financial Review

INTRODUCTION

The unaudited interim condensed consolidated financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" (IAS 34) as adopted by the European Union and the requirements of the Disclosure and Transparency Rule sourcebook (DTR) of the Financial Conduct Authority (FCA) in the United Kingdom as applicable to interim financial reporting. The unaudited interim condensed consolidated financial statements are not affected by seasonality.

In conjunction with the operational performance, we are pleased with the financial performance of H1. The period in question saw the generation of competitive EBITDA and profit margins as well as significant free cash flow. Further good progress was made delivering against our financial strategy, particularly regarding cost management and driving cost saving initiatives despite unscheduled costs incurred associated with COVID-19.  

The Company is on track to achieve full year production and cost guidance and looks forward to delivering continued operating results, taking advantage of a promising gold price environment, and maximising value through growing operating margins to drive free cash flow generation and shareholder returns.

Centamin is a low cost, highly cash generative business which offers sector leading dividend returns to shareholders, balanced with active investment to drive future growth. The Company has a strong balance sheet with US$367 million of cash and liquid assets as at 30 June 2020, with no debt, hedging or streaming instruments, thereby offering shareholders pure exposure to the gold price. The Company continues to seek value opportunities in organic growth and strategic acquisitions that would support the corporate strategy and business objectives, underpinned by a strategy of delivering sustainable returns to all of our stakeholders.

Consolidated Statement of Comprehensive Income 

Revenue from gold sales for the period increased by 56% YoY to US$449 million (H1 2019: US$288 million), with a 27% increase in the average realised gold sales price to US$1,657 per ounce (H1 2019: US$1,305 per ounce) complimented by a 21% increase in gold sold to 270,529 ounces (H1 2019: 220,507 ounces net of Cleopatra) with no ounces attributable to Cleopatra in H1 2020.

Cost of sales represents the cost of mining, processing, refining, transport, site administration, depreciation, amortisation and movement in production inventories. Cost of sales is up 11% YoY to US$233 million, mainly as a result of:

·    5% decrease in total mine production costs from US$174 million to US$164 million, due to stable open pit mining costs, a 13% decrease in underground mining costs, a 13% decrease in processing costs offset by a 25% increase in finance and administration costs due to higher salaries and wages as a result of extended rosters and a 70% increase in refinery and transport costs due to different routes flown all related to COVID-19 as well as a 21% increase in gold ounces sold;

·    9% increase in depreciation and amortisation charges YoY from US$60 million to US$66 million due to higher production affecting amortisation rates and US$20 million increase in the cost of property, plant and equipment (excl. capital work in progress) which increased the associated amortisation charges; and

·    A negative movement in inventory adjustment of US$3 million compared to positive movement in inventory adjustment of US$24 million in H1 2019 reflecting the movement in mining inventory over the half year.

Other operating costs comprise expenditure incurred for communications, consultants, Directors' fees, stock exchange listing fees, share registry fees, employee entitlements, general office administration expenses, the unwinding of the restoration and rehabilitation provision, foreign exchange losses and the 3% production royalty payable to the Arab Republic of Egypt ("ARE"). Other operating costs increased by US$6 million or 44% YoY to US$20 million, mainly as a result of:

·    US$5 million increase in royalties paid to the government of the Arab Republic of Egypt ("ARE") (in line with the increase in gold sales revenue) (+ve); and

·    US$1 million increase in other expenses (+ve).

In H1, US$5.7 million has been incurred that can be directly attributable to COVID-19, the majority of which relate to increased salaries and wages as a results of extended rotation cycles of onsite personnel at Sukari as travel restrictions were imposed as part of lockdown and mandatory quarantine periods before arriving on site.

Exploration and evaluation costs comprise expenditure incurred for exploration activities in Côte d'Ivoire and Burkina Faso. Exploration and evaluation costs decreased by US$0.3 million or 3% from US$10.5 million in H1 2019 to US$10.2 million in H1 2020 due to reduced spending in both jurisdictions.

Adjusted EBITDA was US$255 million, an increase of 117% YoY, mostly driven by the 56% increase in revenue associated with a 21% increase in gold ounces sold at a 27% higher average realised sales price, complimented by a slight reduction in cash costs per ounce sold in the period. The EBITDA margin increased by 17 percentage points, to 57%. Profit after tax was US$191 million, up 221% YoY. Basic earnings per share was 6.5 US cents, an increase of 280% YoY.

During the six months ended 30 June 2020, US$101 million was paid (H1 2019: US$39 million) as dividends to the non-controlling interest ("NCI") in Sukari Gold Mine ("SGM"), being the Egyptian Mineral Resources Authority ("EMRA").

Dividends paid to the non-controlling interest in SGM being EMRA, pursuant to the provisions of the Concession Agreement, are recognised as a non-controlling interest attributable to SGM. EMRA does not own shares in Centamin, therefore Group earnings per share is calculated on the profit attributable to the owners of the parent.

