2018 tipped as ” a year to forget” for Centamin as grades falter

Centamin's Sukari gold mine, Egypt.

CENTAMIN could produce as much as 13% less gold than it expected for its 2018 financial year after a second quarter recovery failed to materialise.

Consequently, production could be as low at 505,000 ounces of gold compared to its guidance at the beginning of the year of 580,000 oz.

The company said in a production update today that lower-than-expected grades from the open-pit and underground section of its Sukari gold mine in Egypt were the main reasons for the likely year-on-year production decline. It guided to a new range of 505,000 to 515,000 oz. The company produced 544,658 oz in its 2017 financial year.

Shares in the company fell by about 16% in the first hour of trade on the London Stock Exchange. “This is a negative … and unexpected as the company with the 1Q18 results earlier this month had reaffirmed its guidance,” said Goldman Sachs.

Said Investec Securities: CEY [Centamin] has rebuilt its reputation in recent years to one for reliability so it is disappointing to see such a substantial downgrade just three weeks after it reaffirmed its previous FY18 guidance”.

Centamin said that it expected to stage a recovery in the third and fourth quarters, but cash costs would come in at $625 to $640 per ounce whilst all-in sustaining costs would be between $875 to $890/oz compared to guidance of $555/oz and $770/oz respectively. “Production equipment availability is now improving and ore tonnes from stoping will increase back to the previous 60:40 split, stoping to development tonnes,” the company said of production from the underground section of Sukari.

“Grades from the open pit are forecast to increase in Q3 as previously reported within the Q1 Results,” it said.

“Only five months into the year, Centamin’s 2018 is likely going to be one to forget,” said RBC Capital Markets in a report. “Revised production guidance this morning is about 14% lower than our initial forecast,” it said.

“However, from a long-term investment perspective, the lower production this year, although unhelpful in the short-term, is only being caused by transitory issues. The larger transition zone material through this part of the hill pushback was already explained in Q1 as being a function of less data owing to the challenging landscape. Further drilling now anticipates this will pass by Q3,” said RBC Capital Markets.

Centamin paid out its entire cash flow generated in 2017 via a final dividend of 10 US cents/share which took the total dividend to 12.5c/share, equal to $144m. At a dividend yield of about 5.8%, the payout was then described by CEO, Andrew Pardey as “… a significant return for any of the FTSE250 companies”, which then had an average yield of some 2.7%.