First gold glints for Centamin

Centamin Egypt has begun surface mining at its Sukari project, which is about 500 miles south of Cairo, and will soon be selling gold from this large, easy-to-mine deposit that is often described as the best gold project of any mining company trading on the Alternative Investment Market.

If the gold price remains strong, bringing this major project into production couldn't be better timed. Once it is in production, only Centamin's shares will offer exposure to a well-financed, mid-sized gold producer with large reserves in a lowish risk country.

So far, gold stays in demand. Even though the price remains over $900 (£592) per ounce, some analysts predict it could rise significantly further as investors continue to be gripped by fear, in particular of rampant inflation. Charles Gibson, mining analyst at Edison Investment Research, predicts that gold could be poised for the second leg of a bull run. His premise is that recent global events, though extraordinary, have precedents: long-term trade deficits, burgeoning budget deficits and bank failures were also prominent in the 1970s. According to Mr Gibson, a re-run of a 1970s-style cycle could see the gold price average over $1,000 per ounce for the next 20 years, with a short-term peak of over $1,500 per ounce. That would be great for gold producers.

At the heart of Centamin's Sukari project is a 6.5m-ounces gold reserve, which should yield over 160,000 ounces of gold sales in the year to June 2010 and over 270,000 ounces the following year. The hillside location allows relatively easy access to the orebody. Removing the top of the hill increases access to the open pit and potentially doubles open pit mining rates.

Construction of the processing plant - including mills, tanks and a crusher - is on target. Production (defined as starting up the processing plant to produce gold) is due to begin mid-year, although delays to the site's electricity supply could yet cause a postponement. Furthermore, as with all mining projects, there is always the possibility that unseen snags will crop up somewhere in the processing circuit. However, at worst, teething problems will delay the project rather than expose fundamental flaws in it.

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Whilst open-pit production offers the immediate investment upside, drilling beneath the open pit has identified thicker, higher grade zones. These offer the possibility of substantial underground mining. The company will begin building a sloping shaft to target the underground operations in the second half of 2009, with full-scale underground mining expected from 2011. Combined surface and underground operations could lift total production to 325,000 ounces per year from 2011 and (for further capital spending of $290m) to 650,000 ounces per year from 2013.

Unlike some gold miners, Centamin is well financed through to production. Broker Ambrian estimates that the project requires another $85m of capital spending, which would reduce cash to around $25m. Thereafter, operations should generate considerable cash flow, which would make Centamin self-funding. The project's attractions are further helped by an agreement with the Egyptian government. Under this deal, the government does not get any revenues until Centamin has recouped 50 per cent of its capital outlay. This accelerates Centamin's cash flow in the early years, speeding up the point at which the project is self-funding.