Centamin's road to redemption

Appointed in April 2020 following aborted takeover talks with now fellow London-listed gold player Endeavour Mining, Horgan oversaw a strong share price run last summer before pit stability issues at Sukari's west wall forced the company to lower guidance. Centamin's stock plummeted by nearly a quarter overnight.Having reworked the mine plan, the first phase of a life of asset review at the beginning of December offered a chance for Horgan to lay bare past failings at Sukari."I think the company got itself into this tailspin whereby it was working year to year. Somebody somewhere said tier one assets have to have 10 years of 500,000 ounces. And that became dogma, without thinking about what's right for the asset."That's how the company got itself under-stripped in the open pit, underdeveloped in the underground, under-explored in geology...we were too busy thinking just about replacement."You can't run a 10-15 year asset on a year to year basis; you've got to basically have a life of mine plan, or at least 10-year plan, that drives your five-year plan, and that drives your 12 month budget," he said.The CEO said the fact Sukari had at least another 12-13 years to run meant it was a case of "stripping it back to the chassis"."There's sufficient runway ahead of us that it's worth doing that and basically breaking it down to its constituent parts, and then putting it back together," he said.Rather than using different mining techniques, Horgan said the key to improving Sukari's performance was a simple combination of people and processes."You can take the best ore body in the world and put a bunch of amateurs in charge and they wouldn't make a penny; you can take a marginal ore body with some pretty sharp people and you can make a pound note," said Horgan."When I came in, I just felt we were light in two or three really key areas, or to be blunt the people in the place weren't of the requisite quality. So it was about plugging some headcount into some key areas," said Horgan.Horgan's previous experience as CEO of private West Africa-focused gold explorer Toro Gold - which sold the Mako gold mine in Senegal to Resolute Mining in 2019 - meant he didn't have to look far for likely candidates.Howard Bills, Horgan's Toro co-founder, came on board as Centamin's group exploration manager in June 2020, with another former Toro alumnus Paul Cannon joining as environmental and social manager in September."How you turn the culture around is that obviously you lead by example; you try to inspire, you talk, you put rules in place, systems etc. But another good way to do it is you just inject that successful DNA into the business. And if you can bring people across who have been successful with you, who know how you work, and inject that enthusiasm, energy, respect, professionalism into the business; it helps to just it accelerates that process," said Horgan.While it was Horgan's work at Toro that catapulted him into contention for the role, it was as executive director at AIM-listed diamond producer BDI Mining in the noughties where he learnt how to handle misfiring assets."It was a bit of a mess…strange parallels 15 years later," he said.At Sukari, Horgan said the turnaround was largely a case of "basic engineering"."There's no Colonel Sanders secret sauce recipe; there's no clever insight; it's about just getting some basics back into the business," he said."We talk about putting a world-class mine around the world-class ore body; we've got the ore body, now let's put the mine around that."Horgan said the company was addressing the under-stripping in the pit, which had led to limited working areas, leaving minimal operational flexibility "which meant any slight hiccups that happened from time to time hit your guidance".On both the openpit and the underground, Horgan said he wanted to "get ahead of the curve, such that we've got an operation where we've got embedded flexibility".While Horgan believes the company has already made significant strides over the past 15 months, the CEO has identified a number of areas for potential efficiencies in a bid to shave costs."We've got this target of US$100 million of savings in the opex annualised repeatable, and we've delivered about $60-65 million. And then of the balance, we've got two or three things that we've identified as well."You're unlikely to walk in and find a 20% saving straightaway; it's 2-3% here, or 3-4% there and when you amalgamate the number of these individual initiatives, all of a sudden, bam: you're taking 10 15% out of the cost base," said Horgan.Restoring faithBearing in mind Centamin's struggles over the autumn, analyst response to Horgan's time in charge has been largely positive.An April note from US investment bank Jefferies entitled "Steps in the Right Direction" noted the fact Centamin moved a record 22.6Mt of material in the March quarter suggested its waste-stripping program had started well.In May, Canadian bank RBC upgraded the stock to "outperform", pointing to the company's strong performance in Q1 as a sign new management was ironing out issues at Sukari. Peel Hunt also weighed in with positive note, calling the company's Q1 "a strong start to the year and the first signs of Sukari becoming a more consistent mining operation on a quarter-to-quarter basis".However, the company's bumpy performance since 2018 - when it suffered