Centamin a takeover target

Reuters | Fri, 19 Jun 2009 13:17
[miningmx.com] -- Centamin Egypt Ltd is seen as a possible takeover target by one of the majors as the gold exploration company is set to move into production over the next month at its Sukari gold project in Egypt.

North American gold miners, such as Newmont Mining Corp and Barrick Gold Corp, are seen as the most likely buyers, said Jonathan Guy, analyst at Investec Securities.

"They are probably sitting on their hands until this thing is actually in production and it's been demonstrated that they can export gold and get cash out of the country," he said.

Newmont, the world's second-largest gold company, and Barrick, the world's biggest gold producer, have operations in North America, South America, Australia, the Pacific and Africa.

Centamin is trading at a discount compared with both of the gold majors on a net present value and 2010 price/earnings ratio basis, so it makes it value accretive for the majors to pick it up at the current levels, Guy said.

Brock Salier, analyst at Ambrian Capital, also mentioned Barrick and Newmont as potential buyers and added South Africa's Gold Fields, the world's fourth-biggest gold producer, and Australia's Newcrest Mining Ltd to the list.

One company that isn't thought to be interested is West Africa-focused Randgold Resources Plc following comments made at the time of its first-quarter results in May.

RESOURCE UPGRADE

As well as the start of output, Centamin is expected to benefit from a move up to the London Stock Exchange's main market and an increase in estimated resources at its deposit.

Sukari is one of the largest gold deposits found in the past decade, said Guy.

Sukari, Egypt's first modern gold mine, contains about 12.89 million ounces of gold, according to a February announcement, with the figure anticipated to grow when a new resource estimate is released in the third quarter.

Centamin expects to reach a milestone 15 million ounce resource this year, said Kate Ward, analyst at HansonWesthouse.

The company is planning to move from the Alternative Investment Market, London's junior market, to the main market around the end of this year in a move that would lift the share price.

"It widens the range of companies that can hold them," said Guy. "It would go straight into the FTSE-250 so the index funds would have to buy some of it."

The shares have jumped almost 80 percent in London this year, helped by higher gold prices and a takeover premium, to 75.23 pence, valuing the group at about 755 million pounds ($1.24 billion).

The company has no debt, cash of about $70 million at end May, and no hedging.

While Centamin experienced a two-year delay on the project, related to permit issues with the Egyptian government, this was resolved and the government is now seen as supportive.

"There is no point derailing the first carriage of a gravy train," said Salier.

Egypt has no mining code, although it plans to put out a code this year, and so Centamin operates under a profit sharing agreement.

Under this arrangement, Centamin is able to take all of the cash flows from the mine, less a 3 percent royalty, until its capital and exploration and operating costs have been recouped.

"You don't pay any tax up front so you get to front-load all of your profits," said Salier.

Centamin will have more cash flow, because it hasn't been taxed, to invest in expansion during this period.

"Whoever buys this asset has the same advantage," said Salier. "It's a self-funding expansion because you don't pay tax up front."