Centamin’s open-pit upgrades a ray of sunshine at Sukari

VANCOUVER — Shareholders of Egyptian gold-operator Centamin (CEE-T, CEY-L) received a welcome bit of good news when the company released an upgraded open-pit plan for its flagship Sukari gold mine 700-km from Cairo near the Red Sea.

Centamin has had a rough ride over the past year, with its sole operating asset located in the politically turbulent nation of Egypt. The company has experienced the full effects of the Arab Spring, and was forced to downgrade guidance numbers last year following difficulties tied to the civil uprising — Centamin ended up meeting its guidance of roughly 205,000 oz. of gold after that number was revised from a preliminary estimate that clocked in at upwards of 290,000 oz. of gold output. More recently, the company ran into problems when the Egyptian government was unable to deliver promised fuel subsidies due to cash shortages.

Centamin shares hit a three-year low of 95¢ during first quarter 2012, and the company learned just how dissatisfied its shareholders had become when they attempted to throw out a series of management bonuses via a 63% vote at a recent annual general meeting in London, England.

The new plan at Sukari boosts head grades from open-pit ore to between 1.1 to 1.5 grams gold per tonne over the next five years, and reduces the operations strip ratio in 2014 to 6.72:1 — down from 14.5:1 — as a result of improved management of hill removal east of the mine. The open-pit mine life clocks in at 30 years, with an average grade of 1.09 grams gold.

According to Centamin the guidance improvements were made possible through the delivery of new mining equipment, along with the completion and commissioning of a US$287-million “Stage 4” expansion initiative that would double Sukari’s annual throughput levels to 10 million tonnes by the end of 2013. The company has spent US$99.3 million on the expansion thus far.

In addition, a re-scheduling of waste and ore deliveries allowed the miner to access more consistent grades. Metallurgical recovery rates are expected to improve to 89% over the next few years courtesy of further automation of the reagent addition, and the installation of a custom designed carbon regeneration kiln.

Sukari is pegged to produce 250,000 oz. of gold this year and 367,190 oz. in 2013, which would jump to 431,400 oz. in 2014 and 445,100 oz. by 2015. Centamin produced 49,071 oz. of gold over the first quarter, marking a 9% year-on-year quarterly increase at cash costs of US$637 per oz. Processing throughput rates clocked in at around 1 million tonnes during the quarter, a 38% increase over first quarter 2011, with a record 415,600 tonnes being processed in January.

 “The team at Sukari delivered a solid quarter of gold production in line with our guidance and we remain on track to reach our full year production,” commented Chairman Josef El-Raghy. “With our commitment to a continued capital expenditure and exploration programme, the periods ahead will see sustained growth on many fronts in both Egypt and Ethiopia.”

Centamin enjoyed a rare upswing following news of the updated open-pit plan, with company shares jumping 6.2% or 6¢ on May 30 en route to a $1.03 close. Shares have been on the downward trend since hitting a quarterly high of $1.52 in early February.

Centamin shares have plummeted 50% or $1.02 over the past 52-weeks, as the company has struggled with ongoing political turmoil in Egypt. Upcoming national elections in June may provide more solid socioeconomic footing, but could just as easily see the country regress back into civil turmoil.

Bank of Montreal (BMO) Capital Markets analyst David Haughton maintains an “Outperform” rating on the stock with a $1.75 target price,

“[A]nalysis suggests that Centamin represents good value at these levels,” he notes in a May 30 research comment. “However, the share price remains captive to geopolitical risks and uncertainty in Egypt. BMO Research remains confident in Sukari’s geological upside and in the company’s ability to achieve its longer term production targets.”

Haughton explains that the re-optimized mine plan is essentially “in-line” with BMO research forecasts, and that analysts had already factored in a smoother grade and stripping profile over the 2014 and 2015 operational years.

Also of note is Centamin’s unique agreement with the Egyptian government, which allows the company to retain 100% of its cash flow — minus a 3% revenue royalty — until it can recoup its capital expenses. Centamin is exempt from paying taxes for 15 years with an option agreement to extend that window to 30 years. The company had cash and liquid assets totalling US$175 million to end March.

Sakuri also features an underground mining component that produces higher grades at between 10 to 12 grams per tonne gold. The underground mine achieved a record ore movement during the first quarter with 71,800 tonnes processed and continues to ramp up production.

First quarter underground development included an additional 624 metres of decline progress to access additional stoping blocks slated for processing this year. Centamin also completed 1,800 metres worth of diamond drilling underground during the quarter, in order to define short-term stope potential, and test depth extensions below its Amun zone.