The profit share payments during the year will be reconciled against SGM's audited financial statements. Any variation between payments made during the year (which are based on the Company's estimates) and the audited financial statements, may result in a balance due and payable to EMRA or advances to be offset against future distributions. SGM's June 2019 financial statements are currently being audited.

Basic earnings per share attributable to owners of the parent of 6.49 US cents for the six months ended 30 June 2020 increased when compared with the six months ended 30 June 2019 of 1.71 US cents. The increase was driven by the factors outlined above.

Consolidated Statement of Financial Position 

Centamin has a strong and flexible financial position with no debt and no hedging and cash, bullion on hand, gold and silver sales debtor and financial assets at fair value through profit or loss of US$367 million as at 30 June 2020 (31 December 2019: US$349 million).

The majority of funds have been invested in international rolling short-term interest money market deposits.

Current assets have increased by US$25 million or 6% from US$447 million at 31 December 2019 to US$472 million at 30 June 2020 as a result of:

·    US$8 million decrease (-ve) in inventory driven by:

o  US$4 million decrease in stores inventory (-ve); and

o  US$4 million decrease in mining inventory (-ve);

·    US$6 million decrease in the financial assets at fair value through profit or loss which relates to an equity interest in a listed public company that has been fully disposed of (-ve);

·    US$5 million decrease in trade and other receivables (including gold and silver sales debtor) due to timing of gold sales (-ve);

·    US$2 million increase in prepayments (-ve); and

·    US$43 million increase in net cash (net of foreign exchange movements) (+ve) driven by the profit for the period less the payment of the 2020 Q1 interim dividend of US$69 million and a US$101 million payment to EMRA as distributions to the NCI.

Non-current assets have decreased by US$12 million or 1% from US$926 million at 31 December 2019 to US$914 million at 30 June 2020, as a result of:

·    US$56 million increase in the cost of property, plant and equipment (+ve);

·    US$65 million charge for depreciation and amortisation (-ve);

·     US$4 million decrease in exploration and evaluation assets, as a result of the drilling programmes in Sukari Hill offset by capitalisation of exploration and evaluation assets to mining properties in property, plant and equipment(-ve); and

·    US$1 million increase in inventory related to mine ROM stockpiles (+ve).

Current liabilities have decreased by US$6 million or 9% from US$66 million at 31 December 2019 to US$60 million at 30 June 2020, as a result of:

·    US$7 million decrease in accruals mainly due to settlement of advisory costs related to a third party approach(-ve);

·    US$1 million increase in current provisions (+ve).

Accumulated profits increased by US$21 million from US$615 million at 31 December 2019 to US$636 million at 30 June 2020, as a result of:

·    US$191 million profit for the year after tax (+ve); offset by

·    US$101 million profit share paid to EMRA in the year (-ve); and

·    US$69 million 2020 Q1 interim dividend paid (-ve).

Consolidated Statement of Cash Flows

Net cash flows generated by operating activities comprise receipts from gold and silver sales and interest income, offset by operating and corporate administration costs.

Group cash costs of production were US$642 per ounce produced, down 7% YoY, predominantly due to a 5% decrease in mine production costs. Group all in sustaining costs ("AISC") were US$899 per ounce sold, down 4% YoY due to increased costs offset by increased gold ounces sold. Both cash cost of production and AISC are tracking on budget and thereby within our guidance range of US$630-680 per ounce produced and US$870-920 per sold for 2020.

Stringent cost and capital allocation management combined with a stronger gold price has more than doubled operating cash flow YoY (119%) to US$255 million due to the 56% increase in revenue associated with a 21% increase in gold ounces sold at a 27% higher average realised sales price complimented by a slight reduction in cash costs per ounce sold in the period. Group capital expenditure, including sustaining and non-sustaining capital, was US$52 million. This was lower than scheduled due to short term deferral of non-essential capital projects, in response to COVID-19. Capital expenditure is scheduled to significantly increase in the second half as essential projects ramp up - subject to any further adjustments required in response to COVID-19.

Net cash flows used in investing activities comprise exploration expenditure and capital development expenditure including the acquisition of financial assets. The primary use of the funds in the period was for purchase of property, plant and equipment and investment in underground development at the Sukari site in Egypt offset by the disposal of an equity interest in a listed public company.

Net cash flows used in financing activities comprise dividend payments to the non-controlling interest in SGM, being EMRA, and dividend payments to the owners of the parent, being shareholders of the Group.

After distribution of profit share payments to Company's partner, the Egyptian government[5], the Group generated free cash flow^1,3 of US$102 million, up 186% YoY driven by increased gold sales, stronger gold price and reduced capital expenditure in the period. Profit share payments of US$101 million, up 157% YoY, and royalty payments of US$13 million, up 53% YoY, were made in H1. Under the terms of the Concession Agreement with our Egyptian partners, EMRA, on 1 July 2020, the profit share mechanism changed to 50:50, from 55:45 in favour of Centamin, and will remain at this level for the remainder of the tenure. At a consistent average realised gold price of approximately US$1,650 per ounce, H2 free cash flow generation is expected to be lower than H1 due to the final step change in profit share split and a higher capital expenditure programme.

