Centerra Gold (OTCPK:CAGDF) is a Canadian gold producer with operations in the Kyrgyz Republic, Canada, Turkey and the U.S. and a further development project in Canada, which has a very positive feasibility study.
They have steadily increased production in the last few years and have just guided to production of 740,000 to 820,000 ounces of gold for 2020. Although this is roughly the same figure as was achieved in 2019, the company metrics look attractive at this level of production. The company clearly focuses on the long term increase in shareholder value. In 2004 the balance sheet value of the company was 601,751,000. This has increased to 2,076,166,000 in 2019 This is a track record that most gold miners cannot match as the sector has a reputation of destroying shareholder value over time. This cannot be said about Centerra.
Above – The Kumtor Mine (picture from the website), the mainstay of the company’s portfolio.
Below is an analysis of the company’s metrics including a prospective end 2020 P/E and a price to book.
2020 P & L – I have compiled this P & L using information in the company’s 2020 outlook press release. I have used a gold price of $1650 and the mid point of all guidance in the release. All figures are in US$.
| 2020 P & L | in $,000 | in $,000 | in $,000 | in $,000 |
| Revenue (note 1) | 1,287,000 | |||
| AISC (note 2) | (816,660) | |||
| Gross Profit | 470,340 | |||
| Costs | ||||
| Depreciation (Note 3) | (249,600) | |||
| Finance cost (note 4) | (6,000) | |||
| Total costs | (255,600) | |||
| Profit before Tax | 214,740 | |||
| Tax (note 5) | (32,211) | |||
| Profit after tax | 182,529 | |||
| Profit per share (note 6) | 62c |
Notes1. Production guidance for 2020 is 740-820,000 ounces, so revenue is 780,000 x $1650.
2. AISC guidance for 2020 is $1013-1081 per ounce, so AISC are 780,000 x 1047.
3. The company has guided to depreciation of $295-345 per ounce of gold, so depreciation is 780,00 x 320.
4. The guidance is for finance costs of $5-7m.
5. I have used the normal rate of tax of 15% for a Canadian company.
6. There are 293,567,824 issued shares so earnings per share are 182,529,000/293,567,824.
Company metrics
1. Using a share price of $6.08 (12/3/20) the prospective end 2020 P/E is 9.8.
2. Using the share price of $6.08, the price to book value of the company is
6.08 x 293,567,824 / 2,076,166,000 or .86.
Conclusion
The company looks undervalued looking at the metrics above. A prospective P/E of 9.8 and a price to book of .86 are valuations you would expect from a company that is not doing very well. However Centerra has increased production on a consistent basis. Gold production has climbed from 620,821 in 2014 to 783,308 in 2019. They also have further development projects that can increase production further. So what are the risks?
1. The company’s main asset is the Kumtor mine. The original life of mine feasibility study had the open pit mining finishing in 2023 and the milling operation completing in 2016. However the company produces regular updates on further exploration. This is identifying further deposits and is helping to ease this concern.
2. The company has had 2 safety incidents in the last 6 months. On the 18th February, there was a fatality at the Kumtor mine. An excavator operator was killed when his machinery tipped over. On the 1st December 2019, there was a significant rock movement at the Lysii Waste Rock Dump at the Kumtor mine. Two people were killed. Safety issues are a major priority for all miners and the recent record is a worry.
3. The gold price may break it’s uptrend. This would negate the positive trend in the shares.
4. At present, all gold miners shares are being impacted by the general malaise in the broader share market. Although this may prove temporary, it makes timing of share purchases difficult.
5. The company’s AISC are high at $1047 per ounce, which is a negative.
Taking all the above information into account, I think the shares look attractive. A prospective P/E of 15 for the company would move the share price to $9.31. The price to book would then be 1.31. With the industry average at 1.2 this is not too much of a stretch. The company has a good record of adding shareholder value, which is a rarity in the gold mining sector. This helps to alleviate the high AISC concern. The company therefore looks to be a good long term investment. I have recently purchased some shares and am looking to add on dips.
Disclaimer – This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
Disclosure: I am/we are long CAGDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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