“Our projected capital expenditures for 2018, excluding capitalized stripping, is estimated to be $242 million which includes $100 million of sustaining capital^NG and $142 million of growth capital^NG spending.  Growth capital spending includes $82 million for the Öksüt Project in Turkey where we expect to commence construction activity in April and $36 million to advance the Kemess Underground Project with pre-construction activities.  Öksüt represents the new generation of low-cost production and an important third source of cash flow for the Company.”  See “2018 Outlook” for further details.

This Management Discussion and Analysis (“MD&A”) has been prepared as of February 22, 2018, and is intended to provide a review of the financial position and results of operations of Centerra Gold Inc. (“Centerra” or the “Company”) for the three and twelve months ended December 31, 2017 in comparison with the corresponding periods ended December 31, 2016.  This discussion should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2017 prepared in accordance with International Financial Reporting Standards (“IFRS”).  In addition, this discussion contains forward-looking information regarding Centerra’s business 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 dollars (“USD”), except as otherwise indicated.  Additional information about Centerra, including the Company’s most recently filed Annual Information Form, is available at www.centerragold.com and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.

Overview

Centerra is a Canadian-based gold mining company focused on operating, developing, exploring and acquiring gold properties worldwide and is one of the largest Western-based gold producers in Central Asia. Centerra’s principal operations are the Kumtor Gold Mine located in the Kyrgyz Republic and the Mount Milligan Gold-Copper Mine located in British Columbia, Canada.

Centerra’s common shares are listed for trading on the Toronto Stock Exchange under the symbol CG. As of February 22, 2018, there are 291,785,970 common shares issued and outstanding and options to acquire 4,816,297 common shares outstanding under its stock option plan.

As of December 31, 2017, Centerra’s significant subsidiaries are as follows:

On January 8, 2018, the Company completed the acquisition of AuRico Metals Inc. (“AMI”), thereby acquiring AMI’s Kemess Underground and Kemess East properties as well as a royalty portfolio which includes a 1.5% net smelter return (“NSR”) royalty on the Young-Davidson gold mine in Ontario and a 2.0% NSR royalty on the Fosterville mine in Australia.  See “Subsequent to December 31, 2017” for further information.

As at December 31, 2017, the Company has also entered into agreements to earn an interest in joint venture exploration properties located in Mexico, Sweden and Nicaragua.  In addition, the Company has exploration properties in Armenia, Canada and Turkey.

Substantially all of Centerra’s revenues are derived from the sale of gold and copper.  The Company’s revenues are derived from gold and gold/copper concentrate production from its mines and gold and copper prices realized upon the sale of these products. Gold doré production from the Kumtor mine is purchased by Kyrgyzaltyn JSC (“Kyrgyzaltyn”), a Kyrgyz Republic state owned refinery and significant shareholder of Centerra, for processing at its refinery in the Kyrgyz Republic while gold and copper concentrate produced by the Mount Milligan mine in Canada is sold to various smelters and off-take purchasers. 

The Mount Milligan Mine in Canada is subject to a streaming arrangement whereby RGLD Gold AG and Royal Gold Inc. (collectively “Royal Gold”) is entitled to purchase 35% of the gold and 18.75% of the copper produced from the Mount Milligan Mine for $435 per ounce of gold delivered and 15% of the spot price per metric tonne of copper delivered (the “Mount Milligan Streaming Arrangement”).

The Company’s costs are comprised primarily of operating costs at the Kumtor and Mount Milligan mines and the Langeloth molybdenum processing facility, project development costs at the Öksüt Gold Project and the Greenstone Gold Property, closure and holding costs of the Boroo Mine (a majority of the Boroo infrastructure is on stand-by pending progress on the Gatsuurt Gold Project), care and maintenance costs at the Company’s molybdenum mines (Endako Mine and Thompson Creek Mine), exploration expenses relating to the Company’s own projects and its earn-in projects, administrative costs from offices worldwide and depreciation, depletion and amortization (“DD&A”).

There are many operating variables that affect the cost of producing an ounce of gold and a pound of copper.  In the mine, unit costs are influenced by the ore grade and the stripping ratio.  The stripping ratio is the ratio of the tonnage of waste material which must be removed per tonne of ore mined.  Ore grade refers to the amount of gold and/or copper contained in a tonne of ore.  The significant costs of mining include labour, diesel fuel and equipment maintenance.

At the mill, costs are impacted by the ore grade and the metallurgical characteristics of the ore, which can impact gold and copper recovery. For example, a higher grade ore would typically result in a lower unit production cost. The significant costs of milling are labour, energy, grinding media, reagents, consumables and mill maintenance.

Mining and milling costs are also affected by the cost of labour, which depends mostly on the availability of qualified personnel in the region 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 influence the cash costs of mining and milling.  The non-cash costs (namely DD&A) are influenced by the amount of capital costs related to the mine’s acquisition, development and ongoing capital requirements and the estimated useful lives of capital items.

