Centarra's superior growth prospects more than compensate.

Since listing in June 2004, the strong performance of gold has provided firm support for the stock. Between May and January, positive investor sentiment lifted Centarra more than 150% to an all-time high of C$43.30. The stock price has since corrected. During February and March, the shares paused to consolidate, finding support between C$34 and C$33.

A robust performance over the past two weeks coincides with acceleration in gold prices to new 25-year highs of nearly US$600 an ounce. Centerra's break above C$38.75 indicates a renewal of upward momentum which we believe will result in a near term retest of the C$43.30 high.

With the long-term upward trend remaining intact and the outlook for gold prices firmly bullish, Centerra is poised to attain considerably higher levels over time, in our opinion.

Centerra Gold is a growth-oriented Canadian-based gold producer, trading on the Toronto stock exchange and operating in central Asia and the former Soviet Union. The company maintains interests in two producing gold mines: a 100% stake in the Kumtor mine in the Kyrgyz Republic; and a 95% stake in the Boroo mine in Mongolia.

Centerra produced 767,000 ounces of gold at a total operating cash cost of US$247 an ounce during calendar 2005. This ranks Centerra as one of North America's leading gold producers and the largest Western-based gold producer in Central Asia and the former Soviet Union.

Centarra also has stakes in two highly promising emerging developments: a 100% interest in the Gatsuurt Project in Mongolia; and a 62% interest in the REN joint venture in Nevada, USA.

The company recently completed an updated Feasibility Study on its Gatsuurt Project, as well as reporting additional highly successful drilling results from its Kumtor mine. Gatsuurt is located just 35km east of the Boroo mine in Mongolia, which the company successfully commissioned in early 2005.

The release of the Gatsuurt Feasibility Study has increased the overall confidence level of the deposit, by converting a large proportion of the gold resource into mineable reserves. The project's reserves now stand at close to 1 million ounces, with a further 0.5 million ounces in the resource category. This inventory is now sufficient for the company to announce the go-ahead for mining at Gatsuurt.

As Gatsuurt is located so close to Boroo, the company has the option of trucking material directly to Boroo. This will commence with high-grade oxide ore as early as the second half of 2006, providing a major boost to the company's production profile from 2007 onwards.

Operationally, 2006 will be a challenging one to some degree. Centerra is currently developing a section of the ore body that is relatively unpredictable in terms of grade and mineralisation, hence operating costs are variable. Lower-grade material is likely to persist throughout 2006 before grades begin to recover again in 2007.

As a result, forecast group production will fall from 767,000 ounces during 2005 to around 718,000 ounces in 2006, with a corresponding increase in operating costs from US$247 an ounce in 2005 to US$300 an ounce in 2006.

During 2007, we anticipate a strong rebound in output as production from Gatsuurt commences, with total gold produced jumping to 800,000 ounces at a cash operating cost of US$277 an ounce. We therefore anticipate a substantial jump in earnings over the next few years. Moreover, Centerra is entirely unhedged and offers excellent leverage in a rising gold price environment.

We believe the stock offers strong relative value compared to a number of its fellow second-line gold producers. In addition, Centerra appears to have underperformed its peers over recent months.

We have a strong degree of confidence in the company's capacity to reach its stated 1 million ounce per annum production goal. The company maintains conservative accounting practices, such as expensing all exploration expenditure. It also adheres strictly to the Australian designed JORC (Joint Ore Reserve Committee) resource and reserve guidelines, when many of its peers adhere to less rigorous Russian reporting standards.

Centerra currently maintains cash reserves of US$200 million, and after capital investment of US$72 million in Gatsuurt during 2006, should return to generating surplus cash flows of between US$80 million and US$100 million annually from 2007.

Centerra is also establishing an impressive track record of exploration success, having added 4.8 million ounces of gold to its proven and probable reserve base through exploration work over the past two years. The company's proven and provable reserves now stand at around 7.1 million ounces. Nevertheless, there are risks associated with investment in the region that must be borne in mind by investors.

Centerra Gold has all of the elements to become one of the world's leading gold producers over the next decade. It possesses a strong balance sheet, strong operational management and a clear strategy focused on a region that has been relatively under-explored due to political constraints. Furthermore, Centerra has 11 years successful operational experience in central Asia. Given our continued bullish stance on gold, we recommend Centerra Gold as a Buy around C$39.80.