CGAU - Centerra Gold Is Well-Positioned For The Expected Bullish Gold (Rating Upgrade)

2023-08-02 06:51:57 ET

Summary

• Centerra Gold Inc. receives a Hold recommendation rating due to improved gold price scenario and increased gold production forecasts.
• The company's second quarter results show increased revenue and gold sales, but also higher production costs.
• The stock price of Centerra Gold Inc. is positively correlated with gold prices and may benefit from a potential bull market in gold.

A Hold Recommendation Rating for Centerra Gold Inc.

This article updated the previous Sell recommendation for the stock in Centerra Gold Inc. (CGAU) with a Hold rating given the improved gold price scenario and the company's gold production forecasts following the recovery of Turkish mining operations after being suspended last year due to the discovery of mercury in the facility's gold room.

The business should therefore perform significantly better than in the first half of 2023, adding to the upside catalyst of high volatility with gold price movements that characterize Centerra Gold Inc. shares. However, investors may want to wait a little longer before buying shares of this gold producer as the shares could potentially be priced more comfortably in the coming weeks.

In fact, there is a risk of headwinds that could push gold prices off current levels before the yellow metal experiences a strong bull market between late 2023 and 2024.

Despite the presence of copper production and a favorable molybdenum price environment encouraging more investment in the molybdenum business, the majority of Centerra Gold's revenue comes from the sale of gold, and its shares also show a strong positive correlation with the yellow metal.

How Centerra Gold Inc. Performed Recently

Centerra Gold reported second-quarter results after the market close on Monday, reporting a non-GAAP loss of -$0.20, missing the average estimate of analysts by $0.09.

Revenue was $184.5 million, up 10% year over year and beating analysts' average forecast by $15.85 million.

Centerra Gold sold 48,155 ounces of gold in the second quarter of 2023, up 16% year-over-year at an average realized market price of $1,532 per ounce, and it sold 12.8 million pounds of copper, down 32.3% year-over-year, at an average realized copper price of $2.56 per pound.

On a consolidated basis, the company incurred gold production costs of $1,066 per ounce, up 11% year-on-year, and it incurred total All-in sustaining costs [AISC] on a by-product basis of $1,711 per ounce, up 3% year-on-year.

Costs were negatively influenced by mine sequencing and short-term factors such as continued inflationary pressures and timing issues in Turkey due to national holidays in late June 2023 and a deterioration in the performance of the company's currency hedging program.

The company invested $20.8 million in upgrading fixed assets such as property, plant and equipment, while $20.7 million went to sustaining investments. Operations generated $33.4 million while free cash flow was $10.6 million.

Capital expenditures were down from last year, but the change wasn't really the factor that explained the significant improvement in both operating cash flow and free cash flow.

These two items represented a strong positive turnaround from the prior year's quarter when they consisted of outflows of $3.5 million and $31.2 million, respectively. Operating cash flow and free cash flow benefited mainly from a higher volume of gold sold and a higher price for the precious metal.

The gold business benefited from the restart of activities in Turkey. Without the national holiday at the end of June 2023, higher production of the yellow metal could enter the market and the positive impact on Centerra Gold's profitability would have been greater.

The price of gold per ounce traded higher as monetary tightening gradually eased from increases of 75 basis points in 2022 to increases of 25 basis points in 2023 through the mid-June 2023 pause.

Higher gold sales volumes/prices led to an improvement in net cash change, which was still negative in Q2 2023 but improved amazingly on a sequential basis. It was negative $10.2 million in Q2 2023 versus negative $119.8 million in Q1 2023. So, cash and cash equivalents were nearly $800 million as of June 30, 2023, reflecting cash on hand of $401.8 million and an available credit line of $398.1 million. Disregarding cash flow from operating activities, available cash on hand alone is enough to fund the quarterly dividend for years to come.

The higher free cash flow allowed Centerra Gold Inc. to pay a quarterly dividend of CA$0.07 (or $0.0525) per common share on June 12, 2023, and going forward, the company has declared that it will pay the same quarterly dividend on August 29 to shareholders of record as of August 15.