Figure A is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/8d8746c4-e1ce-4298-ae34-50e380159fa2

In Figure A, the Company’s 2017 production costs^NG at its two operating mines totaled $551 million, which includes a full year of production at Mount Milligan. Production costs at Kumtor were 3% lower than 2016 ($332 million in 2017 compared to $343 million in 2016).  The reduction reflects the impact of lower input prices (mainly for consumables) and the varying levels of production in both years. These impacts on costs are discussed in the operational sections of this MD&A.  There is no comparable data for Mount Milligan as the Company acquired the asset on October 20, 2016.

Over the life of each mine, another significant cost that must be planned for is the closure, reclamation and decommissioning of each operating site.  In accordance with standard practices for international mining companies, Centerra carries out remediation and reclamation work during the operating period of the mine, where feasible, in order to reduce the final decommissioning costs.  Nevertheless, the majority of rehabilitation work can only be performed following the completion of mining operations.  Centerra’s practice is to record the estimated final decommissioning costs based on conceptual closure plans, and to accrue these costs according to the principles of IFRS. 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 environmental budget is deposited by Boroo into a government account and such funds are recovered by Boroo during the mine closure phase after completion of the annual environmental commitments.  As required by Canadian provincial laws and US federal and state laws, the Company has provided reclamation bonds for mine closure obligations at its Canadian and U.S. sites, including the Mount Milligan Mine.

The Company reports the results of its operations in U.S. dollars, however not all of its costs are incurred in U.S. dollars. As such, the movement in exchange rates between currencies in which the Company incurs costs and the U.S. dollar also impact reported costs of the Company.

Economic Indicators

Gold Price

The average quarterly gold spot price of $1,275 in the fourth quarter was in-line with the 2017 quarterly high of $1,278 reached in third quarter. The average gold spot price for 2017 was $1,258 per ounce, an increase of 1% over the average in 2016.

Figure B is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/ecb18240-fd66-4ded-aea5-907cab9a5527

Copper Price

The average quarterly copper spot price increased in the fourth quarter to $3.09 per pound, the highest quarterly average of 2017, from $2.88 per pound in the third quarter. The average copper spot price for 2017 was $2.80 per pound, an increase of 27% over the average in 2016.

Figure C is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/e4ac226c-5f1d-4fb3-a2e9-6177ed002c49

Currency

Figure D is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/2f6fb51b-d585-4c39-af64-3194c394e2d0

Canadian Dollar

The Canadian dollar, despite starting the year under pressure, and facing the prospects of a widening rate disadvantage with the U.S., saw a 7% gain against the U.S. dollar during 2017 (1.34 to 1.25). With the exception of the U.S. dollar, the Canadian dollar underperformed against other major currencies.  In Canada, the Bank of Canada raised its overnight rate twice, from 0.5% to 1%, and suggested it is beginning a tightening phase although it continues to be cautious on concerns surrounding ongoing NAFTA negotiations.  The Canadian dollar is highly exposed to fluctuations in crude oil prices due to the country’s status as a major exporter of oil. Energy prices are predicted to remain strong in the short term and interest rates to increase through 2018, which may help prevent potential depreciation of the Canadian dollar.

Kyrgyz Som

Russia, and by economic growth in the Kyrgyz Republic. In 2017, the Russian Ruble and Kazak Tenge, strengthened against the U.S. dollar by 5% and 2%, respectively.  The strengthening in the Russian ruble reflects higher oil prices and Russia’s improving economic situation. Independent of the performance of the Kyrgyz Republic’s main trading partners, economic growth in the Kyrgyz Republic in 2017 can be attributed to increases in gold mining, manufacturing, electricity generation and construction." data-reactid="71">The Kyrgyz Som to U.S. dollar exchange rate appreciated 1% over 2017. The Som continues to be influenced by the strengthening of currencies of the Kyrgyz Republic’s main trading partners, mainly Russia, and by economic growth in the Kyrgyz Republic. In 2017, the Russian Ruble and Kazak Tenge, strengthened against the U.S. dollar by 5% and 2%, respectively.  The strengthening in the Russian ruble reflects higher oil prices and Russia’s improving economic situation. Independent of the performance of the Kyrgyz Republic’s main trading partners, economic growth in the Kyrgyz Republic in 2017 can be attributed to increases in gold mining, manufacturing, electricity generation and construction.

Foreign Exchange Transactions

The Company receives its revenues through the sale of gold, copper and molybdenum in U.S. dollars.  The Company has operations in Canada, where the Mount Milligan Mine and its corporate head office are also located, the Kyrgyz Republic, Turkey, Mongolia and the United States of America.  During 2017, the Company incurred combined expenditures (including capital) totalling approximately $1,066 million.  Approximately $567 million of this (53%) was in currencies other than the U.S. dollar (Figure F).  The percentage of Centerra’s non-U.S. dollar costs, by currency was, on average, as follows:

Figure F is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/d07279a5-ba10-4e91-987d-e29147f8b7ba

