I think Centamin (LSE: CEY) could prove to be a great penny stock to buy following recent share price weakness. The gold miner has lost 8% of its value in just over a week. This makes an already-cheap UK share look even better value in my opinion.
At a current price of 88.3p per share, Centamin trades on a forward price-to-earnings ratio of just 15 times. I think this is pretty cheap considering the company’s solid profits outlook as it ramps up gold production.
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The company is making plans to supercharge annual output at its Sukari mine to 500,000 ounces by 2024. Centamin pulled 415,370 ounces of the yellow metal from Egyptian ground last year, around the mid-point of guidance. It’s looking to produce between 430,000 and 460,000 ounces of gold in 2022 too as it moves towards that half-million target.
Gold demand is bouncing back
So Centamin’s share price has slumped in recent sessions on hawkish comments from the US Federal Reserve on interest rates. The central bank signalled that rate hikes could be more severe than the market had been expecting, causing gold values to reverse. But I think it’s too early to claim that gold’s race is run. And at current prices I think Centamin could be a great buy to prepare for a fresh bounceback in bullion values.
The World Gold Council recently announced that metal demand reached 1,147 tonnes in the final quarter of 2021. This was the highest level for 10 quarters and was driven by an range of factors. Jewellery demand was strong and, at 713 tonnes, was the highest three-month figure since mid-2013.
Solid investment demand for gold also delivered that strong quarterly figure. Bar and coin investment of 318 tonnes represented the highest fourth-quarter total for five years, the World Gold Council said. Moreover, outflows in gold-backed exchange-traded funds (or ETFs) also slowed markedly at the end of 2021.
I’m not surprised that investor demand for gold has increased. Speculation that policy makers continue to underestimate the inflationary threat remains high. The ongoing Covid-19 crisis and its enduring threat to the global economy remains a huge danger. And more recently the threat of military action in Eastern Europe has fuelled demand for safe-haven assets, too. All of these factors remain very much in play at the start of 2022.
5% dividend yields!
Of course, there’s a chance that gold prices could continue backpeddling instead (they recently touched six-week troughs around $1,800 per ounce). Buying mining shares like Centamin is also risky because commodity production is highly risky and profits-sapping problems can be common.
Still, at current prices below £1 I still think Centamin looks highly attractive from a risk-to-reward angle. I’d also prefer to buy this gold share instead of the metal itself (or a bullion-backed financial instrument) as it gives me the chance to receive dividends. And at 5%, Centamin’s yield for 2022 is pretty fat. This is a penny stock I’d be happy to buy today and hold for the long haul.