Mid-cap gold miner Centamin (LSE: CEY) unveiled its output figures for the second quarter today, and they did not make for good reading.
The miner reported quarterly gold production of 81,281 ounces during the three months to the end of June, down 13% from the year ago period.
Nevertheless, gold output was up around 9% from the previous quarter and management reiterated its full-year production forecast, so it was not all bad news. Management expects that Centamin will produce 420,000 ounces of gold during 2014.
Analyst concern
However, despite management’s optimism, City analysts are worried about Centamin’s future. And rightly so, to meet these full-year production targets Centamin will now have to produce 133,000 ounces of gold per quarter for the last two quarters of this year — implying that third quarter production will have to jump by 64%.
When the company unveils third-quarter output figures, investors should have a better idea of whether or not Centamin will be able to meet full-year figures. For now however, Centamin has a lot of work to do.
Still, production during the first quarter of this year was hit by operational problems at the company’s flagship Sukari mine. These issues have since been resolved and the mine is ramping up production to previous levels. If there are any slip-ups in the production ramp up in, Centamin is unlikely to meet its full-year target, leaving little room for error.
Other troubles
Meanwhile, aside from production troubles, Centamin is still trying to fight off a legal dispute concerning its Egyptian Sukari mine.
During 2012 a court ruled the company’s right to operate the mine was invalid, a ruling which Centamin immediately appealed. The current court case is adjourned until the 7th of October and Centamin hopes to have the case closed (in its favour) by the end of 2014.
City experts believe that “…Centamin’s chance of success in the court case is now very likely indeed…” based on a new law introduced earlier this year.
What to do now?
So, based on today’s news should investors buy, sell, or hold Centamin?
Well, current City forecasts estimate that the company will report a pre-tax profit of £93m for 2014, earnings per share of 7.7p. However, with today’s lower output guidance and possibility that the company may not meet full-year targets, this forecast could be revised lower.
What’s more, the City expects Centamin’s earnings per share to fall a further 11% next year, to 6.9p. These forecasts are concerning and with Centamin exposed to so many risks, including a lower level of output and legal disputes, for many investors the shares could be too risky.
Overall then, based on today’s news I would avoid Centamin.