But be prepared for a bumpy ride!
Its Sukari goldmine, in the Eastern desert of Egypt, was mined by the Pharaohs and the Romans. But Centamin Egypt (LSE: CEY) is planning to dig a lot more of the yellow metal out of the ground, by a combination of modern geology and brute force.
Whilst the gold bulls and bears fight out the future of the precious metal, there is much to be said for gold miners as a long-term play on the gold price. But mining companies brings their own distinctive risks, none more clearly so than Centamin has this year.
As the company cut production forecasts on Tuesday after access to explosives was restricted by local officials, its shares dived 24% to 104p, around half the price they hit last November before the revolutions in Tunisia and Egypt.
But the company is confident that the officials are acting without the authority of the military regime and that production will return to normal in the third quarter. If fears of the risk posed by the revolution are overdone, then this is a valuable buying opportunity.
From open pit to underground
Construction at Sukari, Centamin's only asset, was started in 2007 with production commencing in 2010. Most extraction is from open pit mining: digging out vast amount of earth to extract low concentrations of gold.
Some underground operations were commenced in May, which are expected to yield 10-12 grams of gold per ton compared to the 1 gram per ton of the open cast operations. Even so, cash production costs are relatively low, at an anticipated $550 per ounce for 2011.
Centamin was on course to produce 250-290,000 ounces in 2011, but Tuesday's guidance reduced that to 200-210,000 ounces. The target is to reach 500,000 ounces per year. Ore processing capability is planned to double to 10m tons per year by early 2013, with the capital cost funded entirely from cash flow.
There's plenty of gold for Centamin to dig out, with proved and probable reserves of 9.1m ounces, plus another potential 5.4m. The rise in reserve estimates has been a significant factor driving the share price since the company moved to the main market in 2009.
Despite the problems with the supply of explosives, production in the second quarter of the year was still up 6% on the previous quarter. However cost of production was up 15% to $606 per ounce. Average sales price was up 10% to $1,545 per ounce.
That margin generates a healthy P&L. On a consolidated basis, the company generated an annualised 17.7p per share in the last quarter. That's equivalent to a PE of 5.8.
It generates cash flow too. Operating activities produced $27m of cash whilst investment cost $33m. That barely cut into Centamin's $146m cash pile. It has no debt.
The company made a small acquisition in the year, of PLUS-market listed Sheba, which takes it into Ethiopia and is the first move to diversify.
Centamin was granted a concession of up to 60 years in 2005. Under the concession agreement, the operating company Sukari Gold Mines is a 50/50 joint venture between Centamin's Egyptian subsidiary and the Egyptian Mineral Resources Authority (EMRA).
Centamin is solely responsible for funding Sukari, but is entitled to recover all operating costs and capex. After that, the profit is shared with EMRA, with 60% to Centamin in the first year, 55% in the second and 50% after that.
Centamin itself is an Australian company with two items on its balance sheet: interest-free loans to its Egyptian subsidiary, and cash. But importantly, Centamin consolidates Sukari in its accounts, so what it reports includes EMRA's share. When this starts to be paid out it will show as a cost in the P&L.
In addition, Sukari pays a 3% royalty, but is exempt from all taxes and duties for 15 years.
This is double edged. When the cash-on-cash investment return turns positive, earnings will be hit. But with a 50% share as sleeping partner, the government has a vested interest in the status quo.
There's a large element of uncertainty over the future course of events in Egypt. Since the military government took over in February low level disorder has continued in Cairo, but this has not affected the remotely located Sukari mine directly.
There is, as yet, little sign of the elections which the military government originally promised within 6 months. Economic reforms, and a clamp down on corruption, should benefit Centamin but the risk of a new government being aggressive to foreign ownership can't be ignored.
Unless things go very badly this looks a buying opportunity, but definitely a speculative one.
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