The Centamin (LSE: CEY) share price has underperformed as of late. Since the beginning of the year, the stock has fallen 15% and is once again trading as a penny stock. The question I am asking myself is whether this recent pullback has presented me with an opportunity to buy more of its shares.
2022 at a glance
On the face of it, 2022 looked like a strong year for Centamin. Total gold production increased 6% to 440,974 ounces. However, this was not enough to satisfy the market, with the share price falling 6%, yesterday. As I write the stock is down another 4%. One key concern is rising costs.
All-in sustaining costs (AISC) rose 22% to $1,399/oz. This was primarily driven by a 11% increase in mine production costs. Higher fuel, oil, lubricants, and reagent prices more than offset higher gold production. As a result, earnings per share declined by 29%.
Although these results are disappointing, they were to a large extent expected. In 2020, Centamin set out a three-year capital investment plan to increase production and drive operational efficiencies at the Sukari mine. The peak reset year was predicted to be 2022.
Renaissance of gold
In the last 50 years, there have been two major bull markets for precious metals. One was during the inflationary decade of the 1970s. The other, in the early 2000s, following the tech bust.
During both periods, one related macro driver precipitated a move higher – falling global gold production. Today, I believe we are entering a similar era.
Since 2019, gold production has been falling. Many reasons can be attributed toward this decline. Growing social pressure to accelerate the energy transition has led to many large gold producers shifting capital to ‘green’ metals.
Newmont, the largest gold producer in the world, is today producing the same amount of gold as it was 16 years ago. Further, not only are mining companies depleting their reserves, but the quality of their existing assets is drastically deteriorating.
I am of the firm belief that demand for gold will rise this decade. One source for this rise will be retail investors. The default 60:40 stock and bond portfolio performed poorly in 2022. If interest rates continue to rise and inflation remains elevated, further downside risk is likely.
Exploration
The lifeblood of any gold miner is exploration. Centamin has a two-fold strategy in this respect. Firstly, it seeks to identify potential deposits within trucking distance of Sukari. Secondly, it is exploring for new discoveries capable of supporting standalone operations.
Its Doropo Project in Côte d’Ivoire, West Africa, has the potential to be a mine that can significantly increase overall group production. However, as with any exploration initiatives, nothing is guaranteed. Even if a new discovery is made, it often takes years before a new mine becomes operational, if at all.
Despite the undoubted high risk of investing in a gold miner, I believe that a small percentage of my portfolio should be assigned to gold.
Centamin provides the best of both worlds. Its existing operations at Sukari means it has a ready source of capital to fund new projects. A rising gold price is likely to propel its share price significantly higher. On this pullback, I definitely intend to buy more shares.