In 2017, Centerra’s non-U.S. dollar costs were incurred 51% in Canadian dollars, 40% in Kyrgyz soms, 5% in Euros, 2% in Mongolian tugrik and 1% in Turkish lira. The average value of the Turkish lira depreciated against the U.S. dollar over the year by approximately 3% from its value at December 31, 2016.  The Euro, Canadian dollar, Mongolian tugrik and Kyrgyz som appreciated against the U.S. dollar by approximately 7%, 3%, 2%, and 1%, respectively, from their value at December 31, 2016. The net impact of these movements in the year ended December 31, 2017, after taking into account currencies held at the beginning of the year, was to increase annual costs by $9.1 million (increase of $16 million in the year ended December 31, 2016), inclusive of a foreign exchange gain on Canadian dollars acquired in the fourth quarter of 2017 due to the anticipated closing of the acquisition of AMI in January 2018 ($3.0 million) and currency derivative gain of $1.2 million (nil for the year ended December 31, 2016).

Diesel Fuel Prices

One of the most significant movements in commodity prices in 2017 was the continued strengthening of oil prices.

According to the U.S. Energy Information Administration, based on the global benchmark North Sea Brent, crude oil prices ended 2017 at $65/bbl the highest end-of-year price since 2013. Brent prices have increased $10/bbl since the end of 2016. West Texas Intermediate (“WTI”) crude oil prices averaged $51/bbl in 2017, up $7/bbl from the 2016 average, and ended the year $6/bbl higher than at the end of 2016.

Figure E is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/8621c321-f8f4-4c77-af6e-ed49dadbb5f8

Russia either directly or through Kyrgyz distributors. Kumtor’s diesel prices include added costs for other factors such as seasonal premiums for winterizing of diesel fuel and transportation costs from the Russian refineries." data-reactid="80">Fuel costs represent a significant cost component for Centerra’s mining operations.  Prices for Kumtor diesel fuel in 2017 generally reflected the price movements of Brent crude oil, which dipped downward during summer months of 2017 and then gradually started increasing towards the end of the year. On average, the purchase prices for diesel fuel for Kumtor were up 8% in 2017 compared with 2016, averaging $0.41/l for the year. Kumtor sources its fuel from Russia either directly or through Kyrgyz distributors. Kumtor’s diesel prices include added costs for other factors such as seasonal premiums for winterizing of diesel fuel and transportation costs from the Russian refineries.

To manage its exposure to fluctuations in diesel fuel prices, the Company has established a diesel fuel price hedge program.  See “Financial Instruments – Fuel Hedges”. 

Liquidity

Financial liquidity provides the Company with the ability to fund future operating activities and investments.  The Company’s financial 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 financial institutions, and corporate direct credit of highly-rated, highly-liquid issuers.

Centerra generated $500.9 million in cash from operations in 2017 and has a balance of cash, cash equivalents and short-term investments of $415.9 million as at December 31, 2017.

As at December 31, 2017, the Centerra B.C. Facility, which was entered into as part of the acquisition of Thompson Creek, had an outstanding balance of $190 million at December 31, 2017, after repayments of $135 million in 2017 (outstanding balance as at December 31, 2016 - $325 million).   Subsequent to December 31, 2017, this facility was amended and restated to become a corporate facility (see Credit Facility - Centerra Revolving Term Corporate Facility).  

As at December 31, 2017, Centerra had drawn $76 million against its $150 million revolving line of credit with the European Bank for Reconstruction and Development (“EBRD”).  Subsequent to December 31, 2017, the funds drawn were repaid and the credit facility with EBRD was cancelled.

The Company believes its cash on hand, cash flow from the Company’s Kumtor and Mount Milligan operations and cash from the Company’s existing credit facilities will be sufficient to fund its anticipated operating, construction and development cash requirements through to the end of 2018.

Capital Management

The Company’s primary objective with respect to its capital management is to provide returns for shareholders  by ensuring that it has sufficient cash resources to maintain its ongoing operations, pursue and support growth opportunities, continue the development and exploration of its mineral properties, satisfying debt repayment requirements and other obligations, and certain  benefits for other stakeholders.

Management is aware that market conditions, driven primarily by metal prices, may limit the Company’s ability to raise additional funds. The Company is also required to maintain a number of financial covenants as part of its credit facilities, which may limit the Company’s ability to access future funding. These and other factors are considered when shaping the Company’s capital management strategy.

Credit Facilities

Centerra was in compliance with the terms of all of its facilities at December 31, 2017.

Centerra EBRD Corporate Facility

In 2016, the Company entered into a five-year $150 million revolving credit facility (the “EBRD Facility”) with EBRD.  The EBRD Facility included $50 million for the purpose of funding direct and indirect costs associated with the Gatsuurt Project.  At December 31, 2017, the Company had drawn $76 million under the EBRD Facility, after making $74 million of repayments in 2017.

Subsequent to December 31, 2017 and in connection with the entering into of the Corporate Facility, the Company repaid the remaining $76 million principal amount outstanding under the EBRD Facility and subsequently cancelled the EBRD Facility.

Centerra B.C Holdings Credit Facility

As part of the acquisition of Thompson Creek in October 2016, Centerra B.C. Holdings Inc., a wholly-owned subsidiary of the Company, secured financing from a lending syndicate in the aggregate amount of $325 million (the “Centerra B.C. Facility”), consisting of a $250 million non-revolving term facility and a $75 million senior secured revolving credit facility. 

