Centamin (CEY) has always been one of my favourite gold producers and, although I may not be as bullish on gold as fellow ShareProphets writer Nigel Somerville, I still expect the metal to do well over the next few years. This Egyptian gold miner has had its share of problems over the past couple of years and it has recently encountered some lower grade areas at its Sukari mine that it has had to work through. Even though that was largely part of the mine plan, the market hasn’t generally responded well to it. Having made a very strong recovery and seen its shares hit a high of over 232p last August, its fortunes have been on the wane since and took a further dip after the latest production report for Q1 2021, as well as suffering from the impact of falling gold prices, which are now well off of the highs of last year.
I personally think we could be about to see gold show some sort of recovery though, even if it doesn’t go on to challenge the previous highs, as whilst it has pulled back on more encouraging signs and optimism about the equity markets and the general economy going forwards, this euphoria seems to be waning and the impacts of Covid definitely haven’t gone away and are likely to be felt for a number of years. Just how much of an impact they have though, given that all the major economic powers were badly affected and have had to take on huge amounts of extra debt, remains to be seen. Inflation in particular is seen as an issue and whilst governments claim that they will be able to control that, I remain to be convinced that they have much that they can do, and the soaring prices of many commodities - including lumbar and soy beans - will add to that inflationary effect. On that basis I think it would be silly not to have at least some gold (or silver given the two generally move in tandem) in your portfolio, and the easiest way to gain exposure to price movements in that is by holding shares in an unhedged gold miner, which generally offers a leveraged play on movements in the commodity price. The latest update from Centamin showed that whilst production for the three months was down by 17% on the same quarter in 2020, it had risen by 53% as compared to the previous quarter, and at 104,000oz was in line with guidance and expectations.
The figures show that grades are still far lower than they have been previously - 31% lower at the main open pit operation as compared to a year ago - but I have no reason to suspect that they won’t improve again in the future, and most mines go through phases of working through lower grade areas at times. The company still managed to generate $9.4 million of free cash flow in Q1, after paying out $37 million in capex, plus $27.4 million to the Egyptian government for royalties and profit share. The balance sheet also looks strong here, with over $330 million in net cash (prior to paying out $34.7 million in dividends), and it still has plenty of gold left in the ground to extract, with the current reserves supporting another 12 years of life at 450,000 to 500,000oz per annum. The company recently updated on some changes to its model, with around 750,000oz of existing reserves now unlikely to be mined – these were earmarked for the end of the life of the open pit and at a very high cash cost per ounce. Instead the company is looking at utilising other more attractive areas of the mine with resources that can possibly be mined more economically, and sooner. The new model takes a base gold price of $1,350/oz and gives roughly the same mine life overall.
Whilst most of the proven and probable reserves are contained in the open pit part of the mine there is still plenty of potential from the expansion of the underground operations in the future. So, the company should continue to do well both from its mine plan, given the annual production forecast, as well as the potential to convert more resources into reserves over the coming years, as long as gold also stays strong. Costs have been rising, but even still AISC is still only around $1,036/oz, and I would expect to see that improve as and when the company works through some higher grade zones. Financially the company should also carry on doing well, having generated a net profit of $155 million during 2020, resulting in EPS of $0.135 (or roughly 10p per share) versus the current share price of around 107p. The dividend yield also looks very attractive – depending on whether this year follows a similar pattern to 2020 – and the company paid out $0.15/share last year, equating to a yield of roughly 10% at the current share price. So, if you are looking for some exposure to gold, and a miner which to me looks to be offering good value at the current share price, then I would definitely suggest Centamin as one to buy.
Filed under: Centamin, Bidstack, ITV, Iconic Labs, Dave Sefton, Malcolm Stacey, Tom Winnifrith
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