Why Centamin is my best penny stock

At Centamine (LSE: CEY) share price at the last close. Since the beginning of the year, the stock has fallen 15% and is once again trading as a penny stock. The question I have is whether this recent pullback presents an opportunity to buy more shares.

2022 at a glance

Looking ahead, 2022 looks like a strong year for Centamin. Total gold production rose 6% to 440,974 ounces. However, this was not enough to satisfy the market, with the share price down 6%, yesterday. As I write the stock is down another 4%. One of the main problems is the rising costs.

All-in sustaining costs (AISC) rose 22% to $1,399/oz. This was mainly driven by an 11% increase in mine production costs. Higher prices for fuel, oil, lubricants, and reagents more than offset the higher gold production. As a result, earnings per share fell 29%.

Although this result is disappointing, they went to a large extent expected. In 2020, Centamin established a three-year capital investment plan to increase production and drive operational efficiency at the Sukari mine. The peak reset year is predicted to be 2022.

Renaissance of gold

In the last 50 years, there have been two major bull markets for precious metals. One was during the inflationary decade of the 1970s. Another, in the early 2000s, after the tech bust.

During both periods, one macro related driver precipitated the move higher – Falling global gold production. Now, I believe we have entered the same era.

Since 2019, gold production has decreased. Many reasons can be attributed to this decline. Growing social pressure to speed up the energy transition has led many large gold producers to shift their capital to the ‘green’ metal.

Newmont, the world’s largest gold producer, now produces the same amount of gold as it did 16 years ago. Furthermore, mining companies not only reduce their reserves, but the quality of existing assets is drastically reduced.

I am sure that the demand for gold will increase this decade. One source for this increase will be retail investors. A standard 60:40 stock and bond portfolio does not fare well in 2022. If interest rates continue to rise and inflation remains elevated, downside risk is more likely.

Exploration

The life blood of a gold miner is exploration. Centamin has a twofold strategy in this regard. First, it seeks to identify potential deposits within a truck distance from Sukari. Second, explore new discoveries that can support independent operations.

The Doropo project in Côte d’Ivoire, West Africa, has the potential to be a mine that can significantly increase the group’s production. However, as with any exploratory initiative, nothing is guaranteed. Even when a new discovery is made, it often takes years before a new mine becomes operational, if at all.

Despite the obvious high risk of investing in gold miners, I believe that a small percentage of the portfolio should be assigned to gold.

Centamin provides the best of both worlds. Existing operations in Sukari means having a ready source of capital to finance new projects. Rising gold prices can drive stock prices higher. In this pullback, I would definitely buy more shares.