Is this growth stock a buy after reporting a 25% rise in production?

Should you pile into this fast-growing company?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Gold mining company Acacia Mining (LSE: ACA) has surged by 11% today after reporting a 25% rise in production for the third quarter. Its strategy appears to be working well and it has a bright long-term future. But is now the time to buy it, given the uncertain outlook for gold?

Acacia’s gold production rose to almost 205,000 ounces, which is 25% up on the same quarter of the previous year. This drove revenue higher by 48% and when combined with a reduction in cash costs of 26%, it had a positive effect on Acacia’s profitability. The company’s EBITDA (earnings before interest, tax, depreciation and amortisation) was $104m higher than in the third quarter of 2015 at $125m. And with its net cash position having increased by $32m to $203m, Acacia is in a stronger financial position than it was just a few months ago.

Looking ahead, Acacia is forecast to increase its bottom line by 53% in the next financial year. Despite this rapid rate of growth, it trades on a relatively low valuation. For example, Acacia has a price-to-earnings (P/E) ratio of 19.6. When combined with its earnings growth outlook, this equates to a price-to-earnings growth (PEG) ratio of only 0.4. This indicates that now is a great time to buy Acacia.

Of course, the outlook for the price of gold is uncertain. US interest rates are forecast to rise before the end of the year and this would have a negative impact on the gold price. That’s because interest-producing assets would become more popular relative to gold, which could dampen demand for the precious metal.

Furthermore, the US election result may now be swinging towards a Clinton victory. If this occurs, there may be a more predictable outlook for US government policy. That’s because we’ve had eight years of a Democrat President, so it would probably be more akin to a continuation rather than a change. This could also reduce demand for gold, since the precious metal tends to be popular during uncertain periods.

Lower risk?

Clearly, Acacia lacks diversity. Therefore, less risk-averse investors may prefer to buy a mining company that has a lower risk profile in this respect. For example, Rio Tinto (LSE: RIO) produces a range of commodities including iron ore and aluminium. This helps to diversify its income stream and makes its risk profile lower than that of Acacia.

In addition, Rio Tinto offers good value for money. It trades on a forward P/E ratio of just 15.3 and has significant growth potential thanks to its sound financial footing. This provides it with substantial cash flow that can be invested in developing its asset base to produce higher profitability in future. And with Rio Tinto yielding 3.3% from a dividend covered 1.9 times by profit, it’s a better income stock than Acacia, which yields 1.2% from a dividend covered 4.4 times by profit.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Rio Tinto. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Newspaper and direction sign with investment options
Investing Articles

When cheap markets meet favourable conditions, sentiment flips very quickly

London’s stock market is cheap — some sectors, even cheaper. Given a change in sentiment, the uprating could be substantial.

Read more »

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »

Photo of a man going through financial problems
Investing Articles

I’d stop staring at the Nvidia share price and buy this FTSE 100 stock instead

This writer reckons there is a smarter way to invest in Nvidia today without taking on stock-specific risk. Here is…

Read more »

Young lady working from home office during coronavirus pandemic.
Top Stocks

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »