The Centamin (LSE:CEY) share price has been quite volatile since the start of the pandemic. Despite its operations being disrupted by Covid-19, the business saw its stock rise to an all-time high last year. Since then, it’s almost halved. And consequently, over the previous 12 months, the Centamin share price has yielded a return of -33%. What caused this volatility? And can the company return to its 2020 highs later this year?
The volatile Centamin share price
Centamin is a gold mining business that operates out of Egypt. The initial surge in its share price appears to have been triggered by the rapidly rising value of gold.
I think it’s fair to say that a lot of investors panicked in 2020. After all, the pandemic did trigger a global recession. And in times of crisis, gold is used as a safe haven for most investors looking to weather the storm. But with mining operations worldwide being disrupted, the supply of the precious metal started to fall just as demand went up. And so by August, the price of gold had reached as high as £1,570/ounce – a 25% increase since the end of 2019.
Needless to say, this was excellent news for Centamin. So why did its share price subsequently crash? In October 2020, the management team cut its full-year gold production guidance from 510,000-525,000 ounces to 445,000 ounces. Why? Because localised movement within a section of its Sukari mine was detected. As a result, the area was deemed unsafe to continue mining, and so the volume of production has suffered.
This announcement alone saw the Centamin share price tumble by 22% within 24 hours. But to make matters worse, the vaccine rollout also triggered a decline in gold prices, which exacerbated its downward trajectory.
Time for a comeback?
Despite the poor stock performance in the second half of last year, there are some reasons to be optimistic. Firstly, the financial health of the business seems to be sound. There is no debt on the balance sheet and plenty of cash to spare. In fact, the company was able to continue paying dividends without any cuts throughout all of 2020.
The reduced gold production is a frustrating development, especially since it’s currently unknown whether the region of Sukari will be safe to mine in the future. But despite this disruption, total production for the first quarter of 2021 came in at 104,047 ounces – a 53% increase compared to the previous quarter.
What’s more, with governments around the world issuing stimulus packages, the fear of inflation is on the rise. And since gold is often used as a hedging tool against inflation, the price has started to move back up.
The bottom line
Mining is an inherently risky business. After all, the fickle nature of commodity prices can have a significant impact, both positive and negative. 2020 serves as a perfect example of that.
But despite the risks, I do believe the Centamin share price is capable of achieving some rapid growth this year as the business returns to pre-pandemic operating levels. Therefore I would consider adding this FTSE 250 stock to my portfolio.
