One way to play the recovery in the commodities market is to buy a diversified miner and spread the risk. Or you could play it the opposite way if you see a single-focus producer which you think has good prospects.
Gold miner Centamin (LSE: CEY) is one way to take the latter approach. Though the share price has already almost doubled over five years, it’s actually lost nearly 50% of its value since a peak in April 2017, and I think it could be looking a bit oversold at the moment.
The problem right now seems to be weak forecasts, which suggest a further 23% hit to EPS this year after last year’s 48% slump. And Thursday’s third-quarter results didn’t help.
Mixed results
Although the company reported a 27% quarter-on-quarter rise in production at its Sukari mine to 117,720 ounces, actual sales only grew by 9%. That apparent shortfall shouldn’t matter as it’s really just down to the timings of gold pours and shipments, but a 7% drop in the average selling price, to $1,206 per ounce, does matter.
The overall result (of a sales rise and a price fall) was a modest 1% improvement in revenue and a 1% decrease in quarter-on-quarter pre-tax profit.
Stocks like Centamin really do hinge on the price of gold, and it’s been on a bit of a slide so far this year. But on the upside, Centamin has no debt, its shares don’t look highly valued to me, and it does pay good dividends.
The yield is forecast to drop this year, mind, to yield 4.2%, but there’s a rebound to 5.6% predicted for 2019 — though gold price movements between now and then make it probably one of the least reliable forecasts. But if gold is your thing, I see Centamin as a good choice.
Diversification
The opposite strategy, of going for a diversified miner like Glencore (LSE: GLEN), should reduce the risk of relying on a single commodity.
But you can still face a volatile ride, and even though the Glencore share price has climbed strongly since the depths of early 2016, it’s still underperformed the FTSE 100 over the past five years. And over 10 years, we’re actually looking at a 40% loss.
That does cover a period before the merger with Xstrata in 2013, so perhaps those earlier years are not a good comparison. Since the merger, Glencore shares have outperformed the Footsie by a couple of percent, but with a far rockier ride.
What does this say?
I’ve always been generally positive about the mining business as I see it as a long-term safe sector — it’s digging up riches that the world just can’t do without. But I think you really do need a very long-term horizon.
I recently examined problems that are likely to be depressing the Glencore share price. But even if we look at miners without such issues, I’m becoming increasingly unconvinced that the long-term benefits really outweigh the cyclical volatility.
BHP Billiton shares, for example, have performed even worse over five years with a 12% drop. Rio Tinto is up 16% over the same timescale, but lags the Footsie over longer periods.
But I do still see Glencore shares as cheap on a forecast P/E of eight, and I think they could rise when those problems are sorted.