In July 2017, the Company entered into an amendment of the Centerra B.C. Facility to increase the senior secured revolving credit facility under the Centerra B.C. Facility from $75 million to $125 million.  The amendment also includes additional favourable terms such as permitting upstream distributions of up to $50 million without the matching pre-payment requirement of the original agreement.  Prior to the amendment, the Centerra B.C. Facility required Centerra B.C. Holdings to make a matching pre-payment on all distributions to Centerra.  The amendment became effective in August 2017, when the conditions precedents were satisfied, including the execution of hedges for 50% of the gold and 75% of the copper production covering Mount Milligan’s production from July 2017 to June 2019. 

In September 2017, in addition to making the scheduled $12.5 million payment towards the non-revolving term facility, the Company repaid the outstanding balance on the revolving facility ($74.4 million). As at December 31, 2017, $190 million was drawn on the Centerra B.C. Facility ($190 million non-revolving term facility and nil from the revolving credit facility).  See also “Centerra Revolving Term Corporate Facility” below.

Subsequent to December 31, 2017, Centerra B.C. Facility was amended and restated in connection with the Company entering into the Corporate Facility.

OMAS Facility

In 2016, OMAS, a wholly-owned subsidiary of the Company, entered into a $150 million five-year revolving credit facility (the “OMAS Facility”) that currently expires on December 30, 2021. The purpose of the OMAS Facility is to assist in financing the construction of the Company’s Öksüt Project.

Availability of the OMAS Facility is subject to customary conditions precedent, including receipt of all necessary permits and approvals. If the conditions are not satisfied, waived or amended by the deadline (noted below), the commitments under the OMAS Facility will be cancelled. The original deadline for satisfaction of the conditions of June 30, 2017 has been extended several times given the delay in obtaining necessary permits for the Öksüt Project.  The current deadline is March 15, 2018, however OMAS and lenders are currently negotiating to further extend the deadline to June 30, 2018.  As part of these negotiations, it is expected that the term of the facility will be extended beyond December 30, 2021 and that Centerra will provide a guarantee of OMAS’s obligations under the OMAS Facility but that such guarantee would only be effective if certain conditions relating to the tenure of the Öksüt mining license are not satisfied by August 22, 2022. 

As at December 31, 2017, $4.8 million (December 31, 2016 - $4.2 million) of OMAS Facility deferred financing fees were included in prepaid expenses (note 10) as the Company has yet to draw from the facility. The deferred financing fees are being amortized over the term of the OMAS Facility. The Company expects to be in a position to draw on the OMAS Facility in the second quarter of 2018. See “Caution Regarding Forward Looking information”.

AuRico Metals Inc. Acquisition Facility

Subsequent to the end of the year, on January 8, 2018, the Company announced it had acquired all of the issued and outstanding common shares of AuRico Metals Inc. (“AMI”).  The purchase was funded, in part, by a new $125 million acquisition facility (“AuRico Acquisition Facility”) with the Bank of Nova Scotia, as administrative agent, lead arranger and lender. The AuRico Acquisition Facility was repaid and cancelled subsequent to December 31, 2017, after the Company entered into the Corporate Facility, as noted below.

Centerra Revolving Term Corporate Facility

On February 1, 2018, the Company entered into a $500 million four-year senior secured revolving credit facility (the "Corporate Facility") with a lending syndicate led by The Bank of Nova Scotia and National Bank of Canada.

The Corporate Facility is to be held at the corporate level and is an amendment and restatement of the Centerra B.C. Facility (discussed above), which had an outstanding balance owed of $190 million (continued under the Corporate Facility).  The Corporate Facility also replaced the EBRD Facility and the AuRico Acquisition Facility discussed above. The Corporate Facility is for general corporate purposes, including working capital, investments, acquisitions and capital expenditures and as at February 22, 2018, $315 million was drawn on the Corporate Facility.

Mineral Reserves and Mineral Resources

On February 8, 2018, the Company released the results of the updated mineral reserve and mineral resource estimates for the Kumtor mine, the Mount Milligan mine and re-iterated mineral reserve and mineral resource estimates for the Company’s other projects, including the Hardrock deposit, all as of December 31, 2017.  The release also included the Kemess Project which was acquired on January 8, 2018 as part of the AuRico Metals Inc. acquisition.  For additional details, please see the news release “Centerra Gold 2017 Year-End Statement of Mineral Reserves and Resources and Fourth Quarter Exploration Update” filed on SEDAR and posted on the Company’s website on February 8, 2018.

Mount Milligan’s mineral reserves and mineral resources are presented on a 100% basis.  Sales of gold and copper from the Mount Milligan mine are subject to the Mount Milligan Streaming Arrangement whereby Royal Gold is entitled to 35% and 18.75% of gold and copper sales respectively.  Under the Mount Milligan Streaming Arrangement this streaming arrangement, Royal Gold pays Centerra $435 per ounce of gold delivered and 15% of the spot price per metric tonne of copper delivered. 

