Snap up its shares as operational setbacks become history
Thursday 01 Aug 2019 Author: Yoosof Farah

For those who are nervous about where the world is heading, one way to potentially take comfort (and profit) could be through a mining company digging for gold by the Red Sea.

After cutting its production guidance three times last year due to operational issues and suffering from associated share price weakness, FTSE 250 miner Centamin (CEY) is starting to win back the market’s favour, helped by a stronger gold price.

The miner is targeting 490,000 to 520,000 ounces of gold production this year, ahead of the 484,322 ounces it sold last year.

Gold tends to do well when there is an economic downturn, and its price per ounce has hit six year highs so far in 2019 due to a multitude of global problems, including the US/China trade war, Brexit uncertainty and bubbling tensions in the Middle East.

Centamin says its all-in sustaining costs will be around $890 to $950 per ounce. With gold having hovered above $1,400 an ounce this year, the company stands to make a decent profit.

In addition, the company has around $300m in cash on its balance sheet as well as no debt – unlike a lot of other miners – so that gives it some protection should it come into any unforeseen problems, which can never be ruled out with mining companies.

Centamin last month reported an improvement in its business following numerous operational problems in the past year at its Sukari mine. It previously suffered lower grades of gold than expected from the open pit section of its mine and disruption to the process it uses to get the gold out of the ground.

But the firm has moved to reassure investors that it has a ‘new team in place’ ready to return Sukari ‘back to its full potential’, having ‘identified, evaluated and implemented’ solutions to the aforementioned problems.

‘Centamin’s share price, while off its lows as gold prices have rallied, in our opinion does not reflect any operational improvements and is pricing in significantly lower than spot and long-term forecast gold prices,’ say analysts at investment bank Jefferies.

‘With improving free cash flow in 2020 (7% yield), driven by metal price forecasts and modest assumed operational improvements, we forecast the dividend yield returning to 5%, a notable standout versus global gold peers.’

The analysts believe improvements in Sukari’s open pit near term, along with stronger free cash flow generation and shareholder returns will drive the equity re-rating.

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