Centamin PLC (LON: CEY) – FY20 guidance remained on track.

Jersey-headquartered Centamin PLC (LON: CEY) is a FTSE-250 listed Gold Mining Company, which specialises into exploration and development of minerals. It owns Sukari Gold Mine in Egypt with a current production capacity of 500,000 ounces (oz) per annum with mineral resources of 10.3 million ounces of gold. The Sukari Gold Mine has bulk tonnage open pit and underground operation, which began production in 2009 and became the first large-scale modern mine in Egypt.

The Company’s solid fundamentals and robust cash flows allow them to acquire and develop other gold projects. The FY19 was marked as a tenth successful year of commercial production at its Sukari Gold Mine. In FY19, CEY produced 480,528 ounces of gold at AISC (all-in sustaining cost) of US$943 per oz and the cash cost of production stood at US$699 per oz. The Company expects to release its Q3 FY20 Report on 21 October 2020.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

CEY is well-positioned among intermediate gold producers to generate substantial returns for shareholders. It has a clear strategy for generating long-term value from operating quality assets and maximising cash flow through financial discipline. Moreover, the Company has no debt and robust liquid assets (US$367 million as of 30 June 2020) unlike its peers, which gives them the strategic advantage to pursue upcoming growth opportunities. FY19 was the sixth consecutive year of returning surplus cash to shareholders.

   (Source: Refinitiv, chart created by Kalkine Group)

(Source: Refinitiv, chart created by Kalkine Group)

Its near-term plan is to construct the solar solution to power its gold processing plant. Furthermore, the Company has an industry-leading dividend policy (per ounce produced and by yield), low-cost and long-life assets to support the long-term shareholders return. Adjacently, Sukari is among the top 10 tier asset with 25 years of exploration driven growth.

(Source: Presentation, Company Website)

However, the Company is also exposed to various risk and uncertainties. It is exposed to financial risk with fluctuations in Gold price and exchange rates. Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow. The Global covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.

Industry Outlook Dynamics

The Gold prices lingered below US$1,900 per oz since lack of additional US fiscal stimulus kept the US dollar firm. The world mines are expected to produce 3,368 tonnes of gold in 2020, which is 4.6% lesser than in 2019 and the lowest in the past five years. The Covid-19 pandemic has led to an unparalleled money printing and low-interest rates globally, which shall put gold on track for registering its best year in a decade as it appeals investors as a hedge against currency debasement and inflation.

The Gold investment is an efficient way of preserving the purchasing power as the one ounce of gold cost has risen from US$20.67 in 1993 to US$2,000 in 2020. However, in present times, Gold has also been outperforming the major asset classes, in terms of return. Therefore, it is provoking a fundamental shift in asset allocation.

The uptick in gold price was seen prior to the Covid-19 pandemic with a trade war between US and China and sudden downtrend in real interest rates. The Covid-19 pandemic further exacerbated these concerns by dragging real interest rates into negative territory. Moreover, the dollar depreciation should support the rally seen in the gold prices movement.

In 2020, the onset of the Covid-19 pandemic has made Gold’s relevance as a hedging tool even more prominent, which accelerated the price performance. The Gold ETFs surpassed 1,000 tonnes of new demand. The Gold ETF recorded its tenth consecutive month of net inflows in September 2020.

The Gold prices increased by ~17% during the H1 2020 and soared by an additional ~10% in July. The Covid-19 pandemic may bring structural shifts to asset allocation, and there are strong fundamentals to support the Gold investment in the longer term. According to the global demand trends report from WGC (World Gold Council), the gold demand fell in H1 FY20 vs H1 FY19. However, the increased investment by Central banks and robust inflows into gold ETFs amid the pandemic zoomed the Gold prices.

The chart below shows the performance of future gold price which was trading at US$1,915.25 oz as on 19 October 2020 (before the market close at 10:15 AM GMT+1), up by 0.46% against previous day closing price.

 (Source: Chart created by Kalkine Group)

Growth Catalysts

• Record inflows into Gold-back ETFs should continue to offset the demand weakness in other sectors.
• The reduced opportunity cost of holding Gold with persistently low-interest rates would bolster the demand for Gold being a source for long-term returns.
• Central banks have been adding to the gold reserves since the financial crisis. Presently, the official reserves are more than 5,000 tonnes higher than they were in 2009. The central banks own nearly 35,000 tonnes of Gold, equivalent to ~17% of worldwide above-ground stocks.
• Uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil.
• Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources.

Key Risks

• The long-term price performance is dependent heavily on retail purchases, which makes demand a critical factor for long-term growth. According to the global demand trends report from WGC, the Gold demand in H1 2020 declined by 6% against the last year comparatives. The jewellery demand plunged 46% (year on year) in H1 2020 as consumers were deterred by the high price and with a reduction in the disposable income. Similarly, the bar and coin investment declined sharply in Q2 2020 due to Covid-19 led lockdown.
• The gradual resumption of economic activities and receding apprehensions of Eurozone disintegration could dent demand for gold to hedge related risks.
• The scale and continually evolving nature of coronavirus pandemic are causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations during H1 2020.
• With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars.
• Supply from gold producers can decline as only US$4.4 billion was spent on exploration in 2019 against US$11.8 billion in 2012. Consequently, there were only three gold discoveries in 2019 as compared to 42 major gold discoveries in 2000. In short, there would be less gold, if a lesser amount is invested on exploration.
• The allocation to gold could go down if real interest rates rise dramatically.

