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Centamin: Sukari: Dog or Diamond?

Contributed by Fox-Davies Capital

The Centamin share price has suffered a yearlong decline. Many investors have put this down to the turmoil that the political shake-up in Egypt has caused and a declining gold price. In this note we evaluate potential other factors.

We have also noted the haste with which the expansion to 10Mt pa was pursued. Whilst there is a logical argument that the expansion should have been built as early as possible to postpone the Egyptian Government getting their free carried 50% interest, we believe that an equally important driver was to achieve the economies of scale as soon as possible.

In this report we conclude that to remain profitable in the medium term at current gold prices, the underground ore reserves need to increase by 5.8Mt of ore containing 1.6Moz of gold. At the mining rate in the five year plan; this will extend the underground mine life to 2025 and postpone the date at which the open pit grade drops to 1 g/t.

At that point in time, the recovery will also drop, and assuming that the fuel subsidies are well and truly gone, the mine drops into a loss making situation. Worse still, if the gold price is only $1,000/oz the mine will report negative cashflows.

There are two possibilities, other than much higher gold prices that could resolve this problem. Firstly the underground could be much bigger than we have modelled, either in tonnes or grade. Either option would have a significant impact on our net present value calculation. Secondly the other possibility is that Sukari Hill is mineralised. If it contains 1 g/t, the same grade as the current open pit, there would be a significant increase in ore reserves, but more importantly, the strip ratio would be slashed and mining costs would be significantly reduced.