My stock of the week: Hochschild Mining

Andrew Woods explains why a strong earnings record and mining expansion makes this precious metals firm his stock of the week.

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In what has been another volatile week for the stock market, indices have moved again due to the current issues of inflation and rising interest rates. As such, my stock of the week is Hochschild Mining (LSE:HOC). The shares have gained 5% in the past five days. Let’s take a closer look.

Rising silver price

The share price performance of the firm — a South America-based silver and gold miner — is closely linked to the underlying price of precious metals. 

In the past week, the silver price has been rising, climbing about 2% in that time. What this means is that the value of Hochschild’s output should also increase in value.

Given that silver is a necessary component in green products, like solar panels, it’s possible that demand will continue to rise. 

Together with gold, silver is also considered a safe-haven investment during times of crisis. With a potential recession looming, it’s conceivable that investors may transfer to precious metals.

Recent results

Hochschild’s most recent results have been mostly disappointing on account of wage and cost inflation. These are beginning to reduce the company’s profit margins.

For the six months to 30 June, pre-tax profit fell to $15.3m. During the same period in 2021, this figure stood at $97.8m.

We can observe a similar trend in revenue, which declined from $394.8m to $347.8m. Additionally, a declining cash balance and net debt featured in the interim report. 

While I may initially find these results off-putting, I’m always aware that the issues facing the business could well be short-term in nature.

In the same report, the firm declared an interim dividend of ¢1.95 per share. This was flat compared to last year and is an indication that I may be able to derive consistent income by purchasing the shares.

Strong earnings and mining expansion

Although recent results are hardly exciting, a look to the longer term may reveal Hochschild’s earning potential.

Between 2017 and 2021, for instance, the company’s earnings per share (EPS) rose from ¢8 to ¢14. By my calculation, this results in a compound annual EPS growth rate of 11.8%. I find this both consistent and attractive. However, it’s not necessarily an indication of future earnings growth.

What’s more, the business has been focusing on the expansion of its mining and production capabilities. In August, the firm secured a permit to increase exploration activities in the potentially lucrative area of Goiás state, Brazil. 

Furthermore, it’s upgrading the Mara Rosa project in that region. This should lead to greater efficiency in gold production in the coming years.

Overall, I’m looking beyond very recent results when considering an investment in Hochschild. It has exhibited strong earnings growth over the last number of years and is focused on expansion.

In the past week, the silver price has also shown signs of a more bullish nature, and this can only be good news for the company. I’ll be adding some shares to my portfolio soon.  

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.

Andrew Woods 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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