Capital expenditure

The following table provides a breakdown of the total capital expenditure of the Group:

(1)  Includes Sukari expenditure relating to Cleopatra in non-sustaining capital expenditure before the offset of net pre-production gold sales.

Cumulative exploration expenditure capitalised for Cleopatra at Sukari is US$23 million (project to date) offset by pre-production net revenues of US$18 million in prior periods (refer to notes 2.1 and 2.2 to the financial statements for further details) resulting in US$5 million remaining on the statement of financial position at 30 June 2020.

Exploration expenditure

The following table provides a breakdown of the total exploration expenditure of the Group:

(1)  Cleopatra expenditure before the offset of net pre-production gold sales.

Exploration and evaluation assets - impairment considerations

In consideration of the requirements of IFRS 6, management is not aware of any information that would otherwise suggest that an impairment trigger has occurred which would require a full impairment test to be carried out at 30 June 2020.

Non‑GAAP financial measures

Four non‑GAAP financial measures are used in this report, each with a condensed definition, for the full definitions see the financial review section of the 2019 Annual Report.

1.     EBITDA and adjusted EBITDA

EBITDA is a non‑GAAP financial measure, which excludes the following from profit before tax:

·    Finance costs;

·    Finance income; and

·    Depreciation and amortisation.

Reconciliation of profit before tax to EBITDA and adjusted EBITDA:

(1)   Profit before tax, depreciation and amortisation and EBITDA includes a charge to reflect the removal of fuel subsidies.

(2)   Adjustments made to normalise earnings, for example profit on financial assets at fair value through profit or loss, impairments of property, plant and equipment, non-current mining stockpiles and exploration and evaluation assets.

2.     Cash cost of production per ounce produced and sold and all-in sustaining costs per ounce sold calculation

Cash cost of production and AISC are non-GAAP financial measures. Cash cost of production per ounce is a measure of the average cost of producing an ounce of gold, calculated by dividing the operating costs in a period by the total gold production over the same period. Operating costs represent total operating costs less sustaining administrative expenses, royalties, depreciation and amortisation.

Reconciliation of cash cost of production per ounce produced:

(1)   Mine production costs, cash cost of production, cash cost of production per ounce, AISC and AISC per ounce sold includes prepayments recorded since Q4 2012 to reflect the removal of fuel subsidies.

(2)   The movement in inventory on ounces produced is only the movement in mining stockpiles and ore in circuit while the movement in ounces sold is the net movement in mining stockpiles, ore in circuit and gold in safe inventory.

A reconciliation has been included below to show the cash cost of production metric should gold sold ounces be used as a denominator.

Reconciliation of cash cost of production per ounce sold: 

(1)   Mine production costs, cash cost of production, cash cost of production per ounce, AISC and AISC per ounce sold includes prepayments recorded since Q4 2012 to reflect the removal of fuel subsidies.

(2)   The movement in inventory on ounces produced is only the movement in mining stockpiles and ore in circuit while the movement in ounces sold is the net movement in mining stockpiles, ore in circuit and gold in safe inventory.

In 2020 the movement of inventory on cash costs of production per ounce produced and sold has been amended to exclude the effect of amortisation and depreciation (non-cash items) on those movements. This change is only being applied prospectively from 2020 onwards.

Reconciliation of AISC per ounce sold:

(1)   Mine production costs, cash cost of production, cash cost of production per ounce, AISC and AISC per ounce sold includes prepayments recorded since Q4 2012 to reflect the removal of fuel subsidies.

(2)   Includes refinery and transport.

(1)   Please note that non-sustaining corporate costs relate to expenses and/or accruals recognised for work performed by the Group's advisors on the successful defence of the third party all-share acquisition attempt of Centamin plc. This is not a normal cost incurred in the day to day operations of running the Group and as such has been excluded from our Non-GAAP reporting measures.

3.     Cash and cash equivalents, bullion on hand, gold sales receivables and financial assets at fair value through profit and loss

Cash and cash equivalents, bullion on hand, gold and silver sales debtor and financial assets at fair value through profit or loss is a non-GAAP financial measure. Cash and cash equivalents, bullion on hand, gold and silver sales debtor and financial assets at fair value through profit or loss is a measure of the available cash and liquid assets at a point in time.

Reconciliation to cash and cash equivalents, bullion on hand, gold sales receivables and financial assets at fair value through profit and loss:

4.     Free cash flow and adjusted free cash flow

Free cash flow is a non-GAAP financial measure. Free cash flow is a measure of the available cash after distributions to the NCI in SGM, being EMRA, that the Group has at its disposal to use for capital reinvestment and to distribute to shareholders of the parent as dividends in accordance with the Company's dividend policy.

(1)    Adjustments made to free cash flow, for example acquisitions and disposals of financial assets at fair value through profit or loss, which are completed through specific allocated available cash reserves.