Questor share tip: Centamin mines more gold than expected

Centamin
46½p+1⅓
Questor says HOLD

FTSE 250 gold miner Centamin said yesterday that annual production from its gold mine in Egypt was well ahead of market expectations, news that sent the shares almost 5pc higher.

Centamin operates the Sukari mine, located in the south east of the country some 465 miles from Cairo. This is the company’s only revenue-generating asset.

Total gold production in the fourth quarter ending on December 31 reached 91,546 ounces, 8pc higher than the third quarter and up 7pc on the same quarter of 2012.

This pushed full-year output up 36pc year-on-year to 357,000oz, beating the company’s forecast of 320,000oz.

“Consistently high levels of productivity have been achieved at Sukari throughout 2013, with minimal impact from unplanned stoppages or the start of stage four commissioning activities,” said chairman Josef El-Ragpy.

“Full-year production is ahead of guidance, as indicated in the third-quarter results, and we look forward to delivering a further successive year of growth in 2014 as the plant expansion drives the continued ramp-up towards our 450,000oz to 500,000oz per annum long-term target.”

Throughout the political problems caused by the Arab Spring, Sukari has continued to operate, with only a few minor issues such as disputed fuel subsidies and delays in gold exports slowing production.

The company’s all-in cash cost for producing each ounce of gold is $850, which is at the lower end of the major gold players. However, Centamin has seen its share price struggle as the price of gold fell 27pc last year to $1,244.

Centamin is about to finish its major capital expenditure programme and increase output. This means that royalty payments to the Egyptian government are also likely to increase significantly over the next few years, as spending eases.

The big political issue that needs to be resolved is a legal case brought by elements associated with the previous government who are challenging the legality of Centamin’s permit to operate Sukari. The mine will still operate until the court decides otherwise and Centamin’s case is supported by an earlier ruling from an Egyptian court issued in March. The High Administrative Court of Egypt suspended a judgment issued by a lower court, which ruled against Centamin.

The 2014 earnings multiple stands at seven times and a small dividend is forecast in the near future. However, the court ruling and political risk make this a very high-risk bet. Hold.