Hochschild Mining (LSE:HOC), a silver giant, has benefited greatly from the shiny metal’s appreciation. But is this stock still a millionaire-maker?
Just like my colleague Royston Wild, I still see plenty of opportunities for silver to appreciate. Let me explain why. The coronavirus crisis isn’t over yet. In fact, we see rising numbers of Covid-19 cases in the world with the US being the epicentre of the disease. In my opinion, this could lead to another lockdown, which would be a catastrophe for the global economy. But the stock market seems to be ignoring this. Even if the second lockdown doesn’t happen, central banks will keep pumping plenty of money into the financial system for a while. This is a highly bullish factor for gold.
But how about silver? Well, it’s often referred to as the ‘small brother of gold’. The two metals seem to move in the same direction. However, the investment market for silver is much smaller than that for gold. So, silver prices tend to be more volatile. This could allow investors to earn a much higher profit from the grey metal’s appreciation.
Investing in Hochschild Mining
That being said, I see significant advantages in buying shares over physical metals. To start with, if you buy physical commodities, you’d end up paying substantial storage fees. Additionally, physical metals don’t pay you any dividends or interest. This isn’t true of shares, of course.
I’d take a closer look at Hochschild Mining (LSE:HOC). It is a company operating in South America. Most of its revenue comes from mining and selling silver but it also extracts and sells some gold. As I’ve mentioned before, the current situation is highly bullish for the grey metal. Additionally, it looks undervalued compared to gold since silver has been underperforming its big brother for some time.
In April, Hochschild management pulled the company’s guidance and withdrew its proposal to pay a final dividend for 2019. It all sounds like bad news for the company’s shareholders. But the reason was the fact that silver cost about $12 per ounce at the time. There wasn’t enough market liquidity to go around. So, investors sold even safe-haven assets. Now silver prices are trading for almost $19 per ounce. And they have further to rise, I think. So, the company will most probably report much higher earnings this year and pay an even more attractive dividend.
The company’s fundamentals
If we compare years 2018 and 2019, we can clearly see that Hochschild’s earnings per share (EPS) have doubled. In 2018 the EPS after exceptional items totaled 3c but in 2019 they rose to 6c. This brings us the price-to-earnings (P/E) ratio of about 42. This isn’t good at all because it makes the company look overvalued. However, as I’ve mentioned before, the company has great earnings potential.
I also had a look at the company’s 2019 balance sheet and compared it to the one in 2018. Hochschild’s equity (assets less liabilities) increased and so did its cash holdings, which means that the company’s financial position generally improved.
Finally, the company is a classic family business. Its chair, Edouardo Hochschild, owns more than 50% of the company’s shares. So, it’s in the chair’s best interests to run the company for the benefit of its shareholders.
To sum up, I consider Hochschild Mining’s stock to be a millionaire-maker.
