After Today’s News, Should You Sell Centamin plc To Buy Xcite Energy Limited?

Shares in Centamin (LSE: CEY) are falling this morning after the company released its results for the nine months ending 30 September 2015. 

At time of writing, Centamin’s shares have fallen by 7% on the day as the company revealed a 67% drop in earnings per share for the reported period. Earnings before interest, tax, depreciation and amortisation fell 16% compared to the second quarter. 

However, while Centamin’s top line figures were disappointing, the company’s underlying operating figures improved across the business. For example, gold production was up 13% year-on-year and management now expects production costs to come in below expectations for the full-year. Specifically, management expects Centamin’s full-year cash cost of production to be below the previously guided $700 per ounce. All in, sustaining costs are expected to be below the previously guided $950 per ounce. 

What’s more, Centamin remains debt-free with cash, bullion on hand, gold sales receivable and available-for-sale financial assets of $216.1m — around a third of the company’s market cap — at the end of September. 

Good news

While Centamin’s shares are falling, Xcite Energy’s (LSE: XEL) shares are heading higher after the company revealed that it had signed a farm-in agreement with Azinor Catalyst on licence P.1979. Under the terms of the farm-in agreement, Catalyst will fully fund and undertake a detailed technical evaluation of the Licence area to further de-risk the prospects already identified by Xcite on the licence. In return, Catalyst will become entitled to 40% of the equity in the licence area, subject to approval by the Secretary of State for Energy and Climate Change. 

Following the completion of Catalyst’s initial evaluation, Xcite and Catalyst will determine whether the analysis would derive additional benefit from the acquisition of an Induced Polarization survey to de-risk further the prospect. Once again, this study will be funded by Catalyst. 

In many ways, this farm-in agreement is good news for Xcite. Not only will the company gain a partner for the development of the P.1979 licence, with Azinor funding the exploration surveys, Xcite will be able to maintain its focus on developing the company’s core Bently field.

Azinor Catalyst is a shell company that currently owns three licences and 21 blocks located across the Central and Northern North Sea and Rockall Trough. 

Sell Centamin to buy Xcite?

Centamin and Xcite are two very different companies. Centamin is one of the world’s lowest-cost gold producers, which is increasing production and has a hefty cash balance. Xcite, on the other hand, isn’t producing anything and the company’s key asset, the Bently oil field, will take a lot of time and money to develop. 

So overall, it doesn’t make sense to sell Centamin and buy Xcite following today’s news. 

City analysts expect Centamin to report a pre-tax profit of £55m and earnings per share of 4.8p this year. Based on these figures the company’s shares are trading at a forward P/E of 13 and support a dividend yield of 2.5%.