Why investing in Centerra Gold stock still makes sense?

Although Centerra Gold (CGAU) may not be the best mining stock out there, you would still want to make room for CGAU stock in your portfolio.

Centerra Gold shares have declined 45% year-to-date, steeper than the 30% decline in Newmont Corporation (NEM) and 17% drop in Barrick Gold (GOLD) shares. 

Mining stocks are generally down across the board in 2022, as the industry struggles with macroeconomic headwinds. Aside from industry-wide troubles, Centerra has faced company-specific challenges. The good news is that the internal issues that Centerra faces have solutions and the company is already taking steps to address them. 

What exactly does Centerra Gold do?

Centerra is a Canada-based mining company with a global presence. The company is focused on gold and copper production. It has properties in the Americas and Europe.

Centerra currently operates two mines: the Mount Milligan Mine in Canada and Oksut Mine in Turkey. Centerra describes its flagship Mount Milligan project as a low-cost property. It recently acquired the Goldfield project in Nevada, U.S. Moreover, Centerra has interest in exploration properties and joint ventures in the U.S., Canada, Finland, and Turkey. The company had a mine in Kyrgyzstan but it faced problems that it had to sell the property. And that move, though regarded as a loss to the company, helped Centerra drop a major distraction to its strategy.

In 2021, Centerra produced 308,141 ounces of gold and 73.3 million pounds of copper. The company lowered its 2022 production outlook because of issues at its Oksut project in Turkey. At the end of 2021, Centerra estimated its proven and probable gold reserve at 4.85 million ounces. It estimated its copper reserve at 1.36 million pounds. The company has budgeted to spend between $35 million and $45 million on exploration activities in 2022. 

Centerra says it is focused on responsible mining. It explains that its activities from exploration to mine operation and closures align with international industry practices. Therefore, while Centerra’s ultimate objective is to deliver value to its shareholders, ethics and integrity are at the center of the actions it takes. 

Centerra’s history dates back to 1992, starting with a company that was called Cameo Corporation. Centerra has expanded through strategic acquisitions over the years.

If you’re looking to invest in gold, you can do it physically – there are many gold dealers online and offline that can be relevant. But, if you’re looking for gold stocks – you may be looking far for the best stocks to buy now, but right under your nose may be lying a great opportunity. Don’t ignore Centerra. The pullback in the stock may be your chance to buy the dip and the discount may not last long.

Inside Centerra’s balance sheet

Centerra delivered strong Q2 2022 report, with both EPS and revenue numbers exceeding Wall Street expectations. The company ended the quarter with more than $723 million of net cash. The money is nearly enough to cover Centerra’s operating expenses for a whole year even if it doesn’t make any profit as long as it maintains the 2021 spending level. The company’s operating expenses in 2021 were about $726 million. In addition to the cash balance, Centerra has access to $392 million in credit facility.

Goldfield project in Nevada is a goldmine for Centerra

Centerra’s cash balance would be much higher if not for the acquisition of the Goldfield mine project in Nevada earlier in 2022. It spent $175 million of cash on that purchase and that stands out as a great investment for the company.

Centerra has said that the Goldfield project has significant upside potential given its massive unexplored land position. For example, there is potential to expand the facility’s known deposits and extend its mine life. 

Moreover, the company sees Goldfield as a low-cost project and it sees the opportunity to apply the expertise it obtained at its Oksut mine in Turkey to the new project. Replicating the Oksut mine strategies at the Goldfield facility could allow Centerra to operate the project even more efficiently. Investing in low-cost projects could allow Centerra to make more profit from its production activities.

Supply chain snarls don’t cause sleepless nights here

Many mining companies are struggling with supply constraints stemming from the COVID-19 pandemic and the Ukraine conflict. The challenges include shortages of critical supplies. And inflation has added to the pressures, in spite of it can be a good time for gold companies. Centerra has taken steps that are helping it manage through these challenges well. For example, the company has increased its stock of critical supplies such as consumables and reagents to minimize supply chain risks. 

Additionally, the company is pursuing alternative supply sources to both avoid long lead times and optimize costs. Inflation has driven up labor and energy costs for mining companies. However, Centerra has been able to mitigate the impact from soaring energy costs through its fuel hedging program.  

source: US Gold Bureau

Oksut project operation halt is a temporary setback

Centerra has suspended operations at its Oksut project in Turkey over safety issues. The company is working to address those issues and is now hoping to resume operations at the facility by 2023. As a result of the operation halt, Centerra decided to lower its 2022 production guidance. The hit on Centerra’s stock may be partly a result of the challenges at the Oksut facility, yet that is only a temporary setback.

Centerra needs management stability

Apart from the issues at the Oksut project, another challenge for Centerra is the management. In uncertain economic times such as these, a sense of management stability can help build more confidence in a stock. Unfortunately, Centerra hasn’t done well on this front. 

Shortly after appointing a new chief operating offer after a long search, Centerra announced an abrupt exit of its CEO Scott Perry. Centerra tapped Paul Wright, a director at the company, to replace Perry on interim basis as it looks for a substantive executive. In addition to resigning his CEO role, Perry also decided to quit his seat on Centerra’s board. The company will need to bring more stability to its management team to build more investor confidence in the stock.

Is Centerra preparing for takeover?

It has been a trying time for gold mining companies. Product prices have dropped yet costs have increased. Many companies also have projects nearing their end of life, while investing in greenfield projects looks daunting for many amid soaring costs and regulatory headwinds. 

For companies looking to replenish their project portfolio, improve production, and unlock economies of scale, acquisition may be the best option. Centerra has an attractive project portfolio and geographic diversification that could make it a suitable buyout target for some large industry participants. Moreover, Centerra stock has pulled back to a discount level that could be appealing for opportunistic takeover. 

Indeed, Centerra’s hiring of Paul Chawrun as its new chief operating officer is curious. Chawrun was COO at Teranga Gold, which was acquired by Endeavour Mining (EDVMF). Barrick Gold (GOLD) is among the mining powerhouses that could be interested in takeover deals if valuations are attractive. 

Inside Centerra’s technical insights

Centerra’s stock has retreated 6.9% from its 20-day Simple Moving Average, dropped 26% from its 50-day Simple Moving Average, and declined 40% from its 200-day Simple Moving Average. 

source: Barchart:

At $4.58, the stock has its first support level at $4.48, second support level at $4.37, and third support level at $4.31. On the way up, the stock’s first resistance point is $4.65, second resistance point is $4.71, and third resistance point at $4.82. 

source: Barchart:

Centerra’s stock has a 14-day Relative Strength Index of 35 and 14-day Williams Percent Range of 95.84.

Final thoughts

  • Centerra has as strong balance sheet and a clear plan to grow its business. However, it needs to work on its management stability to build more faith in the stock.
  • Gold mining stocks have dropped across the board, but the market seems to have punished Centerra more severely. For investors with long-term outlook, here lies a great opportunity to buy the dip in a promising business.
  • Despite the industry and internal challenges, Centerra has a chance to survive and thrive on its own. But if a buyout offer comes calling, then Centerra investors could secure a premium exit from the stock.