Why I’d shun this mining flop and buy the Glencore share price dip instead

Harvey Jones says Glencore plc (LON: GLEN) is one of today’s more tempting mining stocks, but thinks you should leave a gold specialist well alone.

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Yet more of the shine has gone off Tanzania-focused gold miner Acacia Mining (LSE: ACA). It’s shares are down 10.44% today on publication of its first-quarter results for the three months ended 31 March. 

All that glisters

First quarter production fell 45% year-on-year to 120,981 ounces, primarily due to Acacia’s Bulyanhulu operation transitioning to reduced operations, while Buzwagi’s production is now primarily sourced from lower grade ore stockpiles.

Gold sales fell 37% to of 116,955 ounces, while the group’s All-in Sustaining Cost (AISC) figure rose 4% to $976 per ounce sold. Cash costs also jumped 24% to $715 per ounce sold. Q1 revenue dropped 33% to $157m due to lower sales, offset slightly by higher realised gold prices, even if the sale of a non-core royalty asset for $45m pushed up EBITDA by 4%.

Lost dividend

Interim CEO Peter Goleta put a brave face on things, saying that “Acacia continued to demonstrate resilience during the first quarter” and claiming that production at its three assets puts it in a good position to deliver against full year guidance of 435,000-475,000 ounces. “The switch to stockpile processing at Buzwagi and the move to reduced operations at Bulyanhulu in late-2017 were effectively executed and we are pleased to report an increase in our cash balance to US$107m.”

The group is taking steps to further stabilise its balance sheet. But investors remain concerned with today’s drop coming on top of a similar one in February. Acacia now trades at a forecast valuation of 8.9 times earnings but there is no dividend anymore, scrapped in February. Meanwhile Acacia is waiting to see the outcome of talks between its majority shareholder, Canadian giant Barrick Gold, and the Tanzanian government. Avoid for now.

Monarch of the GLEN

But here’s a miner I would buy, £54b FTSE 100-listed mining giant Glencore (LSE: GLEN). It had deep-rooted problems of its own in 2014 and 2015. But those are now largely in the past, after a successful clean-up policy that involved dumping non-core assets, reducing headcount and boosting efficiency.

However, nothing is steady for long in the mining and minerals sector. President Donald Trump’s sanctions against Kremlin-backed companies and oligarchs are the latest concern, due to Glencore chief executive Ivan Glasenberg’s directorship of Russian aluminium producer Rural (since renounced). However, threats against Russia work both ways, with nickel prices up 9% today on fears that sanctions could threaten supplies.

War talk

Glencore has now rebuilt its balance sheet, boosted its capital efficiency and is focusing on growth again, having bolted on five acquisitions in the last year. Its share price is up 9% in the last week, helped by the wider share price recovery as fears abate over a worsening Syria crisis and US trade war with China.

Glencore currently trades at just 10 times forecast earnings, a figure my Foolish colleague Peter Stephens believes is too low to ignore. He also notes that the group is positioning itself nicely to benefit from the acceleration in electric vehicles. For my part, a forecast yield of 3.9% covered 2.4 times looks tempting. As does the forecast 46% jump in earnings per share growth for 2018.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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