Centamin PLC Delivers Explosive Dividend Despite Profits Slump

Egyptian gold miner Centamin (LSE: CEY) has cheered the market in start-of-week business and was recently trading 14% higher on the day.

The bounce has been prompted by the digger’s decision to shell out a final dividend of 1.99 US cents per share which, combined with a maiden interim dividend of 0.87 cents, takes the total 2014 payment to 2.86 cents. Broker Investec had been expecting a total payout of 2.6 cents per share for 2014, and was by far one of the most bullish forecasters.

The dividend meets the top-end of Centamin’s dividend policy, which seeks to return between 15% and 30% of free cash flow to investors. Cash and cash equivalents at the firm leapt to $125.7m as of the end of December, up from $106m at the same point in 2013.

But bottom line disappoints the market

All was not quite rosy in the garden for Centamin, however, as a declining gold price caused pre-tax profit to slump to $81.6m last year from $184m in the previous 12-month period. Centamin sold its product at an average of $1,257 per ounce in 2014, down 9% from 2013 levels.

At the same time Centamin saw the cost of production also smack the bottom line in 2014, with a full-year cash cost of $729 per ounce rising 10% from the previous year.

Promisingly, however, the Africa-focussed firm saw total production clock rise 6% last year to 377,261 ounces, as the fruits of the massive investment at its Sukari facility paid off handsomely. Indeed, this propelled output during October-December 37% higher from that of the prior three-month period.

So is Centamin a buy?

Of course, Centamin’s investment appeal is intrinsically linked to the likely performance of the gold price. It seems a lifetime ago since the yellow metal struck record peaks above $1,930 per ounce back in the autumn of 2011, and although prices have since stabilised, the broad downtrend remains in place — indeed, gold has fallen back again from $1,300 in mid-January to $1,180 at present as risk appetite has returned.

Still, it could be argued that there remains plenty of mud in the system which could see investors plough back into the safe-haven metal once again. Central banks across the globe continue to devalue the value of their currencies through ongoing easing and low interest rates, boosting the appeal of ‘hard’ currencies like gold. Meanwhile the threat of a Greek default, and consequent implications for the eurozone, continue to swirl. And mounting geopolitical concerns over rising hostilities between Russia and the West could also boost the gold price looking ahead.

But with gold’s multi-decade bull run having been spectacularly broken in recent years, some have questioned whether gold will return to the heady peaks seen previously. With the Federal Reserve expected to raise rates sooner rather than later, boosting an already-robust US dollar, and inflation running at low levels across the globe, Centamin could see selling prices for its product come under further pressure in the coming months and years.

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Royston Wild 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.