Raid Centamin’s cash machine on the cheap

That's a big discount to mid-tier gold peers, and somewhat surprising in the context of Centamin's half-year numbers, which were very strong. In the second quarter of 2016, production from the company's one operational mine at Sukari soared to 140,000 ounces (oz). That was 12 per cent up on the first three months of the year, and 30 per cent ahead of the same period in 2015, and at far lower all-in sustaining costs of just $669 per ounce.

Now, confident the mine can continue to benefit from favourable fuel prices and keep full-year sustaining costs below $750 an ounce, management has boosted maximum output guidance from 470,000 to 540,000 oz for 2016. If Centamin hits the upper end of forecasts, and the gold price holds just above $1,300, there's every chance the company could beat the consensus earnings forecasts set out in the table below. The forecast drop-off in 2017 profits in our table reflects expectations of rising fuel cost and uncertainty over whether 2016's heightened production rates will be built on.

The cash position should continue to swell. In the three months to June, Centamin booked a $45.4m net increase in cash and cash equivalents on a gold price of $1,268 an ounce, and after investments totalling $27.8m to develop Sukari's underground mine and explore development assets in West Africa. The group has an annual exploration budget of $25m, which will help its promising development projects in both Burkina Faso and Côte D’Ivoire. It is an excellent track record of consistent free cash flow growth and cash conversion that puts Centamin above any other natural resources stock on last month's free cash flow kings stock screen. For a miner, the company also scores very well against Joseph Piotroski's F-Score, which tests for improvements in profitability, funding and operational efficiency.

Because Centamin is self-financed, it should also be seen as a less risky bet than some of its big peers. However, two sets of questions hang over the mine's development. Firstly, investors will want to know if the better-than-expected second-quarter average grade of 9.3g per tonne can be repeated or sustained, and whether this can be assisted by further expansion of the high-grade ore seen at lower depths.

The second concern centres on legal wrangles over the validity of Centamin's mine lease. The company has the current Egyptian government's support, but an appeal - which the company is confident will succeed - could drag on for some time, although the gold miner has been advised it could be granted on an interim basis pending a legal review by the country's highest court.