The Gold Miners Index (GDX) had a mixed first-quarter earnings season, with numerous producers reporting year-over-year margin compression and inflation proving stickier than expected, particularly in labor. Centamin (OTCPK:CELTF) was fortunately one of just a few mid-tier producers to disclose solid earnings and margin expansion, and the business is on track to meet its FY2023 projection midpoint of 465,000 ounces. And, while we can attribute much of its margin expansion (Q1 2023 vs. Q1 2022) to the year-ago period’s lapping of easy comps, Centamin continues to pave the way for continued cost improvements at Sukari and potentially on a consolidated basis, if it approves its high-margin Doropo Project in Cote d’Ivoire. Let’s have a look at the most recent outcomes and the outlook for the future.

Production and Sales in the First Quarter

Centamin reported its first-quarter statistics earlier this year, claiming quarterly gold production of 105,900 ounces, a 13% increase over the previous year. Sukari Mine output increased significantly due to outstanding mill performance (3.0 million tonnes processed) and a large rise in input from Sukari Underground, which mined 236,000 tonnes (stope and development ore) at an average grade of 4.02 grams per tonne of gold. Sukari Underground’s outstanding success was attributable to improved productivity as a result of a transition to owner mining, which is paying rewards, with a 53% increase in tonnes mined and a 13% rise in grade compared to Q1 2022 levels. Centamin also stated that the paste fill plant’s wet commissioning began in the first quarter, with the first paste expected this quarter.

Quarterly Gold Production at Centamin

Centamin is tracking ahead of its guidance midpoint of 465,000 ounces in FY2023, based on 105,900 ounces produced in Q1, given that output is back-end weighted (45%/55%), with the 105,900 ounces slightly ahead of the implied 209,000 production plans in H1-2023 as part of this back-end weighted profile. And, with increasing open-pit grades projected throughout the year, as well as a consistent input of considerably higher quality ore from Sukari Underground, 2023 is shaping up to be a very productive year for the company. While underground mining rates have improved significantly year over year (950,000 tonnes per annum annualized rate) and sequentially (+ 1% vs. Q4 2022 levels), grades should continue to rise, with higher grade Sukari Underground ore accounting for a larger proportion of total feed as the company works to increase underground mining rates to 1.5 million tonnes per annum by FY2025.

Centamin’s quarterly revenue climbed to $205.2 million (+8% year on year), with 107,700 ounces sold at $1,902/oz, reflecting increased gold production and better gold prices during the period. Despite the fact that capex spending was slightly behind schedule in Q1 (and is back-end weighted like production), Centamin managed to report positive free cash flow ($8.0 million vs. [-] $23.0 million in Q1 2022) despite limited help from the gold price, which was roughly flat year on year ($1,902/oz vs. $1,883/oz). This contributed to the company finishing the period with one of the strongest balance sheets among its single-asset producer peers, with $155 million in cash and bullion and $300 million in total liquidity from its undrawn revolving credit facility. Centamin’s solid cash sheet will allow for another year of increased capex, pre-development study work at Doropo, and exploration investment, as well as a positive Doropo construction decision in the following 18 months.

Costs and Margin

In terms of costs and margins, Centamin was one of the few mid-tier producers to report margin expansion in Q1, with all-in-sustaining cost [AISC] margins rising to $554/oz from $325/oz the previous year. This was due to a 13% decrease in all-in-sustaining costs ($1,348/oz vs. $1,558/oz) due to higher sales volumes, which offset higher input costs from fuel and most consumables. Cash costs declined 7% year on year to $937/oz, a far more respectable amount than the $1,006/oz reported in Q1 2022. While Q2 all-in sustaining costs are expected to stay over $1,330/oz, slightly above the FY2023 projection midpoint of $1,325/oz, more margin growth appears possible in Q2 due to the benefit of the higher gold price. Furthermore, Centamin should achieve a significant margin increase year over year, with AISC margins expected to exceed $600/oz (FY2022: $395/oz) assuming a $1,930/oz average realized gold price.