three production guidance misses due to operational issues - means some are yet to be convinced."I just can't trust those guys…they don't do what they say they're going to do," was the verdict of one London-based analyst who wished to remain anonymous.This lack of trust coupled with a recent dip in the gold price means Centamin is now trading close to its post-pandemic low at just over 102p.Horgan is unsurprised and unphased."You look back at the recent history of the asset and it couldn't deliver a bloody pizza over the last two or three years. And I recognize that, and that credibility gap - that trust - is the biggest thing that we've got to build back," he said."We need a period of sustained delivery into stated goals in order for people say: okay, they're on top of it, now they're starting to deliver," said Horgan."I'd love guidance this year to be like a long-haul flight: we took off on time, we watched a movie, we landed on time."Another solid set of quarterly numbers - to be published on July 22 - should help matters, and while Horgan couldn't comment on where the company stands currently in relation to its Q2 production target, he said he was "not overly concerned"."We're nearly through June and the finishing line's in sight," said Horgan.The ‘D' wordIf turning Sukari into a consistent performer meant drawing on experience at BDI, Horgan's work at Toro in West Africa has proven critical to another key objective: diversification.Centamin has been developing two projects as part of its West African exploration portfolio, and late May published preliminary economic assessments for Doropo in Cote D'Ivoire and Batie West in Burkina Faso.The former was promising, with the PEA showing a post-tax NPV 5% of US$234 million with an IRR of 21% at a US$1,450 gold price.Total capex to develop the 13-year, 150,000oz per year operation, was estimated at $275 million, with an average all-in sustaining cost of $904/oz."We like what we see there…[it's] a pretty vanilla project of pretty reasonable scale and robustness," said Horgan."We can push the pedal hard now. We've put the band back together...the Mako/Toro team and template and roadmap; I don't have to micromanage that - the guys are just running with it," he added.Horgan said a PFS would follow in a year, with a DFS about nine months later. A construction phase of around 16-20 months will put first production towards the end of 2023 or early 2024.The economics for Batie West were less compelling, with the PEA showing an NPV 5% of just $63 million with an IRR of 11% against capex of $265 million. Centamin is now looking to divest the asset.Horgan puts the lack of positive market response to the PEAs down to a fear among certain quarters that developing Doropo would potentially compromise Centamin's dividend."They thought: oh my god, they're going to blow US$15 million bucks on this thing? Does that mean the dividend not going to be paid? And it's not either, or; it's both, quite frankly," said Horgan.Centamin is in a strong financial position: ungeared and unhedged, with US$330 million on the balance sheet."At the point of construction [of Doropo], I'm not touching the cash flows from Sukari; I'm using the balance sheet that we've built up to basically deliver the construction phase. And I'm putting some asset level financing into the asset to build it… and at that point, Sukari keeps paying the dividend," said Horgan.The CEO has made no secret of his wish to diversify beyond Doropo, but suggests potential M&A is contingent on a period of consistent delivery at Sukari."We need to spend 6,12 or even 18 months showing that we're on top of our game, and I think then at some point on that continuum, we can then start to look at how we build out from there as well," he said."If I can get to Christmas this year, deliver guidance, with the asset set for the next 12,15 years with some upside; exploration upside in West Africa, and then the key is to be able to go out and do things."Egyptian upsideBefore then, Horgan plans to make significant headway with the company's Egyptian exploration programme.An unappetising mining code based around the profit-sharing style of oil and gas contracts had previously ruled out Egypt as a destination for major miners, but a recently promulgated new exploration code triggered a flurry of interest, with Barrick and B2Gold among a group of companies - including Centamin - to secure blocks as part of a bid round launched in November.Though the new code is clearly positive, Horgan said Centamin had requested clarification around a number of terms and conditions, both on the economic and regulatory side."We're just working through that with the Egyptian mineral resource authority. And if we can get those clarifications in place, we're ready to go… So if we could get that signed up through July, get a bit of prep through August, I think we'd be busy from September onwards, we'd been moving pretty quickly," said Horgan.The absence of exploration in Egypt to date presents huge opportunities, suggested Horgan."You've got this huge prospective package of rocks, and it's just never been explored using modern techniques," said Horgan."It's kind of the geologists' dream, they're itching to get involved. Because there can't just be Sukari, right? I think it'll be pretty interesting to see what comes out."

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