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

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?

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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.

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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.