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Cash king Centamin is a precious pick
Thursday 13 Oct 2016 Author: Daniel Coatsworth

This year’s impressive gold price rally has gone into reverse with the precious metal at $1,253 per ounce now trading at a four-month low. We don’t think it will stay down for long. Now is a good opportunity to pick up gold mining shares at a more attractive level than earlier this year.

We like Centamin (CEY) at 153.6p. It has just published record third quarter production figures at its Sukari mine in Egypt.

The gold price has fallen amid US dollar strength and subsiding economic fears. We view this as a temporary situation. It would be unwise to turn bearish on gold given the potential for considerable economic disruption in the UK, Europe and US over the coming 12 months.

certamin larger companies

The gold price typically rises during periods of economic, political and geopolitical unrest. The start of Brexit negotiations, a potentially negative read-across to European economies as a result of this process, and the forthcoming US presidential election all have the potential to trouble the market. Gold could see a new rally.

Gold producers have traditionally outperformed a rising gold price. Centamin says its gold production for 2016 will be at the top end of its 520,000 ounce to 540,000 ounce guidance.

The gold price would need to fall by 40% in value from today’s level before Centamin starts losing money. Its all-in costs are $750 for every ounce of gold produced at Sukari.

Gold Bullion LBM U$Troy Ounce - Comparison Line Chart (Rebased to first)

Centamin believes Sukari could be mined for the next 20 years or more, based on the amount of gold it has found through exploration work. The £1.8bn miner is busy drilling the underground section as well as in and around the open pit section. Elsewhere, it has budgeted $30-$35m for exploration work in Burkina Faso and Cote D’Ivoire this year.

The company is expected to start giving the Egyptian government a share of profit from next year, beginning with 40% of free cash flow and rising to 50% after two years. This is in lieu of all taxes (excluding a 3% royalty at the revenue line).

The agreement lets Centamin recover all costs from building Sukari before the government receives any share of profit. Centamin has invested north of $1.2bn in the mine and has already made some advance payments to the government. (DC)

Centamin is a high quality business. It has one of the biggest gold mines of its peer group on the UK stock market and it generates a significant amount of cash from operations. The dividend could fall in the coming years because of the government profit sharing agreement soaking up some of the cash flow, yet this has never been an income story. Buy for capital growth.

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