Centamin Egypt Limited 18 Nov 09

A great story but now an expensive one – exit stage left.

Centamin has graduated to the London Main Board. The company had to issue a prospectus in connection with the admission of its entire issued ordinary share capital to the Official List.

Not surprisingly the share price has been strong of late, not only because the price of gold has risen, but because index funds have to add Centamin to their portfolios if they did not already own the stock.

Fat Prophets initially recommended buying Centamin Egypt at $1.01 in March 2007 (Fat Mining 69). Our last review of this stock was in August (Fat Mining 188).

From a charting perspective, Centamin Egypt has posted substantial gains over recent months, reaching a high of $2.50 last week. This is an increase of 28% since our last coverage of the stock in August. As evident on the charts, this represents a new all time high for the stock.


Given the large percentage gains, we cannot rule out a period of consolidation and profit taking over the coming weeks. However, any correction from current levels should be limited to support around $2.10, followed by $1.50 and $1.35. For this reason, we are looking to lock in some profits and sell half our position.

From a broader perspective, the recent break to new highs demonstrates the resilience of the broader upward trend, and bodes well for further gains over the longer-term.

At the moment the company is listed on three exchanges, London, Toronto and Australia. Unfortunately for Australian investors the turnover of the company’s shares on the ASX is very low compared with London and Toronto. The ASX accounts for less than 3% of the turnover. When the interests for directors are excluded, Australian shareholders account for around 8% of the company.

With the shareholder base now concentrated in London and Toronto, Centamin has applied to the ASX to have the company removed from the official list. Centamin will comply with the ASX’s conditions which includes a provision for Australian shareholders to sell their Centamin shares on the LSE or TSX.

Centamin will be removed from the ASX official list on 29 January 2010.

At the current time the price of gold is rising apace and Members should not feel urgency to sell their entire holding. However the stock is currently very well priced against its peer group.

After 29 January, any Members that have not sold their shares will have their electronic holdings on the ASX register converted to certificated holdings on the Australian register which will be maintained by Computershare. Members will receive a share certificate representing their holding. This certificate must be kept in a very safe place because it is evidence of the shareholding.

For 3 months following delisting, Australian stockbroker Southern Cross Securities Limited has agreed to facilitate trading in Centamin shares.

One of the key risks in converting shareholdings to certificated holdings relates to liquidity. If liquidity is poor, certificate holders will find that the price they receive for their holdings will be at a discount to market. Moreover, the discount might rise significantly towards the end of the 3 months facilitation period provided by Southern Cross Securities Limited.

For ease of mind, Fat Prophets recommends all Members to sell their holdings before 29 January 2010.

Gold has continued to march higher, breaking above our target of US$1113 this week, to reach a new all time high of US$1143.60.

The pace of recent gains has been rather astronomical and is unlikely to be sustained. We see potential resistance around the US$1150 level and possible consolidation to occur over the coming weeks. The ‘RSI – Relative strength index’ is clearly in the over brought region, increasing the risk of a pullback or period of profit taking in the near term. In addition, the distance of the price to our short term moving average is roughly US$40. This signals that prices are moving too quickly.

The headline pattern on the weekly chart is the broad consolidation pattern between March 2008 and October 2009. This period lasted for over 18 months and was approximately US$300 in depth. Given the sustained break of the October high of US$1070, we have a longer-term target of around US$1200, followed by the US$1315 region, measured by projecting the depth of this range up from the breakout level.

UK domiciled holders can contact their broker to arrange for the transfer of their shares to the London Register. Canadian domiciled holders can arrange to have their transferred to the Canadian Register by completing an Australia to Canada removal request form. This form should be submitted to Computershare or a local broker along with their share certificate/SRN number.

The Prospectus issued ahead of a Main Board listing did not include much new material but of particular interest was Part IX, Illustrative Cashflow Projections of the Group. This is something that the Directors say they would not have done except for the fact that it was a requirement to comply with the European Commission’s Regulation.

For FY11, the company has forecast an operating cash flow of US$65.6m. Cash used in investment activities is US$25.7m whilst financing activities contribute US$8.3m to cash flow. The net increase in cash for FY11 is US$48.2m and for 1HFY12, the projected net increase in cash is US$28.7m.

The company used a conservative gold price to make its financial projections. A gold price of US$800 was used for CY10, falling to US$700/oz thereafter. At the current gold price the cash flow projections will look much more robust.

The current market capitalisation in dollars is around US$2.2bn. If we take the company’s forecast for FY11 at face value, the net operating cash flow ratio is around 34X which is very high. Working backwards from a cash flow multiple of 9X, which we think is fair value, the company would need to generate an operating cash flow of around US$200m per year.

Now let’s turn our attention to the September Quarterly Report. The Sukari Gold Project is still in the construction and commissioning stages. Stage-1 Commissioning is proceeding well on all fronts. The installation of power is almost complete and the powerlines energised across the project.

Three construction milestones reached in the quarter were commissioning of the crusher and conveying systems and first seawater was piped to the raw water pond. The crusher and conveyor system has exceeded requirements operating at 4mtpa. No major issues were encountered with mechanical testing and commissioning of SAG and Ball Mills.

In summary, so far so good -- construction and commissioning has proceeded smoothly.

The pace of open pit mining accelerated during the September quarter to 904,000t of ore mined. This was an increase of 256% over the June quarter. The underground portal is almost complete. The current plan is to try and access higher grade ore sooner than would have been scheduled mining from the surface.

On the exploration front drilling was concentrated in the Pharaoh zone chasing the deeper high grade Hapi Zone mineralisation. Very encouraging drill results were obtained from infill drilling testing the extent of the Amun Deeps porphyry block and Downthrust Zone.

Regional exploration is certain to be fruitful and is underway at Quartz Ridge where a 26-hole program is probing the main quartz vein. Assays were not available for the quarterly report. Exploration is moving away from the Sukari Hill.

It was not a surprise to see a raft of good drilling results but with a resource already standing at 13m oz, incremental increases in resources will not have an enormous impact on the project’s NPV. To greatly increase NPV the company will need to significantly increase planned gold production.

As a brief introduction to new Members, the Sukari gold deposit was a great discovery – after all it is rare to find a significant part of the ore body forming a hill. This makes for low cost mining moving material downhill. The deposit is located in Egypt some 600km south of Cairo and 30km west of the Red Sea. The deposit is associated with rifting in the earths crust forming the Red Sea.

Proven open pit reserves are contained within 201mt grading 1.53g/t gold – this is at a cut-off grade of 0.5g/t gold. Measured and indicated mineral resources stand at 9.9moz with another 3.3moz in inferred resources. A 13moz resource is good by any standard. Doubling the cut-off grade has the effect of halving the tonnes but the grade increases to 2.47g/t for a total of 10moz, still a very sizeable deposit, and an enviable one at that. Exploration is continuing and the deposit is by no means drilled out.

There will be more significant additions to resources and that will lend support to the prevailing share price at the time. However, in recent weeks the market capitalisation has risen by about $A800m. The upside is rapidly being discounted as the gold price rises. Moreover, the increase in the share price has made Centamin less attractive as a takeover target.

Centamin has a market capitalisation of US$2.27bn. This values the Sukari 13moz resource at US$175/oz. The market is currently valuing the company above the industry average which is currently around US$97/resource ounce. The stock is looking increasingly expensive on this metric, but where our concerns lie are with the company’s cash flow projections. On the basis of projected cash flow the stock is expensive.

In summary, we like the Centamin story very much but the stock is expensive. In any event we believe that Members should sell their holdings in Centamin before 29 January 2010.

We do not think Members should reduce their exposure to gold. Members might like to consider switching into Chalice Gold Mines. We introduced Chalice to the portfolio in FAT-MIN-198. Chalice is working on a BFS to develop the Koka Gold Deposit in Eritrea. In a geological sense, the Koka and Sukari gold deposits are not dissimilar.

It is time to start locking in profits from Centamin. Accordingly we are recommending a HALF SELL.


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