Centamin gets boost from suitor

The biggest mining deal of the month is undoubtedly Zijin Mining’s $1.1bn (£810m) all-cash takeover of Continental Gold (CAN:CNL). Continental has a gold project in Colombia that will go into production next year, reaching an average output of 250,000 ounces (oz) per year after getting through the ramp-up phase. The Zijin takeover follows the Newmont-Goldcorp and Barrick Gold-Randgold Resources mergers. But deals have now arrived in the mid-cap space. Endeavour Mining (CAN:EDV) came out in early December with an all-share offer for local favourite Centamin, proposing a combination in which the London-listed miner’s shareholders would have 47 per cent of the combined entity. Centamin quickly rejected this offer, although its share price is up over 10 per cent since it was announced. 

When put against the Continental deal – which was done at a 29 per cent premium for a company not yet producing gold – it’s not hard to understand Centamin’s position. The detailed response also highlighted Endeavour’s debt and operations in the comparatively riskier jurisdictions of Burkina Faso and Mali, which have both seen terrorist attacks recently, albeit in different regions to Endeavour’s mines. 

Centamin chairman Josef El-Raghy said combining the two companies would increase “financial and operating risk without any material benefits to our shareholders”. The two companies also disagree about the mechanics of a deal coming together. Both have accused the other of failing to engage, with Centamin saying Endeavour would not open its books and Endeavour saying Centamin would not listen to private overtures. 

The nuts and bolts of a tie-up aside, Centamin is a target for two good reasons. Its Sukari mine has many years left to run, but its poor performance in the past 18 months means the company has not fully benefited from gold climbing well over $1,500 an oz in recent months. 

Centamin has not provided a compelling explanation for why it so overestimated the ounces to come from a transitional zone in the open pit and why it was surprised by the production issues underground. The problem – unplanned dilution – is when the grade of the ore drops, and Centamin said it was shifting its methods to fix this issue, as well as changing mine management.

So far, the recovery has also been stilted: a production drop between the September and June quarters has also reduced the impact of the higher gold prices. There was a 17 per cent drop in production quarter on quarter so revenue only climbed 8 per cent, to $161m, on a significantly higher average gold price. 

There is change coming at the top, as chief executive Andrew Pardey will leave when a successor is found next year. In light of the operational issues, the right appointment will be a serious benefit to sentiment.