Today I’m looking at two mining shares that have lost between 40%-60% of their value over the last year. Should we pile in and hope to double our cash, or are these falling share prices a warning of trouble to come?
Dispute blocks gold profits
Most mining companies run into trouble because they fail to hit pay dirt.
Tanzania-focused gold miner Acacia Mining (LSE: ACA) has plenty of gold. The problem is that about 50% of its potential production is subject to an export ban. To lift the ban, the Tanzanian government is demanding about $190bn in back taxes and penalties.
Shares in the firm have fallen by about 75% since the ban was imposed in March 2017. Despite this, today’s half-year results show that after making some changes to its operations, it’s still able to operate profitably.
Gold production during the first half of the year was 254,759 ounces, 41% lower than in 2017. Gold sales generated revenue of $333.4m and after-tax earnings of $30.9m, That’s 51% lower than in the first half of 2017, but it was enough to boost the firm’s net cash balance by $9.5m to $63.3m.
Why I’d avoid this stock
This company and its shareholders are at the mercy of the Tanzanian government. Acacia isn’t even negotiating its own settlement — that job has been left to the firm’s largest shareholder, Canada’s Barrick Gold.
As outside investors, we have no way of knowing what kind of settlement will eventually be reached. I don’t expect Acacia to be asked to pay $190bn. But even a much smaller payout could leave the firm lumbered with a big pile of expensive debt.
This could clear the path for rumoured Chinese buyers to sweep in and buy the assets, potentially leaving shareholders with almost nothing. Although the shares look cheap on 5.5 times forecast earnings, I believe the risks are much too high. I’d stay away for now.
Progress in Alaska?
Small-cap oil explorer 88 Energy (LSE: 88E) has also been a big faller over the last year. Its shares have lost around 40% of their value, as investors appear to have lost faith in the promise of a big oil discovery on Alaska’s North Slope.
The latest news from the firm has provided very little encouragement. Flow testing of the HRZ Icewine#2 well delivered disappointing results. Despite trying various techniques to stimulate the well, a 28-day testing period in June only produced 1,372 barrels of stimulation fluid (i.e. no oil) and an average of 26,000 cubic feet per day of methane gas.
88 Energy says that this result “is not considered representative of the reservoir fluids in situ”. The company seems to think that what is needed next is a programme of horizontal appraisal wells. Management is now looking for a farm-out partner to share the cost of such a programme, which I’d expect to be significant.
Still some hope?
In the meantime, 88E is processing seismic surveys tp look for additional drilling opportunities in the HRZ play. It’s also planning a 2019 exploration well in its Western Blocks acreage, along with two partners.
88 Energy may yet hit oil and make a lot of money. But it may not. With no production assets or cash flow, investing in this stock is little better than a gamble. I’m not keen on such risky plays, so I’ll be steering clear of this stock too.
