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Kicking ass (as they say)
Just topped the session high of $1895.48
Currently $1895.31
As usual… long time until 8:00am
RBC RAISES CENTAMIN TO 'OUTPERFORM' ('SECTOR PERFORM') - TARGET 140 (120) PENCE
May 10, 2021
Centamin plc
Upgrading to Outperform
Our view: With operational expectations reset, some potential positive
catalysts from Egyptian concessions and the West Africa portfolio review,
and with Centamin trading sub 0.84x NAV at spot gold we think risk reward
is now skewed to the upside, in particular if gold can hold its recent gains.
Upgrade to Outperform.
Key points:
Still hard work but risk reward now skewed to the upside
Centamin's challenging 2020 and guidance reset was the culmination
of many years of the operation being run for the short-term. New
management now looks well on track to proving out a brighter long-term
future for Sukari. Q1's better than expected production, albeit only one
quarter of many which would be needed to prove out the strategy, was a
positive sign. Although there are likely to be further bumps on the road,
the potential of Sukari remains intact and we think we are now past the
worst of the news flow.
This year could be augmented by two potential catalysts. First, the group
has won a recent Egyptian bid round. Details remain scarce, however, with
grades constrained in the open pit and the underground yet to show its
true potential, a material near-mine satellite discovery could reshape the
production profile and add potential for expansions. We expect to hear
more details in the coming weeks. Secondly, Centamin's adventures in West
Africa have taken away focus from the key Sukari mine. We think a review
could monetise the current exploration portfolio, and this, added to the
$331m of cash and equivalents on the balance sheet, could potentially
drive future buybacks or more optimal usage of the balance sheet, further
enhancing value.
Everything else is going up, and so is gold, so why not gold stocks?
In recent weeks, signs of inflation pushing through the wider economy,
especially from a diverse suite of commodities, appears to be picking
up momentum. With consumer balance sheets and corporate profits
providing plenty of room to pass on price and wage increases, and limited
signs of excess liquidity being removed, we think that gold's optionality
here remains elevated. Centamin is trading on 0.84x spot P/NAV and 4.4x
consensus EV/EBITDA (c. 10% below 5 year average but in theory should
trade at a higher multiples through this compressed profitability phase).
We see potential that gold's recent revival could push multiples higher
again, as we saw in 2020. We move our target multiple to 1.3x our RBC
base case NAV and 6.0x EV/EBITDA (from 1.1 and 5.0x prev). This moves
our price target to 140p from 120p and we move our recommendation to
Outperform from Sector Perform.
Our view
What are the most material ESG issues facing this company?
• Employee health and safety: In 2019 the company recorded one fatality and had
LTIFR of 1.45 (peer average: 2.82). Safety was improved in 2020 with 0 fatalities
and a drop of 40% in LTIFR to 0.84.
• Energy efficiency. Sukari has limited access to energy resources. Currently, the
power is supplied through a diesel fired power station which explains why CEY has a higher scope 1 GHG emissions intensity than peers (34t CO2e/kt processed in 2019 versus peers at 21t CO2e/kt processed) (scope 2 and 3 emissions are not reported). The Group is working on the installation of a solar power plant which is expected to meet up to 25% of the mine's energy needs while reducing scope 1emissions by 48-53Kt of CO2 p.a (12% of 2019 Scope 1 emissions).
• Water management: The bulk of Sukari’s water supply comes from the Red Sea via a 25 km long pipeline. In 2019, CEY consumed 1.01KL of water per ton processed (peers 1.02KL/t). This is +7% vs 2017 level (base year) but during that period the Group has managed to increase the water recycled from 35% to 44% in 2019. This is, however, below peers who recycled an average of 71% of the water used in 2019.
• Waste management: Gold mining involves the generation of rock and hazardous waste. The Group complies with the International Cyanide Management Code and its tailings and waste dumps comply with all regulatory requirements.
• Maintaining the social license to operate: In 2019, 92% of the employees were locals and the company invested $340 thousands directly in communities. This represented 0.05% of the yearly revenues, a level below peers at 0.55%.
Does the company integrate ESG considerations into its strategy?
The group reports its sustainability performance in line with GRI standards. The Sustainability Committee has the responsibility for drafting the Group’s ESG strategy.
CEY has quantitative yearly targets but it does not have a public long term plan to improve its environmental footprint. However, the Group is working on setting medium and long term emissions targets. CEY includes safety in its management bonus (the company reckons this could be as much as 30% of the annual remuneration in some cases). However, it does not include any KPIs related to the environment.
What is diversity like at board /management level?
CEY is governed by a unitary board of 9 directors. 67% of its members are independent (peer group: 71%) and 33% are female (peer group: 33%) and members come from 5 different
countries. Executive board members are remunerated through a base salary, an annual bonus and a performance share plan. There is a minimum shareholding requirement for the CEO of 200% of base salary (peer group: 270%) and variable compensation is caped at 275% of base salary (peer average:275%).
How does the company manage the
relationship with EMRA partners?
Although CEY has control over the Sukari mine, the project is jointly owned with
the Egyptian Mineral Resource Authority (EMRA). The board of the holding entity
operates with simple majority, making arbitration necessary should a conflict arise.
The Group has regular meetings with officials from EMRA and invests time in liaising
with government representatives.
Investment summary
Sukari is a Tier 1 asset. Centamin operates its sole asset, the
Sukari gold mine, in southern Egypt. The mine is a Tier 1 asset,
in our view, albeit one in a relatively high-risk jurisdiction. The
mine has a c20-year mine life with low costs.
Potential for high-return brownfield growth. Recent
exploration drilling at the Cleopatra target has outlined
potential for a second high-return underground, in our view.
That CEY has already begun a potential 1Mtpa decline there
indicates good potential for production to grow to >700koz pa.
This is not included in our base-case NAV.
Track record on dividends set to continue. CEY has been a
consistent dividend payer for some years. With the group net
cash, management has outlined a minimum cash balance that
needs to be held with FCF above this set to be paid out to
shareholders. This gives CEY a potential return ahead of most
EMEA peers.
Potential catalysts
• Update on new Egyptian bid round-Q2 21
• Updated life of mine review- Q4 21
• Improved operational momentum at Sukari – 2022.
• Ahead of consensus dividend – Q1 2022.
Risks to rating and price target
• Production risk: Post a difficult H1, we think CEY will rebuild
trust in Sukari's ability to deliver. However, a risk is further
underperformance of the underground vs plan impacting
grades and hence ounces.
• Political risk: Whilst we think the profit share with the
Egyptian government insulates CEY from high levels of
political risk, Egypt still has the potential for a volatile
political situation to arise.
• West Africa: We see CEY as not under pressure to pull the
trigger on a new project in West Africa, but if one was
commissioned that had lower quality or returns than Sukari,
then we think this would dilute the group's investment case.
• COVID-19: If the pandemic impacts Sukari's operations
either directly through an outbreak on site or indirectly
through limits to contractors and consumables then this
could lead to downgrades to earnings and the group's
dividend.