The dividend payout results in a dividend yield of 3.35% on a forward basis at the time of writing, which compares to an S&P 500 yield of 1.50% .

The dividend payout and its yield will undoubtedly support the share price going forward, but the possibility of counting on another gold operation now, coinciding with a likely bull market for gold prices, sets the stage for important tailwinds.

The Mineral Assets of Centerra Gold

Centerra Gold's mineral assets are performing well as they produced 61,622 ounces of gold in Q2 2023, up 44% year over year, due to record throughput in May and June at the Gold-Copper Processing Plant of Mount Milligan Mine located in British Columbia, Canada, coupled with the resumption of gold activities at the Öksüt Gold Mine located in Turkey.

Mount Milligan's mining operations are progressing into deeper mineral zones, which is expected to be reflected in higher grade and metal recovery.

Öksüt resumed full operation at the beginning of June 2023 and will continue to be ramped up in the coming months. With further development of the mine through the end of 2023, the deposit is expected to deliver significantly higher gold production. As of June 30, 2023, the mine had a stack of approximately 0.3 million tonnes that could yield up to 10,546 ounces of gold compared to 20,503 ounces in June 2023.

Copper production fell 21% year over year to 13.8 million pounds, while pounds of molybdenum sold fell 6% to 3.23 million.

Going forward, Centerra Gold expects a better pace of gold and copper production, in fact, consolidated gold production should hover between 340,000 and 360,000 ounces in 2023, while copper production is expected to be between 60 and 70 million pounds.

Centerra's consolidated gold production costs for 2023 and AISC based on by-products are expected to be lower compared to Q2 2023 as they are expected to be $700-$750 per ounce and $1,000-$1,050 per ounce, respectively.

In Nevada, Centerra Gold engages in the Goldfield Project where its team is conducting drilling activities aimed at an updated resource estimate to be incorporated into a feasibility study which assumes exploration and project development costs of approximately $16 million to $20 million in 2023. The company is seeking to expand resources beyond known deposits and to test peripheral mine targets within the property.

Due to its higher exposure to gold business than copper and molybdenum, which is also reflected in a strong positive correlation with the yellow metal, Centerra Gold's share price has a potentially bright outlook.

The potential will pick up as the company's production yields more ounces going forward with costs trading lower than the second quarter of 2023 while the precious metal has another bull market.

The latter is expected to occur between the end of 2023 and the following year, 2024, as a result of the recession where the economy is likely to be squeezed by the US Federal Reserve's aggressive stance in raising interest rates to combat galloping inflation.

The Valuation of the Stock in Centerra Gold Inc.

The chart below from Seeking Alpha illustrates a very strong positive correlation between the shares of Centerra Gold Inc. and Gold Futures (GCQ2023). In fact, the curve line that shows the course of the correlation coefficient over the past year - see the yellow-colored area - is almost always above the zero line.

Such a situation means that shares of Centerra Gold Inc. should trade higher as gold rises from the current $1,944 an ounce to $1,982.51 by the end of the third quarter of 2023, and $2,055.38 in 12 months, according to Trading Economics analysts' expectations .

The second estimate of future gold price representing an upside of nearly 6% to current stock prices may already be one of the levels the yellow metal reaches during the expected bull market.

The price of gold will most likely rise rapidly if the economy is pushed into recession by the Fed's monetary tightening as the negative business cycle will create headwinds for the value of investors' portfolios against which the yellow metal will act as an effective safe haven.

Thanks to a robust labor market and excess liquidity that households have been able to accumulate from subsidies received during the Covid-19 crisis, consumption is strongly supported, leading to stubborn core inflation.

Core inflation has moderated somewhat recently, but it is still judged to be too high at this point despite an aggressive stance on interest rates as the US FED intends to continue with another hike until the end of 2023 and keep interest rates high for a long time.