Gold Outlook

Gold can act as a genuine diversifier tool in an investment portfolio for a long-term due to the attributes pertinent to scarcity, highly liquid and uncorrelated asset nature. Moreover, it has been proven over time that beyond merely a safe-haven asset during the high-risk time, it can also be an asset to outperform and generate positive returns too. Such dynamics are likely to persist amidst high political and economic uncertainty, battered stock and bond markets, and historically low interest-rates scenario.

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment. However, as the gold prices and uncertainty have the inverse correlation, there is a risk that lower uncertainty with lockdown easing might cause gold prices to consolidate around US$1,800 to US$2,000/oz.

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

2 October 2020: Regarding Sukari operations, the Company updated that it has deferred open-pit mining in the Sukari open pit Stage 4 West wall to safeguard the health and safety of the workforce. The preliminary gold production for three months ended 30 September was nearly 1 20,000 ounces.

4 August 2020: The Q2 FY20 dividend for 6 US cents per share was paid on 11 September 2020, equating to approximately US$69.4 million.

Key Performance Indicators

 (Source: Annual Report, Company Website)

Q3 FY20 Preliminary Production Results

The preliminary gold production for three months ended 30 September 2020 is estimated to be around 120,000 ounces, bringing total production to circa 375,000 ounces in nine months of FY20. Although the precise impact is uncertain, the preliminary estimate for the fourth quarter of FY20 is expected to be reduced to circa 70,000 ounces.

Financial highlights for the six months ended 30 June 2020 (as on 4 August)

 (Source: Interim Report, Company Website)

• During H1 FY20, the Company delivered a strong operating and financial performance despite Covid-19 challenges.
• The revenue and profitability growth were primarily supported by the 27% year-on-year increase in average realised gold prices.
• The All-in sustaining costs (AISC) also remained within the annual guidance range of US$870-920 per ounce. Similarly, the cash cost of production at US$642 per ounce produced remained within the guidance of US$630 to US$680 per ounce.
• Adjusted EBITDA was US$255 million with a 57% EBITDA margin, and subsequently, profit before tax was stood at US$191 million.
• The interim dividend increased by 50% year-on-year to 6 US cents per share, representing 68% of free cash flow generated in H1 FY2020 (US$69.4 million). It was distributed to shareholders on 11 September 2020.
• CEY has a robust and flexible balance sheet with no debt or hedging. As of 30 June 2020, net cash and liquid assets stood at US$367 million after the first interim dividend payment of US$69 million on 15 May 2020.
• The current liabilities also decreased by 9% to US$60 million on 30 June 2020 from US$66 million on 31 December 2019.
• The current assets were increased by 6% to US$472 million on 30 June 2020 from US$447 million on 31 December 2019.

Financial Ratios – Strong Liquidity Position versus the Industry Median

Reported profitability metrics, the EBITDA margin and net margin for the first half of the financial year 2020 stood higher than the industry median, reflecting better control over expenses as compared to the industry. On the liquidity front, Centamin Plc’s current ratio was higher than the industry median of 1.82x, reflecting sufficient current assets to pay short-term obligations. On leverage front, the debt-equity ratio was 0.00 due to no debt, as compared to the industry median of 0.57x.

Share Price Performance Analysis

 (Source: Refinitiv, chart created by Kalkine Group)

On 19 October 2020 (before the market close, at 8:05 AM GMT+1), Centamin PLC shares were trading at GBX 161.80, up by 0.03% against the previous day closing price. Stock 52-week High was GBX 233.30 and Low of GBX 88.28, respectively.

14-day RSI (36.368 – oversold zone) is currently supporting an upside move, which means the stock price could increase in the short term.

 (Source: Refinitiv, Kalkine Group)

In the last one year, Centamin PLC’s stock return has outperformed the benchmark index and the sector as it has delivered ~48.69% return as compared to negative ~11.60% return of FTSE Mid 250 index and a positive ~5.35% return of FTSE All Share Mining index.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (NTM Price/Earnings)

Business Outlook

During H1 FY20, CEY confronted no material operational impact on the supply chain due to Covid-19 mayhem. Due to operational efficiencies, cost per tonne also improved. The Company has remained on track to meet the FY20 production guidance of between 510,000-525,000 ounces of gold, while the cost guidance is likely to be in between US$870-920 per ounce sold in AISC.  

(Source: Presentation, Company Website)

The capital expenditure for FY20 shall remain unchanged at US$150-170 million, while the completion of the first phase Sukari Life of Asset review is on track for H2 FY20. With robust liquidity and no debt obligations, it is in a good position to seek value opportunities in organic growth and strategic acquisitions. In a nutshell, it is aiming to generate a significant sustainable return for the shareholders.

However, as Gold has moved sharply higher in the past few months, the price may experience some consolidation in the near term. Nevertheless, if quantitative easing and other factors encourage investors to treat Gold as money, the potential for Gold price outperformance is extremely high over the next five to ten years. Therefore, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

(Source: Presentation, Company Website)

Over the course of 4 years (FY15 – FY19), the Company’s revenue surged from USD 508.40 million in FY15 to USD 652.34 million in FY19, compounded at an annual growth rate (CAGR) of ~6.43%. During the same period, net profit has surged at a CAGR of ~35.32%. 

Based on the sound business model, robust balance sheet position, and significant acceleration in the free cash flow, we have given a “BUY” recommendation on Centamin PLC at the current market price of GBX 161.80 (as on 19 October 2020, before the market close at 8.05 AM GMT+1) with lower double-digit upside potential based on 17.34x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.). 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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