EUR 47.30 For Business Accounts Only

Downgrade to Neutral on rising costs, shorter LoM

Rising costs, depleting reserves highly negative despite improving grade. Centamin’s 2019 guidance, announced on 25 February, came as a negative surprise. Sukari’s cash costs and AISC are seen rising 8.2-16.2% and 0.7-7.5% to USD675-725 and USD890-950/t, respectively, in 2019, mainly reflecting an increasing stripping ratio at the open-pit. The 2019 reserves and resources update indicate dwindling reserves at the Sukari mine, dropping 12.5% over 2017-19 to 7mn oz. This is despite the recovery from mined grade weakness, which pressured the stock’s performance in 2018.

Expect 46% net income drop in 2019. We raise our cash cost estimates by 12.1% and reduce our life of mine (LoM) estimate by 25% to 15 years, implying a production volume reduction of 20.4% over our LoM DCF valuation. We cut our TP by 23.7%, and downgrade the stock to Neutral, following the 32.5% share price drop since 25 February. The current share price puts the stock on a 2019e P/E of 34.3x, c51% above global peers, down to 15.9x in 2020 (on further grade and cost improvement, on our estimates), in line with peers. Centamin yields 3.2% in 2019 and 7.0% in 2020 vs. 2.2% and 2.3%, respectively, for peers.

Uncertainty underpins West Africa. Centamin announced a 106% resource increase at West Africa’s exploration sites on 15 February, and should announce Côte d’Ivoire’s Doropo Project PEA in early 2H19. The higher resources in West Africa do not indicate commerciality, in our view, as resource development could turn out uneconomical. We remain reluctant to incorporate West Africa into our valuation until there is further clarity.

Risks and sensitivities. Every 5% higher/lower gold prices than our estimate (USD1,284/oz in 2019, rising 2% p.a. thereon) raises/lowers our TP by 12.5%, all else constant. Our TP changes by c7% for each 5% change in cash production costs (not driven by production grade change), 9% for each 5% change in underground mined grade, and 3% for each 5% change in open-pit mined grade, all else constant.