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Centamin - An Undervalued Gold Producer

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One company that has received a huge amount of attention in the gold sector is Centamin, which operates Egypt's only producing gold mine and is a company I have followed closely over the last decade. Centamin is currently subject to a rather spurious court case, from Hamdy Fakharanyan Egyptian lawyer who is questioning the validity of Centamin's licence. This lawyer is a well known trouble maker in Egypt and it is highly probable that Centamin will win the case, which is increasing looking like a waste of everyone's time. The company has stated that they have the relevant licence documentation. The ironic thing is Centamin's licence can only be changed by an Act of Parliament not a small time administrative court.

In situations like this, it is important to focus on facts. Centamin floated on the stockmarket with a resource of around 1m oz and has now increased this to around 14m oz and reserves of nearly 10m oz. To put this into context, its Sukari mine is the 24th largest gold mine in the world and there is still plenty of exploration upside.

Last year, the company produced 262,000 oz, which was above their forecast of 250,000oz. There doesn't seem to be many mining companies that meet expectations these days, but what is even more impressive is that this was achieved despite a temporary suspension of mining operations. In the last quarter of 2012, the mine produced a record 85,000 oz. For 2013, the management is forecasting around 360,000 oz, as they work towards increasing to 500,000 oz. Cash costs are a very respectable $700/oz. In Centamin's latest corporate presentation there is a slide, which compares their Return on Investment Capital (NASDAQ:ROIC) with peers in the sector. Centamin's ROIC is an impressive 23%, which is over double most of other companies.

Before Centamin first encountered these issues last year the share price had recovered to around 100p (their all time high is 200p). The share price is currently 54p, which puts the shares on a PE ratio of 4. Now whilst this is clearly due to the political risk in Egypt, this discount to other miners seems too steep. Once the court case is resolved then hopefully the perceived political risk will reduce. The next hearing is 6th March and it looks increasing likely that the case will be resolved by the end of March. Centamin can then focus on ramping up production. Full Year results are due on 27th March and will impressive growth in earnings.

A profit sharing agreement (NYSE:PSA) with the Egyptian government is due to kick in shortly and this should boost relations further. Centamin have highlighted that over the next 20 years, the Sukari mine should generate around $8bn in government revenues. Egypt does not have the required skills to run this mine without Centamin and given that the terms of the PSA are already in favour of the government, it is hard to see how they will nationalise the mine. Throughout this saga the Egyptian Mineral Resource Authority (EMRA) has provided valuable support to Centamin and they clearly have a good working relationship.

Quite clearly, Centamin is not going to appeal to all investors given the political risk. However, it is an excellent operation with a world class deposit so worth keeping an eye on. If Sukari was in another country, the share price would be 3-4 times the current level. It is worth highlighting that the CEO (Josef El Raghy) owns around 7% of the company. Given the current market capitalisation of around £500m, he has a huge amount of "skin in the game" and his interests will be aligned with other shareholders.