Highlights:

Gold Mineral Reserves

• Centerra’s estimated proven and probable gold mineral reserves increased by 343,000 contained ounces, after processing of 1.1 million contained ounces of gold in 2017 and the addition of 1.9 million contained ounces of gold as a result of the purchase of AuRico Metals which closed on January 8, 2018.  Centerra’s proven and probable mineral reserves now total an estimated 16.3 million ounces of contained gold (746.8 Mt at 0.7 g/t gold), compared to 16 million contained ounces (673.4 Mt at 0.7 g/t gold) as of December 31, 2016.  The 2017 year-end gold mineral reserves have been verified and estimated using a gold price of $1,250 per ounce, except for the Kumtor Mine and the Kemess Underground Project which used a gold price of $1,200 per ounce.  At the Kumtor Mine estimating gold mineral reserves using a gold price of $1,250 per ounce would result in no material change to the contained ounces.

Gold Mineral Resources

• Centerra’s measured and indicated gold mineral resources, exclusive of gold mineral reserves, increased by 2.8 million contained ounces compared to the December 31, 2016 estimate and are now estimated to total 10.2 million ounces of contained gold (559.2 Mt at 0.6 g/t gold).  The increase is primarily a result of the inclusion of 3.2 million contained ounces of gold (1.5 million contained ounces of gold from the Kemess Underground and 1.7 million contained ounces of gold from the Kemess East deposit) as a result of the acquisition of AuRico Metals and the removal of 771,000 contained gold ounces of measured and indicated mineral resources from the ATO property in Mongolia as a result of the sale of the property to Steppe Gold LLC and Steppe Gold Limited.
• Centerra’s inferred gold mineral resource estimate totals 6.8 million contained ounces of gold (168 Mt at 1.3 g/t gold), an increase of 1.0 million contained ounces from December 31, 2016.  The increase is primarily a result of the inclusion of 917,000 contained ounces of gold (277,000 contained ounces of gold from the Kemess Underground and 640,000 contained ounces of gold from the Kemess East deposit) as a result of the acquisition of AuRico Metals.  In addition, at Mount Milligan inferred mineral resources increased by 265,000 contained ounces of gold from additional drilling.

Copper Mineral Reserves

• Centerra’s proven and probable copper mineral reserves increased by 519 million pounds after processing 72 million pounds of contained copper in 2017 and recording a negative model adjustment of 40 million pounds at Mount Milligan, along with the addition of 630 million pounds of contained copper as a result of the purchase of AuRico Metals which closed January 8, 2018.  Centerra’s proven and probable copper mineral reserves now total an estimated 2,568 million pounds of contained copper (575.3 Mt at 0.202% copper), compared to an estimated 2,049 million pounds of contained copper (496.2 Mt at 0.187% copper).  The copper mineral reserves have been estimated based on a copper price of $3.00 per pound for the Mount Milligan Mine and a copper price of $2.50 per pound for the Kemess Underground Project.

Copper Mineral Resources

• Centerra’s measured and indicated copper mineral resources, exclusive of mineral reserves, total an estimated 5,541 million pounds of contained copper (988 Mt at 0.254% copper).  The copper mineral resources are located at the Mount Milligan Mine, the Berg Property, the Kemess Underground, and Kemess East properties that are all located in Canada.
   
  
• At Mount Milligan, measured and indicated mineral resources total an estimated 663 million pounds of contained copper (229.7 Mt at 0.131% copper) at the end of December 2017 and have been estimated based on a copper price of $3.50 per pound.  In comparison to the end of December 2016 measured and indicated resources have decreased by 55 million contained copper pounds.
  
  
• The acquisition of AuRico Metals added the Kemess Underground and Kemess East projects to the Company’s copper statement.  Kemess added measured and indicated resources of an estimated 1,519 million contained copper pounds.  This is based on Kemess Underground measured and indicated resources of an estimated 565 million contained copper pounds (139 Mt at 0.184% copper) and Kemess East measured and indicated resources of an estimated 954 million contained copper pounds (113 Mt at 0.383% copper).
  
  
• Centerra’s inferred copper mineral resource estimate totals 1,427 million pounds of contained copper (265.0 Mt at 0.244% copper).  This includes at Mount Milligan an estimated 111 million pounds of contained copper (35 Mt at 0.143% copper) that represents a year-over-year increase of 80 million  pounds of contained copper that is largely attributable to additional in-pit drilling completed in 2017.  The Company continues to build on this exploration success with additional drilling planned in 2018.
  
  
• The Company’s inferred copper mineral resources also increased through the acquisition of AuRico Metals whose inferred copper mineral resources are an estimated 583 million contained copper pounds (85.4 Mt at 0.309% copper), including an estimated 105 million contained copper pounds (21.6 Mt at 0.220% copper) at Kemess Underground and an estimated 478 million contained copper pounds (63.8 Mt at 0.340% copper) at Kemess East.

