Centamin climbing out of the pit

Consequently, sentiment is dour and management is likely to be cautious in its 2019 guidance. But we still think recent operational improvements are being overlooked, underlined by the group's assurance at the start of November that it “remains on track to produce 145,000 ounces” in the current quarter. Should that rate of output be maintained, investors might soon view 2018 as a lost year, rather than a sign of an enduring crisis.

If we simply assume that fourth-quarter output guidance is achieved and persists, and the gold price remains at  $1,241, Sukari should produce 580,000 ounces in 2019, worth $720m. Next year, capital intensity should fall as output rises, but even if all-in sustaining costs remain at the third-quarter average of $889 an ounce, Centamin will generate operating profits of $200m. Strip out Egypt’s 45 per cent cut, and the miner is still left with net earnings of $110m, or 9.5¢ a share.

Numis expects slightly more than this (see table), despite forecasting for production of 540,000 ounces. That’s because the brokerage thinks the dollar-denominated gold price will average $1,300 next year – hardly a quantum leap, given a possibly slowing US economy and all manner of geopolitical and market risks. Free of hedges and loans, Centamin is well set to benefit from further gold price rises. On Numis’s numbers, a 10 per cent rise in the price of the yellow metal prices translate to a 29 per cent uptick in earnings per share, a 16 per cent rise in cash flow per share, and a 20 per cent lift in net asset value.

That’s one forecast, at least. Another is Centamin’s $40m indicative free cash flow projection for the fourth quarter of 2018, which is based on a $1,200 gold price and all-in costs of $745 an ounce. Annualising this would certainly support a re-rating in the shares. But if 2019 production comes in nearer to Numis’s estimate, the effect of improvements in the underground mine and improving open-pit grades – both of which were flagged by the company last month – could push all-in sustaining costs back towards $850 an ounce, which would still feed through to EPS of 9.5¢, assuming the gold price goes sideways.