Centamin loses its shine as it cuts production guidance

Gold miner Centamin tumbled on Friday after downgrading its production guidance due to "persisting low grades" at its Sukari mine in Egypt.

Production guidance for this year was revised down to between 505,000 and 515,000 ounces from a previous target of 580,000, while the all-in sustaining cost of producing an ounce of gold is expected to be between $875 and $890 versus $770 previously.

"The updated mine plan forecasts a weaker Q2 and strong Q3 and Q4 production profile," Centamin said as it pinned the blame on the lower guidance on persisting low grades from the transitional zone in the open pit and lower development grade from underground.

Peel hunt said that at $1,300 per ounce, the downgraded guidance knocks around $85m or 11% from consensus revenues of $750m and could take around 20% from consensus EBITDA estimates of $410m for 2018.

"The cause of the issue is two-fold. First, lower than expected grades in the transition zone of the open pit mean less gold than expected. This should pick up through the year as mining moves out of this area. Second, volumes of ore mined underground has been down on budget due to kit availability issues. These issues are being resolved (and a second crew has been mobilised by the contractors) and again should see improving tonnage through the balance of the year. Which should mean 2Q is the weakest production quarter this year."

Centamin said total underground production is around 10% below forecast. Production equipment availability has resulted in lower production ore tonnage mined and subsequently development tonnage mined has increased, resulting in a 50:50 split.

RBC Capital Markets said the revised production guidance around 14% lower than its initial forecast.

"However, from a long-term investment perspective, the lower production this year, although unhelpful in the short-term, is only being caused by transitory issues. The larger transition zone material through this part of the hill pushback was already explained in Q1 as being a function of less data owing to the challenging landscape. Further drilling now anticipates this will pass by Q3. The plan to make up ounces from underground has been the reason for today's downgrade - and although we will need to follow up with management, it appears to also be down to a challenging quarter from an operational perspective.

"Therefore, the fundamental impacts to longer-term outlook are likely to be largely unchanged by consensus. With the potential relative magnitude of impact to net asset value from a successful Cleopatra development in 2019/2020, we would look to any weakness today as a buying opportunity."

At 1545 BST, the shares were down 17% at 130.83p.