Stockwatch: a speculative miner with great dividend yield

A recovery from October’s crash fizzled out, but this gold miner has potential, despite gold’s decline.

If you believe in charts, gold is at a critical juncture. With the recent US stock sell-off in response to fears of higher interest rates, gold has also fallen. A price per ounce of $1,700 is seen as a crucial test level from which short sellers will attack if the price falls below – which it has this morning, at near $1,690. 

Current talk is of a drop in price to near $1,500. However, analysts say that if $1,750 is broken on the upside, then $1,800 is possible.  

To me, it exposes how charts are all about herd sentiment when an underlying asset price cannot really be justified on intrinsic value. Gold prices depend on what people are prepared to pay. I empathise with some who say they now prefer bitcoin to gold, for bitcoin fulfils a similar psychological role as an alternative to financial assets and fiat money. 

A questionable portfolio hedge 

My recollection of various financial crashes is gold getting caught by them quite similarly as stocks. Going back to 2008, gold got crucified, and in response to current Wall Street jitters bitcoin is off about 3%. I am unconvinced that either of them offer protection should muck hit the fan.  

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Guessing trend shifts is fraught with difficulty. During the first seven months of 2020, gold soared over 35% to about $2,075 an ounce, as investors sought a safe haven from Covid-19, rising global tensions and a weakening US dollar. Momentum was added by enthusiasm for Exchange Traded Funds among US and European investors, which accumulated some $240 billion worth of gold – close to what is held by the US mint in Fort Knox.  

Yet just as one prominent gold enthusiast opined it could reach $15,000 by 2025, a downturn set in and has persisted – meaning an 18% fall in price since its August peak around $2,075. Better-than-expected news on Covid vaccines last November triggered risk appetite for equities. 

Alert traders who can weigh up shifts in crowd psychology – and act on them - are in clover. But the 2020 experience has not exactly left gold as a glossy portfolio hedge.

Gold is still over 40% higher than in 2016 

Gold mining equities have slumped as well since last August. That is rational given miners are typically prone to operational gearing where revenue changes (whether by mine production, sales, and/or prices achieved) get magnified at the profits level (according to cost dynamics).  

For example, at 103p currently, £1.2 billion mid cap Centamin (LSE:CEY) is down 55% from its 232p August high. This takes it back near the 101p level in April 2016 when I made a ‘buy’ case with gold then around $1,200 an ounce – which was perceived as a key support level, gold would climb from if breached.   

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The nub of my case was the Egypt-based Sukari mine moving from an investment to cash generative phase, perfectly timed with gold prices trending higher. This was Egypt’s first modern mine which started production in 2009 and had advanced production to 500,000 ounces annually, with an estimated 20 years’ mining life.  

It meant Centamin was somewhat a “one project company” given Sukari was its only producing asset (despite exploration in West Africa). But its 2015 cash flow statement had just shown a 60% rise to $186 million which amply covered $71 million investment hence ability to pay out $34 million as dividends. There was no debt. 

For a mining stock that looked an attractive risk/reward profile, despite a forward price/earnings (PE) ratio around 19x and a scant 1.5% yield. Net tangible assets per share over 70p did at least limit downside risk. 

By way of comparison, market favourite Randgold Resources  was on a 40x PE and sub-1% yield. Otherwise you were typically looking at small AIM-listed loss-makers such as Greatland Gold (LSE:GGP) – whose annual losses have since grown. 

Centamin - financial summary
Year end 31 Dec

Source: historic company REFS and company accounts

A 76% advance, albeit a volatile ride 

Helped by the effect of rising gold prices, Centamin’s stock price rose in a volatile trend to over 180p by mid-2017, but mixed financial progress appeared to induce a steady downtrend as low as 83p in April 2019.  

You could say that this shows the merit of a trailing stop-loss in volatile resources’ stocks, both to protect gains and limit losses, although when spiked out of a stock (especially at any loss) it can then be very hard, psychologically, to buy back.  
Centamin’s price then rallied to breach 230p last August when gold was in vogue amid risk-aversion in response to Covid-19. 

Among classic disruptions miners can face, last October the stock plunged 20% to about 160p after ground movement in a waste material area of Sukari forced this to be closed, affecting production. 

The ongoing stock fall may well have added to a sense of disillusion, that “if a well-established asset like Sukari cannot meet hopes in a relative benign gold price environment, then when will it?” 

As a well-worn cynic, my response is net-positive at Centamin’s current level: gold remains attractively priced for a well-established miner, and one should not lose sight how the Sukari asset offers substantial deep-mining and discovery potential. 
If Centamin management becomes perceived as falling short, then potentially it would create takeover potential, although any suitor would effectively need approval from the Egyptian government which is in partnership with the company.  

Strong margins and further cost savings

I also would not overlook how the financial summary table shows operating margins in a high 20’s-to-30% region. And, after $44 million cost savings were achieved last year, a further $100 million is targeted by 2023. 

Consensus anticipates margin growth in support of about $140 million net profit for 2020, then $160 million this year. If realistic, it implies earnings per share (EPS) of about 12 cents, rising near 15 cents, and (after currency translation) a PE multiple of 12x easing to 10x.  

Dividends grew from about 3 cents a share to over 15 cents in 2016, then declined back to 4 cents, but a recovery to about 10p is projected, implying a prospective yield over 6% which is material as a prop. 

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It appears payout policy relates to earnings, hence it is unwise to assume, like other industries, a board will smooth dividends utilising cash reserves. Yet last June’s balance sheet had $320 million cash and no debt, reflecting Centamin’s strong cash generation of about $250 million from operations – in a half-year alone. 

Net tangible assets – there is no goodwill – look to be around 82p a share, hence, like five years ago, should limit downside risk. 

Speculative appeal albeit gold trend is key for now 

Once again, and with a contrarian mindset, I like the way Centamin’s essentials weigh up versus a stock decline that looks chiefly based on a commodity price slide plus inevitable mining disruption. In terms of overall risk/reward profile and surprises dealt by this industry, the odds of getting lucky may outweigh further decline. 

Separate from the moot point – as to what role gold might have in a portfolio – I think Centamin merits renewed attention as a ‘buy’, although timing needs attention to the gold price.  Broadly: Buy. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.