EUR 65.70 For Business Accounts Only

CEY LN | Share price rally overdone; Downgrade to UW

Gold price rally to reverse trend towards mid to late 2020. Gold price surged by c24% since mid-19, amid rising global uncertainty. We assume this trend should reverse in the near future, as per consensus and World Bank forecasts. At the spot gold price of USD1,615/oz, the top ten largest gold miners enjoy a c9-146% EBITDA margin vs. the 10-year historical average of -17-51%, supporting the view that the current price is unsustainable in the long run. Uncertainty can keep gold price elevated in the short run, further weighing positively on Centamin’s share price, but we find the risk/reward unattractive at the current price. We recommend taking profits in the rally.

Raise TP by 27% to GBp127/share; Downgrade to UW from Neutral, on valuation. We raise our TP for Centamin as we account for an 8.5% higher gold price over 2020-24e (keep our long-term gold price forecasts nearly unchanged), as well as a 1.8% lower cost of capital in light of the global monetary easing dynamics. Centamin’s share price rallied by c70% over May-19 to Feb-20. We believe the current share price reflects expectations the spot USD1,615/oz gold price will sustain over 2020-24e, and, as such, expect sentiment to turn negative when gold prices start to normalise downwards. The stock trades on a 2020e P/E of 13.5x, below its historical 5-year average of 16.0x, but we expect it to rise gradually in the long run.

Short-term operational outlook attractive, but medium and long-term performance to gradually deteriorate. We expect Centamin’s gold production to rise by 10% in 2020e, 6% in 2021e, and 5.7% in 2022e, improving after two tough years. However, we anticipate a gradual deterioration in production and rising cash costs beyond 2024e (after two year of stability), as the mine’s underground reserves gradually deplete and underground mined grade falls towards, and later below, the average underground reserve grade when mining moves to lower grade zones, barring further positive upgrades to Sukari’s reserves.

Better-than-expected gold price, and/or reserve quality are the main upside risks. Every 5% higher-than-expected gold price p.a. raises our TP by 11.5%, all else constant. Centamin should publish the Sukari mine’s updated reserve and resource statement in 2020. Additionally, better-than-expected reserve replenishment and/or higher-than-forecast reserve quality can expand the life of mine (LoM) beyond our 14-year LoM valuation and/or increase the mined grade.