SHARES in UK-listed Centamin, which operates the Sukari gold mine in Egypt, recovered 4% by midday in London after RBS Capital Markets claimed the stock had been oversold – a view not universally accepted, however.
Goldman Sachs acknowledged the longer term outlook for the company following a downgrade to its 2018 production guidance on May 24 was still intact, but it described the short-term outlook as challenged and even “muddled” in the medium-term.
Investors didn’t take to an announcement by Centamin that it would produce up to 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.
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.
“Given the cut to guidance, we temper our production forecasts, not only for 2018 but also for 2019, as we believe that there are likely to be continued challenges,” said Goldman Sachs in a report on May 25. It added that new production from Cleopatra, which it had expected in 2019, was “… likely to be delayed as the company focuses on its current operations: this also drives the decline to our production forecasts,” it said.
Goldman Sachs lowered the earnings before interest, tax, depreciation and amortisation (EBITDA) estimates for the 2018 and 2019 financial years by 21% and 16% to $342m and $422m respectively. At the time of the production announcement, RBC Capital Markets acknowledged 2018 would be “a year to forget” for the company which shot the lights out last year paying all its free cash in dividends.
The market subsequently penalised Centamin shares which fell nearly a quarter between May 24 to May 29. On a 12-month basis, the decline in share value was nearly 30%. The company’s market capitalisation today is £1.46bn.
RBC Capital Market tempered its outlook, however, given the pressure under which Centamin shares had fallen. “Centamin’s share price reaction to what effectively pushes higher grade production back by three to six months, is overdone in our view,” it said. “We believe the medium-term story remains intact and is enhanced by the potential at the Cleopatra target at Sukari,” it added.
This is the view of Numis Securities yesterday which said the shares were “… oversold as Sukari remains a low cost long life asset and Centamin retains a very strong balance sheet with $426m of cash and no debt at the end of the first quarter”.
The impact to free cash flow as a result of the slower recovery in production was some $30m in the current financial year and $7m next year, said RBC Capital Markets: “Certainly management’s track record of relatively stable operations at Sukari takes a knock, but we think there is no fundamental reason to suggest material changes to the medium-term outlook for grades or tonnage.
“Centamin shares have lost $560m in market valuation since the warning. This is out of line with the impact from this change to production guidance, in our view,” it added.
