Yesterday, leading gold producer Centamin (LSE: CEY) released its results for 2021. They went down like a lead balloon with the market, resulting in its share price dropping 9%. It now trades firmly as a penny stock once more. As an existing shareholder, it’s never great to see one’s share get knocked down. However, does the sell-off present me with an opportunity to top up?
A year to forget
Despite average realised gold prices increasing by 2% to $1,797 an ounce, virtually every key financial metric at the Sukari mine was down in 2021. In particular, underlying EBITDA fell 33% driven by a combination of lower production volumes together with increased stripping costs, fuel and reagent prices.
All-in sustaining costs (AISC), a key metric in the mining industry, increased 19% to $1,234 per ounce sold. This was mainly attributable to an increase in mine production, corporate and sustaining capital costs.
However, despite these significant headwinds, the company still had cash and liquid assets of £257m. Some £20m of that figure was unsold gold bullion that remained on-site. Unique among its peers, the company does not carry any debt on its balance sheet. Further, it doesn’t engage in any hedging activities and consequently all gold sales are directly exposed to movements in market prices.
Exploration potential
The lifeblood of any precious metal miner is exploring for new deposits. Presently, the Sukari gold mine in Egypt, is Centamin’s only revenue-producing mine.
The recent problems with this mine, meant that in December 2020 the company announced a three-year reset plan. Crucially, this framed 2021 as the peak reset year meaning lower production and higher capital expenditure. Consequently, I was expecting a sub-optimal set of results this year.
The key reason why I invested in the company was because of its stated aim of becoming a multi-asset, multi-jurisdictional gold producer. The company is attempting to do this by exploring for reserves in Cote d’Ivoire, West Africa.
A preliminary economic assessment confirms that there’s a viable project in this region. It’s now about to start conducting a pre-feasibility study. It’s estimated that the mine has a measured, indicated and inferred mineral inventory of 5.4Moz. This includes 2Moz of gold. As all the deposits will be mined by open-pit, the AISC will be significantly lower. It’s estimated to be $904 throughout the 13-year life of the mine.
The company is also busy exploring for new gold reserves in Egypt’s Nubian Shield. It has already secured 3,000 square kilometres of highly prospective ground in the Egyptian eastern desert. The area is supported by good infrastructure, including roads and a port. It also has a highly educated workforce. Crucially, the region is politically stable and has recently implemented a new mining code.
Would I buy now?
I bought shares in Centamin a few months ago when it was trading as a penny stock. With rising inflation and an inflated asset bubble in many equities, I was looking for a safe haven to protect my nest egg.
Investing in individual mining stocks is risky as already highlighted. Exploration is even riskier, but brings with it huge rewards. Couple that with the fact that Centamin has an established mine at Sukari and that its dividend yield for 2022 is set at a minimum of 4%, I will be topping up while this share remains a penny stock.
