Is Centamin plc today’s top gold buy after 313% profit growth?

Roland Head reviews a strong set of results from Centamin plc (LON:CEY) but highlights a potential downside for shareholders.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The gold rally seen at the start of 2016 may have cooled, but a number of gold miners are reporting bumper profits. Shares of Egypt-focused miner Centamin (LSE: CEY) rose by 4% this morning, after the firm said its earnings rose by 313% to 18.61 cents per share in 2016.

Today I’ll take a closer look at the results and highlight a key risk facing shareholders this year. Is now the right time to invest?

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

An impressive performance

Centamin’s gold production rose by 26% to 551,036 ounces last year, exceeding the firm’s previous guidance of 520,000-540,000 ounces. The group’s all-in sustaining cost of production, an industry standard measure, fell to $694 per ounce, down from $885 in 2015.

This combination of higher volumes and lower costs helped the group to generate a pre-tax-profit of $266.8m, 356% more than the $58.4m generated in 2015. As a result of this strong performance, the group’s net cash balance rose by 85% to $428m at the end of last year.

Shareholders will receive a piece of the spoils in the form of a final dividend of 13.5 cents per share. This will take the total payout for 2016 to 15.5 cents per share, which is equivalent to a yield of 7.7% at today’s prices.

And here’s the problem

This bumper dividend seems unlikely to be repeated for the foreseeable future. Mining analysts are forecasting a payout of 4.1 cents per share this year, giving a prospective yield of just 2.1%.

One reason for this is that Centamin expects costs to rise this year, perhaps because of the higher oil price. Today’s results include 2017 guidance for all-in sustaining costs of $790, significantly above last year’s level of $694.

The ramp-up of the Sukari mine is also now complete. Gold production is expected to be flat this year, at around 540,000 ounces. But Centamin’s share of the profits will be much lower. The company has recovered the costs of developing the Sukari mine. Its mining licence now requires it to pay a share of profits to the Egyptian government.

Analysts expect Centamin’s adjusted earnings to fall from 18.6 cents to 12.1 cents per share this year, due to the effect of a full year’s profit sharing. This puts the stock on a forecast P/E of 16. Gold bulls might want to buy at this level, but I’d probably choose to hold.

A top quality alternative

I rate Centamin as a fairly high quality operation. But there’s little doubt in my mind that FTSE 100 member Randgold Resources (LSE: RRS) remains top dog in the quality stakes.

Randgold combines low-cost reserves, a bulletproof balance sheet and an impressive ability to operate successfully in Africa. The firm’s dividend has risen by an average of 27% per year since 2010, while its book value has doubled over the same period.

The only problem is that this comes at a price. When Randgold publishes its 2016 results next Monday, consensus forecasts suggest it will reveal adjusted earnings of $2.80 per share and a dividend of $0.73 per share.

These forecasts equate to a 2016 P/E of 30 and a potential yield of 0.9%. I’m not tempted at these levels, but long-term investors with an eye on Randgold’s outstanding growth record may disagree.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Senior woman wearing glasses using laptop at home
Investing Articles

SSE shares are up 15% since the market correction! Should I buy?

Jabran Khan looks at why SSE shares have been on an upward trajectory in recent weeks and decides if he…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

After crashing 29%, Spectris shares look cheap to me

After peaking at 4,167p last September, Spectris shares have slumped by over 29%. But I see deep value in the…

Read more »

British Pennies on a Pound Note
Investing Articles

Here is why I added this dirt-cheap FTSE 100 penny stock to my holdings!

Jabran Khan explains why he added this dirt-cheap FTSE 100 stock to his holdings and is excited by its recovery…

Read more »

Woman looking at a jar of pennies
Investing Articles

3 FTSE 100 penny stocks! Which is the cheapest buy?

Our writer examines three penny stocks that feature in the FTSE 100 index to ascertain whether they have a place…

Read more »

Arrowings ascending on a chalkboard
Investing Articles

Is the Vodafone share price an opportunity at current levels?

Jabran Khan looks at the current Vodafone share price and decides if he would add the shares to his holdings…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

4 gems I’d include in my Stocks & Shares ISA

Jon Smith explains some of the top stocks he's thinking about including in his Stocks and Shares ISA a we…

Read more »

Compass pointing towards 'best price'
Investing Articles

At 85p, are Rolls-Royce shares a no-brainer buy? 

The Rolls-Royce share price look very cheap right now. And I think this might be my last chance to buy…

Read more »

positive mental health woman
Investing Articles

My £3-a-day blue-chip passive income plan

Our writer sets out his passive income plan of investing a few pounds each day in top stocks.

Read more »