Interactive Investor

Share of the week: Absolute gold

3rd June 2016 16:58

Lee Wild from interactive investor

It's been a struggle picking a share worthy of top spot this week. Most times there's a standout performer, or a bunch of companies vying for the title. Double-digit gains typically guarantee consideration, but this is a four-day week, there's Brexit fear in the air, and markets are down.

However, a late spurt by Africa-focused gold miner Centamin got us excited, and the share price is up 11% this week. That makes it the top riser and our Share of the Week.

In fact, Centamin could easily be one of the shares of 2016 so far. They're up 64% already and at one stage last month had doubled to 130p. A first-quarter update in April was well-received and its main asset, the Sukari gold mine in Egypt, produced 125,000 ounces over the three months. It's forecast to churn out 470,000 ounces this year.

Big news today, however, is the gold price. Widely-watched US jobs data out Friday lunchtime showed hiring at its slowest rate in six years last month. US non-farm payrolls rose just 38,000 in May compared with Wall Street estimates of nearer 160,000. Previous months were also revised lower.

That got traders thinking the Federal Reserve will not raise US interest rates at this month's policy meeting. The dollar sank in response, driving gold, which typically has an inverse relationship with the greenback, up as much as 2.6% to $1,246 an ounce.

Centamin's assets in Burkina Faso and Ivory Coast look interesting too, and Centamin is spending $25 million (£17.2 million) on an exploration programme there. It should have more idea about how to move things along by the end of next year.

There's been no company specific news this week, apart from a large share sale by chairman Josef El-Raghy. He's been at the £1.2 billion company for almost 14 years and has overseen a transition from small explorer, through construction and into production.

But the former stockbroker sold 12.6 million Centamin shares between last Thursday and Tuesday at an average price of 98p a share, trousering £12.3 million. That certainly explains the drop to an eight-week low of 93p three days ago.

El-Raghy still owns over 5% of the company, however, or almost 59 million shares, currently worth over £62 million. That the share price has recovered strongly since implies that the market is paying little attention to this insider sharedealing, and more to the gold price and Centamin's prospects.

A bullish broker note from Morgan Stanley a fortnight ago had already got investors excited - it slapped an 'overweight' rating on the shares with 130p price target - although the rally proved short-lived as gold lost its shine.

Centamin shares trade on an "undemanding" 4.3 times 2017 estimates for enterprise value/cash profits, the broker reckons: "This is a steep discount to 'premium' peers Fresnillo and Randgold on 12.8x and 11.2 respectively, but broadly in line with closest peers Acacia and Hochschild," it says.

"However, we think operating risk appears lower at Centamin v. Acacia and Hochschild given recent guidance reduction at Acacia, and the key mine at Hochschild having been operating for just a year.

"This lower operating risk, combined with upside risk to guidance and balance sheet optionality makes Centamin our top pick in the gold space."

Preliminary second-quarter production results are due on 7 July.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.