Molybdenum Mineral Resources

• Centerra’s measured and indicated molybdenum mineral resources, exclusive of mineral reserves, total an estimated 758 million pounds of contained molybdenum (792 Mt at 0.043% molybdenum).  The molybdenum mineral resources are located at the Berg Property, the Thompson Creek Mine, and the Endako Mine. 
• Centerra’s inferred molybdenum mineral resource estimate totals 150 million pounds of contained molybdenum (193 Mt at 0.035% molybdenum).

⁽¹⁾       As at December 31, 2017, the Company had 291,782,846 common shares issued and outstanding (291,785,970 common shares as of February 22, 2018).  As of February 22, 2018, Centerra had 4,816,297 share options outstanding under its share option plan with exercise prices ranging from Cdn$5.04 per share to US$36.74 per share, with expiry dates between 2018 and 2025.
⁽²⁾       Average for the period as reported by the London Bullion Market Association (US dollar Gold P.M. Fix Rate) and London Metal Exchange (LME).  This is a non-GAAP measure and is discussed under “Non-GAAP Measures”.
⁽³⁾       Adjusted earnings, adjusted earnings per common shares (basic and diluted), capital expenditures (sustaining and growth), operating costs (on a sales basis), adjusted operating costs on a by-product basis per ounce sold, gold all-in sustaining costs on a by-product or co-product basis (excluding and including taxes) per ounce sold, copper all-in sustaining costs on a co-product basis (before taxes) per pound sold, cash provided by operation before changes in working capital, as well as average realized gold price per ounce (Kumtor, Mount Milligan – combined and Consolidated) are non-GAAP measures and are discussed under “Non-GAAP Measures”. 
⁽⁴⁾       Excludes Molybdenum business.
⁽⁵⁾       Comparative results for Thompson Creek operations (Mount Milligan and the Molybdenum group) have been presented from the date of acquisition (October 20, 2016) to December 31, 2016.

Overview of Consolidated Results

Year ended December 31, 2017 compared to 2016

The Company recorded net earnings of $210 million in 2017, compared to $152 million in 2016.  The increase in earnings in 2017 reflects full-year operations at Mount Milligan, increased gold production at Kumtor, due primarily to higher average mill gold head grades processed in the mill, partially offset by lower realized gold prices. In addition, the 2017 earnings include charges for a settlement reached with the Kyrgyz Republic Government of $60 million, an impairment charge relating to the Company’s Mongolian assets of $41.3 million ($39.7 million net of tax), a tax benefit of $21.3 million due to new tax legislation enacted in the United States and a gain of $9.8 million ($6.9 million net of tax) on the sale of the ATO property in Mongolia.  Excluding these items, adjusted earnings^NG in 2017 were $281.0 million compared to $160.9 million in the comparative year.

Production:
Gold production for 2017 totaled 785,316 ounces compared to 598,677 ounces for 2016.  Gold production at Kumtor was 562,749 ounces in 2017, 2% higher than the 550,960 ounces produced in 2016. The increase in ounces poured at Kumtor is a result of milling higher grade ore from stockpiles (3.58 g/t compared to 3.44 g/t) compared to 2016.  During the year ended December 31, 2017, Mount Milligan produced 222,567 ounces of gold and 53.6 million pounds of copper.

Safety and Environment:
Centerra had sixteen reportable injuries in 2017, including one fatal injury, eight lost time injuries, six medical aid injuries and one restricted work injury.  On April 11, 2017, an industrial accident near the Kumtor mobile maintenance shop resulted in an employee fatality.  Investigations involving the Kyrgyz State Inspectorate for Environmental and Technical Safety have been completed and no charges are expected to be filed. 

During 2017 there was one reportable release to the environment.  The incident occurred at Kumtor on July 9, 2017 when a diesel fuel truck rolled over a safety berm on the technical road on its way to the mine site, spilling 8.8 tonnes of diesel fuel that was immediately contained and, within the day, the contaminated soil was excavated and transported to a waste facility licensed for such material.  By the end of the third quarter of 2017, Kumtor and local authorities completed and closed their detailed investigations.

Financial Performance:
Revenue increased to $1,199 million in 2017 from $758 million in 2016, as a result of additional gold ounces sold (792,466 ounces compared to 580,496 ounces), the addition of copper sales $125.9 million at Mount Milligan and molybdenum sales of $145.0 million.  The increase in gold ounces sold in 2017 results from the addition of Mount Milligan which operated for the full year and recorded sales of 242,331 ounces of gold and contributed $242.9 million in gold revenues.  However, the increase in overall revenue was partially offset by a 6% lower combined average realized gold price^NG during the year ($1,171 per ounce compared to $1,228 per ounce in 2016).    

Cost of sales increased in 2017 to $682 million compared to $412 million in 2016, mainly resulting from the addition of Mount Milligan gold and copper sales and the molybdenum business.  Depreciation, depletion and amortization associated with production was $195.0 million in 2017 as compared to $205.9 million in 2016 due to the impact of the positive stockpile reconciliation of cut-back 17 ore at Kumtor during 2017, which was partially offset by increased sales from the addition of Mount Milligan and the molybdenum business in 2017.