Analysts have introduced the alternative scenario of a soft landing for the economy, but that is not what will happen, rather a recession will come according to the point of view with which this analysis supports the Hold recommendation rating.

Instead of a soft landing, a recession will come as a surprise to most financial market participants, who no longer expect this negative scenario for the economy, even if the US Federal Reserve continues to signal it with interest rates at their highest level since January 2001.

Simply put, a recession in the economy is consistent with the Fed's aggressive monetary policy to curb runaway inflation, fueled by 11 rate hikes to date, but these have yet to fully spill over into the system.

The risk of this not happening, which would derail the investment strategy here designed for Centerra Gold Inc., is small. In fact, analysts of Trading Economics expect the US GDP growth rate to slow down significantly along with a rise in the US unemployment rate.

According to their forecasts, the GDP growth rate in the United States will be 1.7% in 2024, down from 2.4% in the second quarter of 2023, while the US unemployment rate will reach 4.5% by July 2024 (see Trading Economics' chart below), up from 3.6% in July 2023.

Gold will provide protection against the decline in US-listed stocks as these will reflect the headwinds of the recession. Analysts at Trading Economics forecast the United States Stock Market Index [US30] trading from its current $35,622 to $31,845.99 in 12 months.

Centerra Gold Inc. shares are trading at $6.37 per share at the time of this writing with a market capitalization of $1.40 billion.

Given the strong uptrend potential highlighted above, shares do not look expensive as they are slightly above the 200-day Simple Moving Average of $5.92, the 100-day SMA of $6.31, and slightly above the 50- -day SMA moving average of $5.97.

Also, shares are above the $5.74 midpoint of the 52-week range of $3.77 to $7.71, but still below the upper bound of the interval.

The following chart from Seeking Alpha shows that Centerra Gold Inc. shares have a 14-day Relative Strength Indicator [RSI] of 47.58x, which means that the shares are neither at overbought nor oversold levels.

However, the RSI indicates that the shares have bottomed out a bit before mid-May 2023, likely due to the US FED rate hike that took place on May 3. Higher interest rates increase the risk of a recession but bode ill for gold and gold-backed assets as fixed-income securities become more attractive than gold, which does not generate income.

With the US Federal Reserve likely to raise interest rates again and keep rates high for the next few months, this will not be a favorable environment for gold. Therefore, there is a chance that the negative pressure on the gold price will cause Centerra Gold Inc. shares to drop and become more attractive before the recession triggers a gold bull market.

Shares also trade on the Toronto Stock Exchange under the symbol ( CG:CA ). Shares were trading at CA$8.03 per unit on the TSE as of this writing for a market cap of CA$1.85 billion. Shares are trading above the 200-day simple moving average of CA$7.99, above the 50-day simple moving average of CA$7.97, but below the 100-day simple moving average of CA$8.47.

Shares are also above the middle point of CA$7.73 in the 52 Week Range of CA$5.18 to CA$10.28. Also, the 14-day Relative Strength Indicator of 47.06x suggests there is room for shares to reach lower price levels.

Conclusion

Centerra Gold Inc. shares could benefit significantly from the recession expected between late 2023 and the next year of 2024. A recession will revive demand for gold as an anti-recession safe-haven asset, and Centerra Gold Inc. shares, which are strongly positively correlated with the metal, will also trade higher. Centerra is also a producer of copper and molybdenum and should benefit from the continued improvement in copper production and the favorable molybdenum pricing environment.

However, the company's business is primarily gold. The gold business is now benefiting from mining activity moving into deeper mineral zones, which is expected to be reflected in higher grades and metal recoveries, and from the restart of activities in Turkey.

In fact, production and cost guidance for the rest of 2023 calls for higher production and lower costs than the second quarter of 2023, and this should fuel the catalyst for strong upside potential if gold experiences a bull market.

Given the positive growth prospects highlighted, shares are not expensive but could be offered at more attractive prices. It will still be some time before a recession occurs and there is a chance for a more conventional entry point. Therefore, it makes sense to Hold off on buying Centerra Gold Inc. stock for the time being.

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