Since the turn of the year, shares in gold and silver miner Fresnillo (LSE: FRES) have risen by 43%. This is mostly due to an improved outlook for precious metals, with slower than expected US interest rate rises making non-interest-bearing assets such as gold and silver seem more appealing on a relative basis.
Clearly, many investors may have become more interested in Fresnillo after its share price rise. After all, a rapidly rising share price could continue and in Fresnillo’s case this seems likely. That’s because the outlook for gold and silver is relatively upbeat, with US interest rate rises when they come still likely to be offset somewhat by uncertainty among investors regarding the global macroeconomic outlook.
Looking ahead, Fresnillo is forecast to increase its bottom line by 67% in the next financial year. This has the potential to cause a step change in investor sentiment over the medium term and with Fresnillo trading on a price-to-earnings growth (PEG) ratio of just 0.6, it seems to have considerable upside potential. As such, it seems to have the potential to double in value over the medium-to-long term.
Profit potential
One stock that has already doubled in 2016 is Hochschild Mining (LSE: HOCH). As with Fresnillo, Hochschild has benefitted from a surging gold and silver price and could continue to do so over the coming months.
Unlike Fresnillo, Hochschild has slipped into the red in recent years. It made a loss between 2013 and 2015, but is due to return to profitability in the current financial year. This in itself has the potential to greatly improve investor sentiment towards the company and with Hochschild expected to grow its bottom line by 141% next year, its shares could easily double over the medium term.
A key reason for this is Hochschild’s valuation. Despite its shares having risen by 186% since the turn of the year, they still trade on a PEG ratio of just 0.3. This indicates that a 100% gain is still very much on the cards and due to Hochschild being expected to recommence dividends next year, it seems to have confidence in its long-term outlook. This could cause investor sentiment to improve and push the company’s shares significantly higher.
Long-term play
Meanwhile, BHP Billiton (LSE: BLT) has also benefitted from an improving outlook for the wider resources sector. However, its shares have risen by a rather modest 10% this year, which is much lower than Hochschild’s or Fresnillo’s price rise.
Looking ahead though, BHP has stunning capital gain potential. It’s forecast to more than double its pre-tax profit in the next financial year and this could cause its share price to do the same. That’s especially the case since BHP trades on a PEG ratio of just 0.2, which indicates that its shares are dirt cheap. And with BHP having a sound balance sheet, strong cash flow and a diversified business model, it seems to offer a highly enticing risk/reward ratio for long-term investors.