The Company reduced the carrying value of its Mongolian assets by $41.3 million (pre-tax) in the second quarter of 2017 to reflect the receipt of preliminary results from the ongoing technical and economic studies related to the Gatsuurt Gold Project.  As a result, the Company has reduced the carrying value of the Mongolian assets to their estimated recoverable value of approximately $60 million.  On December 22, 2017, the Company issued a new technical report relating to the Gatsuurt Gold Project which included the results of such technical and economic studies.

In the third quarter of 2017, the Company entered into a settlement agreement with the Kyrgyz Republic Government which resulted in a charge of $60 million.  The Company also recorded a gain on the sale of the ATO property in Mongolia of $9.8 million (or $6.9 million net of tax).

In the fourth quarter of 2017, the Company accrued a tax benefit of $21.3 million resulting from new tax legislation in the United States (the Tax Cuts and Jobs Act enacted on December 22, 2017, "the Act"). In addition to reducing the U.S. corporate tax rate from 35 percent to 21 percent, the new rules make other significant changes to the U.S. tax code, in particular the repeal of the Alternative Minimum Tax (“AMT”).   Prior to the new tax legislation, the Company’s molybdenum business had paid income tax under the AMT regime, which was deductible against income tax subsequently payable by the Company.  Due to the repeal of the AMT under the new tax legislation, the Company expects to receive a refund of $21.3 million of the AMT credit balance, in respect of its 2018 to 2021 income tax years.  The final impact of the Act may differ, possibly materially, due to changes in interpretations of the Act or due to any legislative action taken to address questions that arise because of the Act. As a result, the benefit as recorded could be adversely impacted in future periods.

Exploration expenditures in the year ended December 31, 2017 totalled $11.3 million compared to $12.5 million in 2016, reflecting lower spending on advanced projects, mainly at Gatsuurt, as compared to the prior year.

Corporate administration costs were $38 million in 2017, an increase of $10 million compared to the same period of 2016, mainly due to an increase in share-based compensation of $2.3 million as a result of increases in the Company’s share price, additional costs for legal and consulting mainly in relation to the Kumtor settlement negotiations ($1.9 million), $1.6 million of costs associated with the acquisition of AuRico Metals Inc., and an increase in the Denver administration office costs of $1.7 million (formerly Thompson Creek Metals Company’s corporate office).

Operating Costs:
Operating costs (on a sales basis)^NG increased to $487 million in 2017 compared to $209 million in 2016, which includes full-year Mount Milligan costs of $209.7 million.    

Centerra’s all-in sustaining costs on a by-product basis per ounce of gold sold^NG, which excludes revenue-based tax and income tax, increased to $688 in 2017 from $682 in the comparative period mainly as a result of higher operating costs, higher capitalized stripping costs at Kumtor, higher sustaining capital^NG, increased administration costs, as a result of the Thompson Creek acquisition and the impact of the full year of Mount Milligan’s operations in 2017 as compared to 2016.

A Consolidated All-in Sustaining Costs on a by-product basis (per ounce sold) graph is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/0765b4e4-3b6a-4e69-ba31-38d9a7e21308

Cash provided by operations before working capital changes^NG increased to $512.6 million in 2017, compared to $338.8 million in the prior period, as a result of higher earnings in the current year, reflecting one full year of operation at Mount Milligan.  Working capital movements in 2017 reflect a reduction in levels at Kumtor mainly due to timing, partially offset by increased levels at Mount Milligan and in the molybdenum business.

The Company generated $500.9 million in cash from operations in 2017, an increase of $129.5 million compared to 2016.  With a full year of operation in 2017, Mount Milligan contributed $150.6 million (compared to $92.3 million for the period from October 20 to December 31, 2016), while Kumtor generated $416.1 million, similar to its contribution in 2016. Kumtor’s production and gold sales were slightly above the comparative year.

Cash used in investing activities decreased to $10.6 million in 2017 as compared to $1,072.0 million in 2016, reflecting in 2017 the release of Kumtor’s restricted cash of $248.0 million, proceeds from the sale of the ATO project, a reduction in net purchases of short-term investments, partially offset by an increase in capital spending (mainly additional sustaining capital^NG and capitalized stripping at Kumtor) as compared to 2016. The comparative 2016 period reflected payments of $782.9 million on the acquisition of Thompson Creek (net of cash received) and the restriction of Kumtor's cash.

Cash used in financing activities of $234.5 million in 2017 represents debt repayments under the Company’s credit facilities.  The Company made quarterly payments on the Centerra B.C. Facility non-revolving term loan of $12.5 million, in addition to a required prepayment of $10 million in connection with a $10 million distribution from Mount Milligan to its parent.   The Company also paid in full the balance under the revolving portion of the Centerra B.C. Facility of $74.4 million on the Centerra B.C. Facility at the end of the third quarter of 2017.  In addition, the Company re-paid $74 million under the EBRD Facility during 2017.  In 2016, the Company drew $325 million on the Centerra B.C. Facility and raised equity financing of $145.4 million in the form of subscription receipts in support of its acquisition of Thompson Creek Metals Inc., drew an additional $74 million on its EBRD Facility, paid interest on borrowings and paid dividends to its shareholders.

