Stock Pitch - Centamin (LON:CEY)

1st Mar '21 by Keelan Cooper

15 comments 11400 reads

Centamin was pitched to the Stockopedia Investment Club (SIC) on 16th February 2021.

Gold miners have recently suffered as a result of retreating gold prices, which remain around 15% below their July 2020 highs at the time of writing. Despite this recent retracement, gold prices are still up over 30% over the last 2 years, amid heightened global volatility.

As a mid-cap gold producer operating a Tier 1 gold mine, Centamin is well positioned to benefit from the stronger gold price environment. However, issues at the company’s flagship Sukari mine in Egypt have weighed on sentiment and the share price, with the shares losing over half their value since their peak in early August last year.

Despite the falling share price momentum, Centamin scores strongly across valuation and quality metrics, making the stock a speculative contrarian pick. With Centamin’s profitability highly levered to the gold price, does the company offer the SIC good exposure to a possible safe haven in these uncertain times?

Summary

Bull Points - Offers great value on almost all metrics, high dividend yield and generous capital returns policy, catalysts for license bidding and upgraded mine estimates for the group's assets, exceptional balance sheet.

Bear Points - Mine issues at its only revenue generating operations, 50% profit sharing with agreement with Egyptian Mineral Resource Authority, limited near term production growth.

Profile

Centamin (LON:CEY) is a FTSE 250 listed gold miner, which also trades on the Toronto Stock Exchange. At the current share price of 103.6p, the market capitalisation is worth £1.2 billion. Liquidity isn’t much an issue, with an Exchange Market Size of 10k.

The current StockRank for the company stands at 84, with exceptionally high Quality and Value Ranks of 99 and 93 respectively. The value is highlighted by a forward P/E of 10.2 and dividend yield of over 6%.

The opportunity type is a classic contrarian play, where the deterioration in the share price has not transpired to affect the value and quality characteristics of the company. Indeed, Centamin currently qualifies for 8 Guru Screens across a variety of Value, Quality and Income investing themes.

Business & Model

What is the company history & what does it do?

Centamin was established in 1970 and originally floated on the ASX. In 1999, the…

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willhampson

1st Mar '21

Really interesting write-up, thanks. The only thing I'd add is I think one of the very biggest risks has been missed-off; that is, the Egyptian court cases. These have been running on for ages, but I think anyone considering the company as an investment should have a careful read up on this; there is a decent summary under "Legal Developments in Egypt" in the August 2020 interims. That being said, everything has a price and you could argue that the current price reflects this risk. For my part, I just can't get comfortable with it. I also probably have enough exposure through holding Capital (LON:CAPD), so I wish Centamin to be a success! All the best.

Will Marsh

very timely note for me - I was thinking of adding to my holding (£1.30 -£1.50p average £2 target price). Well thought through narrative - interesting conclusion

Neil D56

Performing very badly for a stock with such high level rankings. Also has all its eggs in one basket. Furthermore charting also very poorly, as all Ichimoku supports (for those that follow them!) from daily thru to weekly and monthly have been broken. Just my thoughts...

Simon Rowan

A number of factors conspiring against CEY and CAPD. Firstly gold price, secondly geopolitical problems, thirdly production slow down. In CAPd's case two extra drags, the placing and secondly exiting founder. Both possibly suffering short term effect of IGG's trading position on certain small caps, have already been befitting topping up in shares falling for no other logical explanation and closed my IGG account which I didn't get on with anyway. Charts were good but hated the layout and opening new platforms, all very confusing and not user friendly. The CAPD balance sheet and dividend might not compare with CEY, but the diversification and growth in new business make it a load more attractive. Plus their best customer has a ton of cash!

FederalReverse

I only ever buy precious metals related shares when they are completely hated by the market. It seems that time may be upon us again :) Several mining companies have been very heavily sold off in recent weeks, including Centamin (LON:CEY) and Polymetal International (LON:POLY) which now boast huge prospective dividend yields. The economic picture still looks positive for the precious metals in the longer term with negative real rates likely to persist for a number of years, as low bond yields will be necessary to allow the huge public debts created by Covid-19 to be managed lower at a sustainable cost. Centamin (LON:CEY) is higher risk with the jurisdiction, so only ever a small allocation with this one. There is also always the possible bonus here of another takeover offer emerging. It has always seemed to me that Sukari would be much more highly valued as part of a diversified group, to alleviate the demographic and operational risks, therefore I can see it being attractive to one of the big players around this price level.

lightningtiger

Not good news on this share. Director Rutherford bought two lots of 100k shares for about 270k., so currently he is about 70k down ouch.

There is no sign of a dividend payment this tear yet.

There is also no upturn in the share price, so currently still a falling knife situation. It can still go down further before it comes back.

The vote is clearly against it by 76.9%.

ROC & operating margin are good, but too early to buy yet, if at all. There is other fish in the sea.

Personally this is not a good sector to be in right now in my opinion. Don't lose your money!

Rio Tinto (RIO) would be a much better share XD 4th March. 2021.

