Gold has been showing signs of strength of late and moving forwards into 2019 I would definitely be looking to have some in your portfolio, with an equity position in a gold producer being the best option. I’m a big fan of several of the larger producers – Randgold Resources (RRS) and Polymetal (POLY) – but there is probably more upside potential in the mid-tier miners, and I think that Highland Gold (HGM) offers great value at the current market cap of around £455 million. The fact that its operations are in Russia will put off some people, but personally I see Russia as a fairly safe and proven area for established miners, and do think that you are getting good value-for-money as a result of its geographical location.
Highland Gold is already a well-established producer, with the most recent operational update for the three months up until the end of September 2018 showing a good level of performance, with nearly 75,000 ounces of gold being produced from its Mnogovershinnoye (MNV), Novoshirokinskoye (Novo) and Belaya Gora mines. That took total production for the first nine months of the year to nearly 204,000 ounces, which is in line with 2017, and higher grades have seen it overcome the reduced production at MNV earlier this, and this mine actually saw higher output than the previous year. Work is continuing at Novo to expand the mine as grades have started to drop off, and I would expect to see a positive outcome from that. The company is also on the verge of completing its acquisition of Valunisty, which will be via the issue of $78.7 million worth of shares, as well as taking on $12.3 million of debt net, and this will see it increase its proven and probable reserves by 554,000 gold equivalent ounces, and with a further 1.72 million gold equivalent ounces in the indicated and inferred resources category.
Financially the company is in a good position, with all-in sustaining costs running at $697/oz during the first half of the year, and the most recent quarter saw the company realising $1,206/oz for its gold sales. So, a higher gold price will quickly see it build significantly on the $65.7 million net cash flow from its operations which it achieved in H1. Overall the company made a net profit of more than $28 million for that six month period. It does carry some debt on its balance sheet, but that isn’t unusual for miners, and as at the last update it had just under $170 million in longer term loans and borrowings, but it has been reducing its overall net debt and that now stands at $189 million, down from $203 million the previous year.
As well as generating a good level of net profit and trading a pretty low PE ratio for this sector, it does also pay a dividend, with the final dividend for this year being 5p, to add to the 6p per share that it paid out for H1. Given that the shares are trading at around 140p currently, that gives a yield of circa 7.8%. I would mainly be investing in this one for its future potential and can see the share price going a fair bit higher as long as we see strength in the gold price, but the income from these shares is also well worth having. So, if you are looking to position yourself into gold, then Highland is well worth considering and is one of my favourites listed on the UK markets, as it has strong production along with a more speculative element from further exploration around its already proven mines.
Filed under: Highland Gold, Cabot Energy, ShareProphets share tips of the year, Asiamet, dividend munchers
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