Fully-listed Egyptian gold-miner Centamin (CEY) has updated the market with its Q3 report and revised outlook in view of the ground movement detected at the Stage 4 West Wall as previously advised. The market has not taken the news well, with the shares down by another 20% to 130p but I suggest readers take a slightly longer term view and regard the drop as another over-reaction to a temporary problem. In short, whilst the latest news is disappointing in the short term, the market’s reaction has thrown up a buying opportunity...
On the West Wall we are told: Current scheduling indicates that the remediation work will be completed during H1 2021 and the deferred higher-grade Stage 4 West material can be rescheduled into the open pit mine plan in H2 2021 and into 2022. In other words, if all goes to plan, the West Wall area will once again be available for open pit mining by the end of H1 next year, so the issue has set Centamin back by around 9 months or less. We are also told: Due to historical open pit scheduling, there are limited alternative production areas available to be mined…But…Improving future mining optionality and flexibility is a key focus of the open pit mining planning.
OK, so Centamin appears to have learnt a few lessons from this episode. Indeed, we are told that the company has already commenced an increased waste stripping programme which will offer benefits from 2022 onwards. In short, the next year will be a little difficult but after that we should see the benefits of greater flexibility in more reliable gold production. It may seem a while to wait to get back on track, but Centamin will be releasing phase one of its life-of-asset review covering a three-year outlook for Sukari on 2 December and phase two, due next year, will look further out. A 2015 technical report forecast 19 years of production with upside, so a delay of 9 months whilst a pain, really isn’t all that significant. And meanwhile gold production from the rest of this site continues.
In Q3 the company produced 128,000 oz gold to bring the total for the year so far to 384,000 oz. With open pit mining suspended at the higher-grade Stage 4 West Wall while the company deals with the ground movement mentioned above, Q4 production will be heavily reduced to 60-70,000 oz. That is bad news, for we are told that free cashflow expectations for Q4 are largely neutral (ie probably marginally negative unless the gold price advances) and free cashflow expectation for the year are set at $135-145 million – roughly the end of Q3 figure. Although free cashflow has disappeared for this quarter, production has only halved – the explanation being that costs are not halved and thus all-in cost of production for Q4 will rise sharply to $1450-1650 per oz. But I note that the company tells us that: Free cash flow is a non-GAAP financial measure and defined as cash available after profit share distribution and investing activities. That raises an interesting point for me, because the interim dividend payment (6 US cents per share) cost $69 million and the above suggests there is room for a repeat of that from this year’s cashflow despite the ongoing problems. Bearing in mind Centamin’s pile of liquid assets as at the end of September ($345 million), I would have thought that an unchanged FY dividend in the new year to demonstrate confidence is certainly in prospect. What we do know is that there will be a full year payout, as we were promised the announcement of the 2020 final dividend with the full year results. My money is firmly on 6 US cents per share.
Looking forward, we are now promised 400,000-430,000 oz gold for next year at an all-in cost of $1200-1275 per oz against this year’s forecast figure of $950-1050. That looks to me to mean that cashflow will return to normal in Q3 next year and will be constrained for the first half of the year whilst the company deals with the issues at the Stage 4 West Wall. With gold currently sitting at around $1900 per oz, the above suggests cashflow (taking the mid-points) of around $275 million before other expenditure, dividends and payments to the Egyptian government. If we take the forecast cash-costs of $875-950 per oz that offers up cashflow of around $400 million on the same basis. Could Centamin offer two dividends of 6 US cents for next year at a cost of $138 million? I reckon so – especially if the gold price moves forward as I expect it to do. And bear in mind that by the time the interim dividend for next year is paid, operations at the West Wall should have returned to normal. So I see the latest news as a delay rather than a disaster and at 130p, with a following wind, we could see a yield of around 7% for a bad year. With upside thereafter, despite the possibility of longer problems and some downside risk to the yield for the time being, this looks to me like a cracking buying opportunity for those with a timeline of a year or more. And there is further upside offered by the first part of the life-of-asset review due on 2 December, which is aimed at identifying cost-savings and operational efficiencies. So we could see costs heading south whilst the gold price moves upwards. My previous target was 250p and whilst longer-term I can still see it being achieved, I am reducing my immediate target to 200p for the time being. But at 130p and at up to 150p I would say Centamin is a buy not just for the recovery potential, but for the (perhaps slightly wobbly in the short term) dividend.
Filed under: Centamin, Versarien, RELX, TomWinnifrith.com, Trifast, Quartix, Verditek
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