The market has been slaughtering even the larger companies over any sort of disappointing results recently, but for me that further strengthens the argument to buy shares in Centamin (CEY). The release of its unaudited full year results for 2018 has caused the share price to plummet from the mid-130p range to the current level in the low 90s, and it has now dropped back slightly below the level at which I tipped it as a buy last November. But I’ve not actually seen anything to make me change that longer term buy stance on this Egyptian gold miner, and as I’ve already mentioned, the fact that the market has reacted in this way - as it has done similarly on other shares where results didn’t live up to expectations - suggests to me that there are signs of overall weakness in the market, and that may end up strengthening gold over the coming months.
The yellow metal has performed fairly well so far in 2019, having started the year in the 1280s and is now trading at around $1,320/oz, having hit a peak in excess of $1,340/oz, and I still see a chance of a breakout to the upside. That will largely come down to breaking above that $1,350-1,360/oz level and then managing to hold there – something which it hasn’t managed in over five years, but if it does break higher then it will be very interesting to see what sort of upwards run it goes on from there. Given that FTSE-250 Centamin is a gold producer, then of course stronger prices will be good news for the company, even if the overall markets are showing weakness – barring another proper crash of course, when all shares tend to fall hard, to varying degrees. Obviously there has to be a reason why around 35% of the market cap of this company has been lost in just a few days, equating to more than £450 million, but I would certainly argue that there is no way that anything in the latest results justifies a fall of that magnitude – although it is quite possible that we will once again see the share price slip further down to the low to mid 80p range before it bounces once again, as momentum is pointing in that direction. Although it did seem to find a modicum of support at around 92p.
The fact that 2018 saw a reduction in production and sales, along with higher costs per ounce, was hardly exactly a surprise as all of the updates throughout 2018 – and even prior to that as it was always known that a lower grade transition zone in its Sukari mine would have to be worked through at some point – plus revised guidance had pointed to that. I think the problem here and the reason why some investors have headed for the exit is that after an improvement in production during Q4 2018 to 137,600 ounces, Q1 2019 is expected to produce 105,000-115,000 ounces. That is due to the increased movement of waste material from stages four and five of the mine. I think the market is wrong though to sell the share so hard based upon that, as overall guidance for 2019 stands at 490,000-520,000 ounces – higher than the 472,000 produced in 2018, but still lower than the 544,000 ounces that it managed in 2017. But even if we take the lower end of guidance for the year, and the higher guidance figure for the quarter, that would imply that for the remaining three quarters of 2019, production would average 125,000 ounces and could even be as high as nearly 140,000 ounces per quarter in the best case scenario. The company is expecting though that 55% of total production will be during the second half of the year.
The company is debt-free and had $322 million in the bank at the end of 2018 – following payment of the interim dividend – and has more than enough to cover the $118 million of Capex forecast for this year. Costs and cut-off grades have risen, and alongside depletion that has led to a reduction in proven and probable reserves to 7.25 million ounces, but even just allowing for the open pit operation that still gives that a lifespan of at least 15 years. Costs have been higher due to the total amount of material being mined, but longer term could see a reduction if plans to build a solar farm and a new tailings storage facility go ahead – neither is included in the current Capex forecasts. Despite 2018 not being the best year for the company, it still generated revenue of over $600 million and made a net profit of $152 million, generating net cash flows of $223 million from its operations, which hardly suggests that a 35% drop in share price is warranted. It is also still paying a healthy dividend, which will total $0.055 per share for the full year, or around 4.2p, and at the current share price that gives a yield of about 4.5%. That dividend is less impressive though than many would have been expecting, and is only around half of what was paid out for the full year in 2017, but isn't totally unexpected.
Whilst I can understand investors not being too enamoured with these results, I don’t see them as impacting on the longer term prospects of the company, and for me the stock remains a buy and hold, plus gives good exposure to potentially stronger gold prices – probably even more so now given the severity of the recent drop. I’ll be looking to add more if it slips back into the 80s, or shows signs of a bounce from current levels.
Filed under: Centamin, gold, Neil Woodford FCA, Pantheon Resources, Revolution Bars, shorted shares, WPP
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