Albertos

Made some money on Centamin (LON:CEY) over the years, but have to say, it's a serial disappointer - bought the lows and sold the highs (mostly) - never in long term.

Polymetal International (LON:POLY) is so much better. Multi-mine, history of delivering, medium/long-term growth mapped out (Centamin (LON:CEY) 's West African assets seem to have been there for ever). Market seems to factor in Russia as a massive downside - but is it really much worse than Egypt ?

Each to his own.

Gold shares I have to say look unattractive at the moment - lots of people saying they will come good but looking at the price graphs for the last six months suggests they are massively out of favor with the market. Not surprised the conclusion was not to buy.

Quite honestly I hadn't actually intended on going straight out and buying this share tomorrow but I'm a bit surprised at the universal negativity. I'm just presenting the contrarian view on this, as per the spirit of the pitch which clearly states it's a contrarian opportunity. At the end of the day every stock has it's price. I'm not particularly surprised that the SIC panel voted against it, this is sort of the nature of a a contrarian stock, most people don't want to buy it, hence the falling price!

As for the falling knife adage in some cases I don't pay too much attention to this to be honest. At the end of the day as long as I am happy with the price I pay, and it is a long term investment, where it goes in the short term is immaterial, I'm more interested in the company newsflow. I sometimes factor in momentum to stock selections, but this is purely a value play, so I'm often not inclined to factor it in these cases. No one really knows where the price will go in the short term so I'm not that concerned with it.

With Rio Tinto (LON:RIO) I already have plenty of exposure to the large cap diversified miners via Blackrock World Mining Trust (LON:BRWM) so it's not something I'm inclined to buy. It's been pretty strong lately too so I don't see it as a particularly special buying opportunity right now.

Keelan Cooper

2nd Mar '21

Hi willhampson,

Thank you for your feedback. This is indeed a notable risk, which I've now taken a closer look into and added to the article under legal risks. I appreciate your input!

Kind regards,

Keelan

Hi FederalReverse,

Thank you for your comment.

I agree with your sentiment here. I remember Rio Tinto at £16 in early 2016 when no one wanted to touch it with a barge pole at the time. Factoring in dividends, you would have made close to 500% if you'd held for the next 5 years. Good contrarian opportunities are often few and far between!

Most metals & mining companies have significantly bolstered their balance sheets in recent years, and with the current levels of free cash flow generation, these large dividend payments could continue for some time.

Merger & acquisition activity is also likely to pick up in the coming months. Endeavour Mining has just finalised the takeover of Teranga Gold after having bid for Centamin in Jan 2020. At these lower prices, Centamin could definitely be on the radar of some of the other larger gold majors.

Rusty2

Hi Keelan, thanks for the pitch but Surprised by the lack of diversification in the portfolio, why are so many resource/mining companies being pitched?

I would have thought there are plenty of good companies in other sectors, such as construction and industrials. I know the club got stopped out of Redrow (LON:RDW) but maybe worth having another look?
Others that spring to my mind are IMI (LON:IMI), Rotork (LON:ROR), Luceco (LON:LUCE).

Would it be possible to do an update on the club folio, with the performance, as there has been quite a lot of change since the last posting.

aflash

Tks, v interesting. I had placed a buy order as a result of this article but will revise it lower. The major shareholders of EDV is the matriach of the Sawiris. Her husband built Orascom and her three sons run its various offshoots. All successful in different ways yet members of the Coptic Christian minority in Egypt. To survive in a country where Islamic fundamentalism leads all activity and Coptic churches are attacked, is remarkable.

The jurisdiction had put me off before. Having read Ferdinand DeLesseps' biography of building the Suez canal, then lived in Ismailia and lived through Nasser's nationalization, it seemd to me the chances of a London run company prospering were slim.

However an Egyptian family would have lots of support for acquiring a mine there. Their first offer, just before the price exploded last summer was so opportunistic I reasoned they would be back.

Maybe but not yet, despite the price being lower than at the time of their bid. TGZ will take time to assimilate. Interesting that the major shareholder there was another Middle Eastern dynasty. CEY's board are unlikely to let go, it would take a hostile bid. Why bother when expropriation is an option?

bdowling1956

5th Mar '21

Hello to all. A useful, very well presented article, well done. However, most of the information revealed was out in the market place. Could stockopedia, through there contacts and knowledge base invite opinions from recognised Goldmine experts, Investors, Industry experts to write a piece on the management of Centamin. Ie :management's calibre, strategic focus, development ability?
Some insights would help place the share price and its rolling history in context.

LaughingBuddha

Cant comment on Centamin, but can talk about Barrick Gold (NYQ) in particular which is available at a discount to its pre-covid price and when I took a look at Centamin's charts it too is available at a discount to its pre-covid price. Any gold mining stock with a sound balance sheet and available at a discount to its pre-covid price is worth a buy, the prices are going to go up sooner or later in the medium to long term, in the short term it is anybody's guess.

Harry Hindsight

One hole miner.

Stock Pitch - Centamin (LON:CEY)

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Business & Model

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Keelan Cooper

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