Gold stocks seem to be very much on the radar at the moment, with the price of the yellow metal looking very strong against a back-drop of worldwide concerns over coronavirus and investors looking for a safe haven. With interest rates also being so low at the moment, I think that is adding to the attraction of gold as it is hard for investors to find something that is both seen as a safe haven and also where the value of their investment has a chance of appreciating. Even before coronavirus really started to be seen as a major issue, there were signs that all was not well with the world economy, and as a result gold had been showing strength. But now that is even more the case as the chances of a serious knock-on effect to the world supply chain from the virus looks to be very likely...
Many gold stocks have already enjoyed decent rises, but I would argue that it isn’t too late to buy in spite of that, as high gold prices look likely to remain, and the metal could even rise further if the world economy really does start to take a serious hit. There are a number of gold stocks which I watch closely and like, but one of my favourites has to be Highland Gold Mining (HGM), where I hold a few shares myself and have done for some time. Not only do I want to invest in a company which is strong from a production perspective, but I also want one where there is good potential for further growth in the future.
I wrote about this company at the end of 2018 and what great potential it had – so much so that I convinced myself to buy some soon afterwards! – and at the time the share price was around 140p, with a market cap of £455 million. Since then it has certainly prospered as gold has risen, and now trades at around 227p and a market cap of £828 million, with an extra 40 million odd shares in issue. Its four mines in Russia are producing substantial amounts of gold and the last quarter in 2019 was very good with more than 83,000 ounces, which helped it to just exceed the upper end of full year guidance, at a fraction over 300,000 ounces for the year. This year quite a bit of work will be going on, especially at its Kekura project where initial mining got underway late last year, plus at Belaya Gora and Nova, where it is expecting to spend around $210 million overall on capex this year. Even without growth in output for this year though it should still perform well - not to mention being in a much better position for growth in the coming years - as the gold price is now significantly above the average of $1,395/oz achieved throughout 2019. During H1 2019, which was the last set of financial results, the company achieved a net profit of more than $45 million, with an average gold price of $1,308/oz, and all-in sustaining costs of $778/oz. It is carrying some debt on its balance sheet, as you would expect with a miner of this size, and at the end of June 2019 net debt stood at $216 million, via various loans, and stood at around 1.29 on a net debt/EBITDA ratio and well within range set by the company. In terms of funding the capex needed for the work throughout this year, I would expect that to come from loans, as well as the strong free cash flow generated from its operations, and I can’t see any problem with it managing to get the funding that it needs. The company also pays a dividend, which totalled 10p per share for 2019, and although you aren’t going to get rich from it, a yield of 4.4% isn’t too bad for a miner of this size.
Looking at its reserves and resources, the last report on these was at the end of 2018 so is dated, but at that time it had proven and probable reserves of nearly 5.8 million ounces, along with measured and indicated resources of over 16 million ounces, so it is easy to see the potential for sustainability and growth longer term as further work is carried out – Kekura for instance has in excess of 2 million ounces of proven and probable reserves. There are of course also some risks, and aside from any political risk - which despite operating in Russia I would class as low given the history of the company there - the biggest risk is without doubt the future gold price, especially given the amount that the company is spending on development of its assets in the near term. But if we look at how it was performing at much lower average gold prices, we can see that it is insulated to some degree as it has performed well at those lower prices in the past, and its AISC is relatively low. I can still see value at the current share price, and along with other gold miners it will provide a safe haven for investors if the markets really do start to take a serious tumble. Given the current turmoil it would certainly seem prudent to have at least some gold exposure in your portfolio via a mid-sized producer with growth potential.
Filed under: Highland Gold, Versarien, Neill Ricketts, Restaurant Group, Metro Bank, Microsaic, Goldplat
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