Metals Exploration (LSE:MTL) is a barely-known penny stock that I think has potential to deliver my best ever gains.
The AIM-listed gold explorer trades for 2.7p per share as of 21 February 2024 — that’s tiny.
But having done the digging, I see record profits in its financial statements. And one of my preferred value metrics is flashing a buy.
Any price-to-sales (P/S) ratio of less than one is considered good value. Metals Exploration is trading on a P/S ratio of 0.46.
Mining for gold
The business is the sole owner of the Runruno gold mine in the Philippines. And the company is expanding.
CEO Darren Bowden announced in January 2024 the company is taking a 72.5% stake in YCM. It owns the rights to the Abra tenement, a 62 square mile gold development 130 miles north of Runruno.
Historically the region has produced over 40m ounces of gold.
Profit with purpose
This year Metals Exploration forecasts profits five times higher than any year since 2017, at $58.5m (£46.4m).
When the FTSE 100-obsessed market wakes up to this fact, it could send the company share price soaring.
The other thing I really like is an extraordinarily high return on capital employed (ROCE). This is a measure of how much money the company produces from what it spends. In the last 12 months the miner has produced an 86% ROCE.
Its fourth-quarter results to 31 December 2023 also show record annual positive free cash flow of $72.3m (£57.3m). And earnings per share are slated to jump from 0.45 cents to 2.40 cents.
Resulting facts
The most recent Metals Exploration half-year results to 30 June 2023 show:
- Record operating profit, up 231%
- Record gold production, up 45%
- Debt reduced by 47%
When I last looked at Metals Exploration, I found net debt of $92.9m too high to consider an investment. Paying that down to $48.8m feels a sensible move.
Factor the risks
At this end of the market, there is lower liquidity — fewer buyers and sellers. There’s some currency risk here too: the company also reports its earnings in US dollars. And net debt is certainly a factor.
But adding new licenses to its stable of mining operations looks like a solid move to me. And a price-to-earnings ratio of just two suggests either:
- The market has low confidence in the stock
- The market is dramatically mispricing the stock
I’m leaning towards the latter. Its annual revenue of £125m is more than double its £55m market cap.
And from less than £1,000/oz in 2017, gold is now selling for over £1,600/oz. So the high current market price of gold will boost everything from profits to the ability to pay down debt.
Smaller is better
Investor James O’Shaughnessy famously touted “tremendous returns” from tiny stocks. This strategy is higher risk, but produced an annual compound return of 20.05% over 40 years.
The FTSE 100 has returned an average of 6.9% a year over the same period.
I know from experience that penny stocks can massively outperform. But only if I pick on the basis of booming profits and strong management.
