EUR 43.16 For Business Accounts Only

Cut TP 23% on lower gold grade and prices; Look for recovery in 2019

Management revises down 2018 production guidance for second time. Centamin’s 3Q18 production results, issued on 5 October, showed that gold production from the Sukari mine is improving from the 1H18 weak base, but at a slow pace. Management cut full year 2018 production guidance by 5-7% to 480k oz (-12% y-o-y). This is the second time management cuts 2018 production guidance, the first being in May, when the target was slashed by 11-13% on low grades from both the open-pit and the underground. We cut our production estimates by 6.5% and raise our cash cost and AISC estimates by 1.1% and 1.5%, in line with lower production, respectively, over our forecast period. We maintain our OW call on the stock, but cut our TP to GBp125/share. Despite operational overhangs, Centamin trades on a 2019e P/E of 16.3x, implying an unjustified c22% discount to global peers. Centamin’s dividends remain attractive, yielding 4.3% in 2018 and 6.7% in 2019 vs. 0.7% and 1.2% for global peers.

Gold prices and Sukari mine grade to improve in 2019e; negative sentiment likely to reverse with better performance. Gold prices fell by c10% over Apr-Sep 2018 alone to USD1,192/oz, driven mainly by a stronger USD (USD index appreciated c5% over Apr-Sep 2018) and higher global interest rates (Fed raised interest rates by 50bps over Mar-Sep 2018). However, the price of gold should recoup most of its losses in 2019, according to Bloomberg consensus. A weaker USD (consensus expect USD index to drop 7.7% by end-2019 from current levels) and increasing global economic uncertainties are likely to lend support to gold prices, in our view. As such, we cut our gold price assumptions by 3% p.a., but continue to expect higher gold prices in 2019 to weigh positively on Centamin, since the current share price implies that weakness in gold price and grade is sustainable. Negative sentiment is likely to sustain over at least 1H19, in our view, until there is further clarity on the Sukari mine’s operational improvement and rising gold prices.

West Africa potentially in limbo. We assign no value to Centamin’s exploration assets in West Africa, down from USD147mn. Management changed its accounting policies for exploration and evaluation assets in 2Q18, such that capital expenditures for greenfield exploration are expensed rather than capitalised. This led to a cut in West African exploration assets by USD112mn in 2Q18, which we incorporate in our valuation. Centamin’s exploration activity in West Africa since 2014 (cUSD150mn spent to date) has not yet borne fruit.

Risks and sensitivities. Other than the low likelihood risk of an adverse outcome from lawsuits pertaining to the Sukari mine concession and/or government fuel subsidies, we estimate every 5% lower/higher-than-expected gold price to reduce/raise our TP by c10%, all else constant. Additionally, every 5% of lower/higher-than-anticipated grade from the open-pit and the underground should knock/add 7.2% and 3.2% off/to our TP, all else constant.