Jefferies Note8 Oct 2020 16:51
Centamin
Down But Not Out
8 October 2020
Key Takeaway
The Sukari production update delays the operational led re-rating we had been
hoping for in the coming quarters but doesn't break our investment thesis. Sukari
remains a Tier 1 global gold asset with operational and brownfield expansion upside
and CEY retains a clean balance sheet with a strong commitment to shareholder
returns. Reiterate Buy.
A Disappointing Update. The detection of movement in a localised area of the Stage
4 West wall in the Sukari open pit led to the decision to defer mining of this high grade
zone (90koz with grades up to 2g/t). Underground operations remain unaffected as
do Stage 4 North and Stage 5 North of the open pit but Q4 production was estimated
to be c70koz. Our First View from the release can be found here. While the update
was clearly disappointing and will add quarters to an operational led re-rating we had
previously discussed, we highlight three silver linings from the update.
Silver Lining 1 (Prioritising Safety). Simply put, the safety of the workers in the open
pit was immediately prioritised. While the area has been stabilised, CEY will complete
a more exhaustive geotechnical assessment before integrating the zone back into
the mine plan.
Silver Lining 2 (Discipline). A good example of "mining the mine, not the market" as CEY
could have scrambled to chase additional ounces from other areas of the open pit or
perhaps the underground, to the detriment of the long-term mine plan. While difficult
to commit to in the moment, in our opinion the discipline shown will be beneficial to
the long-term planning and operating of the mine.
Silver Lining 3 (Balance Sheet). A single asset producer ultimately carries more
risk from operational issues at the lone revenue source. Countering this, CEY's
clean balance sheet ($321m net cash, no debt as of 30 June) allows for continued
commitment to shareholder returns (JefE 6% yield 2020, 9% yield 2021) even through
this period of weaker production.
Next Communication? CEY will report 3Q20 on 21 October (Q3 production preannounced of around 120koz was in-line with JefE). We expect a more detailed
discussion on the financial impact to Q4 (and thus FY20 guidance) but would not
expect a detailed discussion pertaining to the rescheduling of Stage 4 West until the
Life of Asset (phase 1) review is released later this year.
Director Dealings. Following the operational update, we note that Chairman James
Rutherford and CFO Ross Jerrard have subsequently purchased 100,000 (c£150k)
and 15,000 (c£22k) shares, respectively.
Valuation. We update our model for the weak Q4 production and implied impact to
cash costs. We assume FY20 cash costs of $721/oz, above the prior communication
of $630-680/oz when production guidance was 510-525kz (JefE: 444koz). We also
bake in some additional caution to our 2021 open pit assumptions. As such, our 2020
and 2021 EBITDA estimates decline by -24% and -14%, respec
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