StarMine Analyst Awards: BMO analyst has golden touch with Centerra call

When Centerra Gold Inc. threatened to shut down its flagship gold mine in Kyrgyzstan last June, Andrew Breichmanas said he sensed the company was "playing chicken."

As the stock plunged, he stayed bullish on Centerra, which rose by about 90 per cent over the rest of the year, as the company arrived at a kind of shaky truce with its host government.

That was one of the calls that earned Mr. Breichmanas, an analyst at BMO Nesbitt Burns, the distinction of the year's top stock picker in this year's StarMine Analyst Awards. StarMine, a unit of Thomson Reuters Corp., scores sell-side equity analysts based on their investment recommendations for the companies they cover.

Each analyst's ratings are compiled to create a hypothetical portfolio. Performance is measured by the return that portfolio would have earned by an investor following the buy and sell recommendations.

Mr. Breichmanas, who covers the metals and mining sector, beat his industry benchmark by the widest margin, generating an excess return of 26.9 per cent over the 2014 calendar year.

He beat his field largely by making calls on small-cap Canadian gold miners operating in "riskier jurisdictions," he said.

"It's definitely a riskier proposition than investing in an asset sitting in Ontario or Quebec. But there are good potential returns if a company can navigate those issues."

Centerra is one of those companies. It has operated in near-constant conflict with the Kyrgyzstani government for more than a decade. (Kyrgyzstan's treacherous politics led the Fraser Institute to once declare it the least attractive mining jurisdiction in the world.)

Last June, when the permits required for a 2014 mine-development plan still had not been approved, Centerra warned that it would shut down its Kumtor mine if the government continued to withhold the necessary approvals.

It was a bold move, considering that the mine, which yielded about 570,000 ounces of gold last year, represents about 90 per cent of the company's overall production. It's a high-quality asset that has consistently generated cash flow over several years.

Investor reaction reflected the magnitude of a potential shutdown of Kumtor, as Centerra's stock dropped by one-third in less than a day.

But the Kyrgyzstani government has just as much interest as Centerra in keeping Kumtor running smoothly, Mr. Breichmanas said. The mine is the country's largest employer and accounted for about 8 per cent of Kyrgyzstan's gross domestic product in 2013.

"We also understood some of the protections the company had within its investment agreement," he said.

Mr. Breichmanas said he spends a lot of time thinking about the geopolitical risks associated with operating in less stable jurisdictions, and that regular site visits help inform his stock picks.

"Being able to understand the backdrop and how it's going to impact performance over the long term is an important element we try to put in perspective," he said. "We spend as much time in the country as we can and understand how these companies operate there."

Another country with a political environment that can be unstable and volatile is Burkina Faso, home to Semafo Inc.'s Mana mine.

"We visited the mine in Burkina Faso and concluded the risks associated with developing that deposit were manageable, and that the team was capable of delivering."

Last year, the company began to fully realize the financial benefits of an expansion of Mana, as production rose and the company beat earnings estimates handily in early August. At that time, Mr. Breichmanas downgraded the stock, after it had risen by 90 per cent from the beginning of the year.

"That was the investment thesis for the better part of two years, and once we saw it happen, it was time to change our call," he said.

His downgrade timed nicely with what turned out to be a peak in Semafo's stock, as it declined by 44 per cent over the remainder of the year.

These days, with the outlook for gold remaining uninspiring, Mr. Breichmanas is focusing on companies transitioning from developers to producers. He named Torex Gold Resources Inc., Asanko Gold Inc., and Roxgold Inc. as promising picks on that front.

"Those are the stocks we're talking about right now, and we think they're good opportunities through the rest of this year."