Centamin (CEY) has had a bad run of form of late, but I believe that this is just a temporary blip in its fortunes and it presents a fantastic buying opportunity for the future. The company has shown signs of weakness ever since it was announced that its Sukari gold mine in Egypt was going through a transitional phase where it would be working through a lower grade zone in the deposit and the management warned that production during this time would be lower than had originally been expected. But since then the company has seen its share price hammered – on occasions as a result of announcing the lower output levels had occurred, despite the market being aware that this was going to happen. Gold itself has also been incredibly volatile during this period and at times has dropped back below the $1,200/oz level, although it has now recovered back to around $1,230/oz.
The latest operational update for the third quarter up until the end of September shows that, as expected, production is starting to improve once more and was 117,720 ounces for the three months as compared to 92,803oz for the previous quarter, although that is still some way short of the 156,000oz of production in Q3 2017. The unit cash cost of production was also higher than the comparable quarter in 2017, at $619/oz compared to just $483/oz, and all-in sustaining cash costs stood at $889/oz compared to $732/oz. But those costs were significantly lower than what we saw in Q2 2018, which suggests that the company is moving back in the right direction. What I also take as a very positive sign is that production for September alone stood at 48,511oz, which is comparable to the sort of monthly output that we were seeing prior to the temporary blip in grades, and I believe that the Q3 results don’t necessarily give a fair reflection of where the company is now, as they include a weaker performance in July and August. The company is forecasting 145,000 ounces for Q4.
The higher costs per ounce were simply down to the lower grades and having to extract larger amounts of material to extract the gold produced during this period. The underground part of the mine at Sukari continues to perform well and further exploration drilling has been showing encouraging results, with a reserves and resources update due in early 2019 at the same time as the final results are published. There have also been encouraging results from drilling in the Cleopatra zone, and the $2.8 million cost of the programme was offset by $2.7 million in revenue generated from the drills. The company had cash and cash equivalents of $254 million at the end of the period and is pretty much debt free, with net assets of nearly $1.2 billion. Its market cap is £1.13 billion currently so you could argue that it is trading at fair value, but that doesn’t take into account any of the potential future upside.
It made a net profit of £10.7 million for the quarter, which is significantly lower than it has achieved previously, but I would expect to start seeing that move in the right direction from now onwards. The final dividend is yet to be announced, but the interim was in line with what has been paid previously, and so I wouldn’t be surprised to see a total of around 10p/share paid out for the full year, which at the current share price of around 97p would give a yield in excess of 10%. The wider markets and economy suggest that gold could once again show signs of strength, and if that occurs at the same time as Centamin are returning to the previous levels of production and profitability that we have seen, then I think these shares have the potential to go on a strong run, possibly even back up to that 160p level and above.
Filed under: Centamin, MySquar, fraudster Rob Terry, CAP-XX, Oxford Technology VCT 2, Everything Bubble
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