Is this cheap 4% yielding gold-mining penny stock a buy for me?

Oliver Rodzianko has found a penny stock he thinks could be appealing for him to buy. Here are the risks and rewards he’s outlined.

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Finding a new penny stock can sometimes be a great opportunity for me. Often, it’s like finding a diamond in the rough. The company I’ve found has a gold mine in Egypt, which is its main asset. But it also has operations in Burkina Faso and Cote d’Ivoire.

Business overview

The organisation is called Centamin (LSE:CEY). In 2024, it has a gold production expectation of around 485,000 ounces, significantly increasing its previous output.

Since 2009, it has produced over 5m ounces of gold at Sukari, its Egyptian mine. The operation has an expected lifespan extending to 2035.

The firm also wants to improve its carbon footprint and aims to reduce its greenhouse emissions by 30% by 2023, compared to 2021.

What I like about it

The company has good margins and revenue growth, which makes me initially confident when considering buying the shares at 60% below their high.

I’m not too worried that the price has been down so much since August 2020. The reason is that part of why I think it fell is due to an overvaluation at the time. Thankfully, the investment is selling at a price-to-earnings ratio of around just six right now.

Coupled with its net margin of 9.2%, better than 75% of companies in its industry, and its revenue growth per year of 9% over the last three years on average, I feel quite confident in buying it at first glance.

The main risks I’ve noticed

However, Centamin is currently paying out 79% of its earnings as dividends. While that might be good for passive income investors, it means the organisation isn’t reinvesting as much money as it could be in growing its operations.

Additionally, any political instability in Egypt can affect the firm’s operations. Roadblocks could include a more challenging regulatory environment and limits on its export of gold. There are also potential disruptions from labour disputes, environmental hazards, and geological disruptions.

How I’m considering it

I think a dividend yield of 4% is quite low considering a 10-year track record that’s not so great in terms of its share price. Therefore, I’m not certain this is the greatest long-term investment.

There’s actually some instability in the company’s long-term earnings growth, which is really a deterrent to me. This makes some valuation estimates look less promising. That’s even considering higher analyst earnings estimates for the next year.

Don’t get me wrong, that 4% yield is nice, but I’m uncertain these shares will appreciate in price in line with an index like the S&P 500.

It does have a strong balance sheet and a lot of positives for me to consider. However, at this time, it’s not going on my watchlist because I can’t see myself holding it for 10 years or more.

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.

Oliver Rodzianko 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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