Looking ahead to FY2024, there is cause to be positive about further cost reductions, with slightly higher output expected as underground mining rates continue to rise and the possibility of decreased power costs. Centamin stated that it is continuing to look at expanding its solar capacity, with a 36 MW solar facility and battery storage system scheduled to be completed in 2022. This is displacing a considerable amount of fuel (70,000 liters per day), and further growth would aid in cost reduction. The biggest prospect appears to be a grid connection, which Centamin is also working on.

As stated in its Q1 Conference Call, grid power maybe 50% less expensive at $0.11 per kilowatt hour compared to its diesel genset, implying that its total power expenses might be reduced by 30% or more, with a 50% reduction in power costs on its power generation excluding solar. Assuming a conservative Q1 2025 grid connection, which would coincide with increased underground mining rates, we should see further cost reductions, with a path for all-in sustaining costs to fall below $1,200/oz, and more than 10% below the estimated FY2025 industry average ($1,340/oz). Let’s take a look at Centamin’s valuation.

Valuation

Centamin has a market valuation of $1.39 billion and an enterprise value of $1.24 billion based on 1.16 billion shares outstanding and a share price of US$1.20. At first look, this may appear to be a high valuation given that Centamin is functionally a 250,000-ounce producer due to the Egyptian Mineral Resources Authority owning 50% of Sukari. However, Tier-1 scale assets (500,000 ounces) frequently trade at a premium, and Centamin has multiple irons in the fire, with a Pre-Feasibility study due at Doropo this month, and the company hunting for new satellite opportunities near Sukari in Egypt, with a large prospective land package with three claim blocks (Nugrus, Najd, Um Rus), with Nugrus being the primary focus given its proximity to the Sukari Plant.

The Nugrus Block’s welcome news is that the barrier to adding ounces to a mine plan is fairly low, with the business stating that even lower-grade (below 1.50 gram per tonne material) would suffice given the benefit of sunk costs and the short haul distance to the plant. So, while obviously, the goal is to make a massive high-grade find, a moderate size low to mid-grade discovery on this claim block would still be lucrative. This is especially true given that the majority of material fed to the Sukari Plant (open-pit material) is at 1.0 grams per tonne and the mill could run at 13.0 million tonnes per year (12.1 million tonnes processed in 2022), implying that a satellite discovery could displace some lower grade ore in the mine plan. And the combination of increased underground mining rates and a mid-grade feed supply (1.5 – 2.0 grams of gold per tonne of gold) with a mill operating at closer to 13.0 million tonnes per year would undoubtedly deliver a good boost to annual production.

Using a fair value estimate of $880 million for Centamin’s part of Sukari and a fair value of $460 million for Doropo, I see a fair value for Centamin of $1.28 billion at a 1.0x NPV (5%) multiple. This excludes any exploration upside at any of its projects (Sukari Regional, Sukari Underground, Doropo), as well as any value placed on its recently acquired 3,000 square kilometer land package or the ABC Project (Cote d’Ivoire). If we add a reasonable valuation of $200 million for near-mine/regional development upside and $155 million in net cash, I estimate Centamin is worth $1.70 billion [US$1.47]. However, while this fair value estimate implies a 23% increase from present prices, I am seeking for a minimum 30% discount to justify initiating new holdings in small-cap companies. So, while I see an upside in Centamin, I don’t see enough margin of safety to warrant paying a premium for the company just yet.

Summary

Despite a difficult transition time caused by movement in a localized area of waste material, Centamin continues to exceed expectations. This has resulted in an accelerated waste stripping program and an update of the previous mine plan. And, while the cost savings have been remarkable thus far, we should see even more by Q4 2024, with work underway to acquire a grid link that could lower overall power costs by 30%. So, with a better H2 on the way, a catalyst-rich year with the Doropo PFS and Nugrus Block drilling, and an improved LOM plan that will involve underground growth and higher-grade mining, there’s a lot to like about the Centamin story. As a result, if we witness a drop below US$1.03, where the stock would provide an appropriate margin of safety, I would consider it a buying opportunity.

Featured Image: Freepik @ onlyyouqj

Please See Disclaimer