Investment extra: Striking gold with Egypt's Centamin

By Ian Lyall for MailOnline
Updated: 11:55 EDT, 31 October 2009

It has taken Sami El-Raghy a long, long time to become an overnight sensation. Thirty-nine years to be precise.

Rich pickings: Centamin's stock has soared recently

His gold mining company, Centamin Egypt, takes a full quote on the London Stock Exchange next week, but was first listed in Australia back in 1970.

Only in the past year has the group registered on investors' radar screens, the result mainly of a spectacular 425% rise of the price of the shares in just 12 months.

Demand for the stock has been fuelled by a red-hot market for precious metals and the potential of the firm's major asset - the Sukari gold mine 600km south of Cairo.

El-Raghy's is an interesting story. The geologist, who has spent most of his working life in Australia, was invited by the authorities in his native Egypt to consider the potential of a number of mines in the country.

He settled on Sukari, a prospect that had been raked over by the British many years earlier and may even have supplied the pharaohs.

What El-Raghy realised very early on, however, was that Sukari was ripe for exploitation using bulk mining techniques that had been pioneered in Australia. This involves digging out many tons of earth a day to extract minute traces of gold.

So since 1995 chairman Sami and his son Josef, a financier who is now chief executive, have devoted their working lives to turning this seemingly low-grade desert deposit into the biggest independent gold field to come on stream this year.

Unable to raise debt funding, the El-Raghys have been forced to sell shares in the company to achieve their dream.

But what you now have in Centamin is a fully-fledged miner with the facilities to go into wholesale production by the year-end.

The first 12 months will see it churn out 200,000 ounces of gold, which will rise to 500,000 ounces by 2012.

Let me put that into perspective. Last year the output of Randgold, the largest producer listed on the LSE, was 650,000 ounces.

The sparkling prospects for the company have attracted investment from Paulson & Co, the world-renowned hedge fund manager. It is the leading shareholder with around 11%, followed by the El-Raghys with 8% and the rest of the staff and management with a collective 4%.

There are a number of blue- chip investors also on the share register including Baring Asset Management, Fidelity, Henderson and Aegon.

And more heavyweight backers will be clamouring to jump aboard after next Thursday, when the company joins the main list in London after eight years on Aim and nearly 40 on the ASX. A constituent of the FTSE 250, Centamin will bring in tracker fund investment.

And I wouldn't be at all surprised to see the stock chased higher from current levels as the passive funds vie to get their allocation.

But what are they buying? Well Centamin is sitting on a potentially huge asset with resources estimated to be 13m ounces of gold. However this resource could conceivably double as more exploration is done on Sukari.

Daniel Lian, a mining analyst with Bank of America Merrill Lynch, recently went out to Egypt to see what the mine was all about.

He told clients in a research note: 'From discussions with the chief geologist we believe that there is still material upside risk to resources. The deposit is open along strike and at depth and, in our opinion, a potential doubling of resource doesn't seem out of the question.

'Anecdotally, there is a chart on the wall of the mine- site office where management keeps track of resource growth. This had to be replaced last year when the graph hit the top of the wall as resource growth literally went through the roof.'

There ought to be more data on reserves in the next few weeks after the move to the main market is out of the way. But be warned - there are risks associated with Centamin.

The downside could be significant if its one single processing plant is hit by any kind of mechanical failure.

And there could be a backlash if fails to hit its target of being in full production by the end of the year.

And of course there is the ever volatile gold price, which at current record levels means the heavy cash costs of getting the ore out of the ground are covered several times over.

The crunch would come if gold collapsed $350 an ounce, which would wipe out any profit.

Our advice: Centamin's share price has doubled in the past six months and you'd have made a 425% paper gain buying in a year ago.

However the company's valuation still isn't out of the ball park at just under net asset value.

Rivals trade at between 1.8 and three times NAV and that gap will narrow as production ramps up.

With plenty of newsflow, this should be an interesting ride. So we are adding it to the Mail's list of more speculative investments with a stop loss of 100p (current price 122p).