Is a higher Golden Bid on the cards for Centamin?
“…At just over 100p the Centamin share price looks remarkably cheap given its runaway valuation this time last year and of course the company recently turned down a bid at roughly 127p a share…”
Gold miner Centamin (LSE:CEY) offers an interesting case study in the ways of the market’s mercurial mind.
Described by one commentator as ‘a byword for quality among gold bugs’, the company’s Sukari Gold Mine, located in the Nubian Desert in southern Egypt, continues to produce nearly 500,000 oz a year, as it has for the past decade, generating record revenues last year for the cash-rich, debt-free company. But Centamin’s share price plunged last autumn, and continues to bump along at its lowest levels for some two years.
Sukari powers on
Sukari, the first large scale modern gold mine in Egypt, and now established as one of the top ten in the world, began production in 2009. The open pit and underground operation has produced more than 4 Moz (million ounces) of gold, and generated more than $1bn revenues. With a 5 Moz reserve at 1.1 g/t grade the mine is expected to have more than 12 years remaining life.
Sukari’s continued productivity, together with last year’s gold price surge, allowed Centamin to publish strong final results (to 31 December 2020) last month. The company sold 468,681 oz at an average realised gold price of $1,766 per oz, powering revenue of $829m, a 54pc increase in profits before tax to $315m, and a 91pc increase in free cash flow to $142m, finishing the year with $310m in cash and liquid assets. With no debt or hedging the company was able to continue its existing dividend policy of releasing 30pc of its free cash flow going to shareholders, announcing a final dividend of 3 US cents per share, worth $34.7m.
Centamin rode high through much of 2020 after ending prolonged uncertainty about a possible takeover from Western Africa focused Endeavour Mining (TSE:EDV) at the start of the year. Despite support from a significant fraction of its shareholders, attracted by the proposition of a powerful mid-tier miner with a market value of almost $4bn and annual production of more than 1.2m ounces of gold, Centamin’s board resisted Endeavour’s $1.9bn offer on the grounds of price.
Centamin does look an obvious takeover target however as its massive Sukari mine is considered a prized asset, but the key point on any deal would be the price, with Centamin likely taking the view its recent share price isn’t indicative of the true value of the company when taking a long-term view.
Momentum stalled
The decision seemed vindicated by the company’s subsequent strong production and rising gold prices, which sent its share price soaring by 70pc. But that momentum came to a juddering halt in October, when ‘movement in a localised area’ of the pit wall at Sukari forced work on a section of the mine to be suspended. Centamin reduced its production guidance for the year from 510,000-525,000 oz to around 445,000 oz, a shortfall worth just under $100m. Mining from the unstable high-grade area could be replaced, but only with less gold-rich stockpile ore
The company’s share price plunged from just over 200p to 150p, and as the gold price has fallen has since fallen back to just over 100p. The market’s seemingly harsh reaction was coloured by memories of Centamin’s struggles in recent years to hit production targets due to operation failures, a series of disappointments through 2017 and 2018 forcing the resignation of its previous chief executive.
After the October incident Centamin announced a comprehensive technical review of its Sukari operations, and the mine’s future prospects. The company is investigating whether the rock can be stabilised to allow mining to restart, commissioning mining contractor Capital (LON:CAPD) to provide waste stripping services – the removal of overburden to facilitate access to mining ore – in a deal worth up to $260m over four years.
Centamin has renewed its geological team and announced that it will be guided by a new value over volume production philosophy. In the company’s own words: ‘Historically, we have been influenced by the headline ounce production profile but now and going forward, we will always look to prioritise value over production volume, as a means to maximise free cash flow generation.’
In Centamin presented its first conclusions from a life of asset review, setting out a three-year outlook for the mine during which it will target stable 450-500,000 oz production at less than $900/oz all-in sustaining cost. The second phase of the review will examine opportunities for exploration, productivity, and efficiency improvements to optimise the full life of the mine.
Options for diversification
Though it seems that there might be much life left in Sukari, the company is aware of need to diversify away from its star asset. As one observer put it bluntly, seen from one perspective ‘Centamin is essentially a play on a single asset in the desert.’
The company is exploring the potential of a cluster of assets around the Côte d’Ivoire. It began extensive exploration at the Doropo Project in the northeast of the country in late 2015, with a maiden resource declared in 2017. The Project’s nine permits cover 1930 km2 and contain a 2.4 Moz Indicated and 1.0 Moz Inferred resource, drilled to 250 metres from surface depth.
The Batie West Project in Burkina Faso, on the border with Côte d’Ivoire, acquired in 2014, trends over 100 km of gold mineralisation, and comprises exploration licenses and one exploitation permit, the Konkera prospect containing a 1.9 Moz Indicated and 1.3 Moz Inferred resource. A scoping study is underway to assess the Project’s potential. The company is also exploring the 750 km2 ABC Project in northwest Côte d’Ivoire, approximately 600 km west of Doropo, a greenfield exploration site consisting of two permits, Kona and FarakoNafana, with a 650 Koz (kilo oz) resource.
The vagaries of gold
As with all gold miners, Centamin’s value will inevitably ebb with the tide of the price of gold. The metal’s price has fallen since last autumn as the anticipated world economic rebound and rising bond yields reduce its value as a haven asset: gold holdings do not pay interest so the metal tends to perform poorly as yields rise on other assets such as bonds. But there have been recent indications that the price is bottoming out, rising somewhat in the past week to its highest level in more than a month. At $1,738.37 at the time of writing gold is now just 20pc shy of its $2,072 August high.
On the upside, weaker prices could stimulate demand for gold, which according to the World Gold Council fell to an 11 year low in 2020, slowing jewellery sales in big markets, notably India and China, the largest consuming countries. And gold would quickly regain its lustre as a store of value if current market anxieties about inflation worsen
Certainly, many of the government spending programmes designed to reinvigorate post-pandemic economies and fund various green new deals are mind boggling in scope. The US has just passed a $1.9tn fiscal stimulus programme, and is currently weighing a further $3tn package targeted at green infrastructure that together would amount to almost a quarter of US GDP. They are supplemented by an expansionary monetary policy expected to last at least until 2024, even though the Fed forecasts US growth as high as 6.5pc this year. Inflation in the US would spill into the world economy, raising the spectre of higher interest rates that would have serious implications for a global economy awash in debt. Prevailing conditions of big government spending, expansionary monetary policy, and high household savings that might be unleashed as economies rebound, provide, as Martin Wolf put it, the ‘kindling needed to light an inflationary fire can be seen almost everywhere.’
Just now the markets seem confident the threat is manageable. Stocks are continuing to rise, bond markets expect a modest and desirable rise in inflation expectations and inflation-risk premiums, and the dominant concern of central banks, notably the Federal Reserve, is still to edge inflation upwards, giving them scope to at last raise interest rates beyond zero.
Solid fundamentals
In truth, many words are being written about outcomes we simply don’t know. What we can say is that Centamin is an investment worth considering on its own terms, not just as an index to the gold price. Despite its well documented operational fluctuations the company has consistently delivered yearly production nearing 500,000 oz and maintains a robust cash flow, giving it plenty of money to develop what seem to be promising assets beyond Sukari.
At just over 100p the company’s price looks remarkably cheap given its runaway valuation this time last year. Given gold’s current low price, it’s one for the contrarian perhaps, but we think Centamin’s plans for future, stable production at Sukari, and elsewhere, make it worth watching.
