Centamin battles instability

Centamin's first-quarter figures this month revealed that its Sukari gold mine in Egypt is performing strongly - if slightly below expectations. First-quarter gold production rose 9 per cent on the same period in 2011 to 49,071 ounces, which leaves company largely on track to meet its 250,000 ounce production target for the year - with the first quarter having always been anticipated as the lowest production period.

Nevertheless, political instability is hurting - the Egyptian government has temporarily removed fuel subsidies, for example, and there was a brief labour strike. Centamin has also needed to mine lower-grade areas while access to higher-grade zones is developed. Taken together, such factors added significantly to operating costs; cash costs rose to $637 (£396) an ounce from $473 an ounce last quarter. They would have been $93 an ounce higher, but management is treating extra fuel charges as pre-payments, rather than expenses, while it negotiates with the government over the continuation of fuel subsidies under a national industry subsidy for diesel.

Political instability has hit Centamin's shares since the Egyptian uprising in early 2011 - fuelled by worries over possible nationalisations and tax changes. But with new presidential elections due within weeks, there's the possibility at least for relief - that is, if the new government moves to calm investors' fears by quickly taking a pro-investment stance.

Goldman Sachs says…

Outperform. The shares are trading on 5.3 times our 2012 EPS estimate of 19¢, compared with a rating of 12.3 times for our gold sector coverage - reflecting fears of asset nationalisation or tax changes. But, operationally, the Sukari mine continues to ramp up toward 500,000 ounces a year and is maintaining a competitive cash-cost position. Our view is that the shares are oversold relative to the risks and represent strong value at this level. We have cut our 12-month price target to 200p, from 210p, implying significant upside and we reiterate our conviction buy recommendation.

Canaccord Genuity says…

Buy. Centamin delivered a reasonable performance in a challenging quarter, which was affected by political instability. But we expect stabilisation in Egypt in the second half, which, in conjunction with our positive outlook for gold, should support the share price. We don't envisage any changes to the existing mining agreement between the government and the company, although the government could potentially require Centamin to start paying its share of profits immediately - that would mean a 4 per cent cut to our net asset value (NAV) estimate to 133p. Our price target stands at 91p.