Cash, cash equivalents, restricted cash and short-term investments at December 31, 2017 increased to $416.6 million from $408.8 million at December 31, 2016 (including $247.8 million of restricted cash and investments at Kumtor).

Capital expenditures in 2017 totaled $326.3 million compared to $247.7 million in 2016, resulting mainly from increased spending on capitalized stripping at Kumtor to develop cut-back 18 in the Central pit and in the Sarytor pit, higher sustaining capital^NG for equipment rebuilds and overhauls, partially offset by lower spending on the Company’s development projects.

Financial Instruments

The Company seeks to manage its exposure to fluctuations in diesel fuel prices, commodity prices and foreign exchange rates by entering into derivative financial instruments from time-to-time.

Fuel Hedges:
In 2016, the Company established a diesel fuel price hedging strategy using derivative instruments to manage the risk associated with changes in diesel fuel prices to the cost of operations at the Kumtor Mine.  The diesel fuel hedging program is a 24-month rolling program and the Company targets to hedge up to 50% of monthly diesel purchases. The Company hedges its exposure with crude oil futures contracts, as the price of diesel fuel closely correlates to the price of crude oil.

Gold and Copper Derivative Contracts:
The Company must satisfy its obligation under the Mount Milligan Streaming Arrangement by delivering refined physical gold and LME copper warrants to Royal Gold after receiving payment from third-party purchasers who purchase concentrate from the Mount Milligan mine. In order to hedge the metal price risk that arises when physical purchase and concentrate sales pricing periods do not match, the Company has entered into certain forward gold and copper purchases and forward sales contracts pursuant to which it purchases gold or copper at an average price during a future quotational period and sells gold or copper at the current spot price.  These derivative contracts are not designated as hedging instruments.

Mount Milligan Gold and Copper Facility Hedges:
The Company entered into a hedging program required as part of an amendment to the Centerra B.C. Facility (see “Credit Facilities”) to cover the period from July 2017 to June 2019.  The amendment required hedging 50% of future un-streamed gold and 75% of un-streamed copper production at the Mount Milligan mine at a minimum average floor price of $1,200 per gold ounce and minimum average floor price of $2.50 per copper pound.  

The hedge positions for each of these programs as at December 31, 2017 are summarized as follows:

ND = Royal Gold hedging program with floating terms, that are not defined as at December 31, 2017.
(1)     Under the forward contracts (including crude oil options), the Company can buy and sell specified assets, typically metals or currency, at a specified price at a certain future date.
(2)     Under the zero-cost collar: (i) the Company can put the number of gold ounces or copper pounds to the counterparty at the minimum price, if the price were to fall below the minimum, and (ii) the counterparty has the option to require the Company to sell to it the number of gold ounces or copper pounds at the maximum price, if the price were to rise above the maximum.

The gold hedging program in 2018 consists of 87,003 gold ounces, including 39,097 ounces sold under forward contracts at an average strike price of $1,285 per ounce and 47,906 ounces of zero-cost collars at an average strike price range of $1,245 to $1,359 per ounce.  The copper hedging program in 2018 consists of 45.3 million pounds of copper, including 6.7 million pounds sold under forward contracts at an average strike price of $2.90 per pound and 38.6 million pounds of zero-cost collars at an average strike price range of $2.45 to $3.14 per pound.   

The gold hedging program is more heavily weighted to zero cost collars in the second half of the program in 2018 and 2019 with 55% collars and 100%, collars respectively. This hedging strategy has also been adopted for copper hedges with 85% zero cost collars in 2018 and 100% in 2019.

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 affiliates.

Operating Mines and Facilities

Kumtor Mine

The Kumtor open pit mine, located in the Kyrgyz Republic, is one of the largest gold mines in Central Asia operated by a Western-based gold producer.  It has been in production since 1997 and has produced over 11.5 million ounces of gold to December 31, 2017. 

Developments in 2017

• On September 11, 2017, Centerra announced it had signed a comprehensive settlement agreement with the Government of the Kyrgyz Republic.  See “Other Corporate Developments – Kyrgyz Republic”.
  
  
• On September 4, 2017, the Bishkek Inter-District Court lifted the interim court order which prohibited KGC from taking any actions relating to certain financial transactions including, transferring property or assets, declaring or paying dividends, pledging assets or making loans. As a result, KGC transferred cash balances over and above its ordinary working capital requirements to Centerra on September 15, 2017, when the lifting of the interim court order became effective.
  
  
• In December 2017, the Kumtor mine received approval from Kyrgyz Republic authorities of its life of mine plan, state reserves, and ecological passport.  It also received its maximum allowable emissions permit (“MAE”) and its maximum allowable discharge permit (“MAD”) from the Kyrgyz Republic State Agency for Environmental Protection and Forestry (“SAEPF”) for the full calendar year of 2018.  With such approvals in place, Kumtor now has all the necessary permits and approvals to operate throughout 2018.