Up 154% in a year! Is this the best UK penny stock to buy?

Metals Exploration is a penny stock company that mines gold in the Philippines. I think it could become a key player in the gold mining industry.

| More on:
British Pennies on a Pound Note

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m researching penny stocks and Metals Exploration (LSE:MTL) is a UK-based company that’s risen 154% over the past year, climbing from 1.6p to 4p since last March.

The £85m mining company identifies and extracts precious metals and base metal deposits in the Philippines. Headquartered in London and operating since 2004, the company has been struggling to reach the highs it enjoyed in the early days.

Back in 2006, the share price climbed as high as 47p. The following years were very volatile but by 2013 it had fallen below 10p and by 2019 it was under 1p.

A turning tide

The company recently finalised a share purchase agreement that could turn its fortunes around. The purchase would give it a controlling share of Yamang Mineral Corporation (YMC), a firm that holds prospecting rights to the 16,000ha gold-rich Cordillera area of the Philippines.

Mining is expected to begin in the second half of 2024 pending agreements with local communities and initial exploration efforts.

“If we have the exploration success we are targeting, we aim to focus on developing a high-grade, smaller-scale gold production-ready project as soon as possible,” said interim chairman Steven Smith.

The share price has been rising steadily since news of the agreement first surfaced in late January. It’s now at its highest level in seven years and is predicted to continue climbing.

Financials

Independent analysts estimate Metal Exploration shares to be undervalued by as much as 76%. This is likely based on the company’s impressive performance so far, with earnings growing at an annual rate of 68% — seven times the industry average.

That’s helped push its profit margins to 28.7%,  up from 4.9% last year. Using a discounted cash flow model, we can see that the undervaluation thesis is supported by a forward-looking price-to-earnings (P/E) ratio of 2.4 times.

But growth like that comes at a price.

Metals Exploration has spent the past few years climbing out of a deep debt hole. Only recently did its debt-to-equity (D/E) ratio drop below 1, putting it in a stable position.

Back in June 2021, the company was drowning in debt 33.6 times higher than its equity. It now holds £54.2m in equity and only £49.3m in debt. That’s an impressive turnaround — although still risky as it’s a fairly high level of debt for an £85m company.

Metals Exploration penny stock D/E ratio
Created on TradingView.com

Gold demand

To evaluate a business’s future prospects we need to consider demand for its products. Looking at the broader gold mining industry, demand has remained relatively stable over the past 10 years, barring a minor dip in 2020 during Covid.

Gold is one of the most precious metals in the world – thought to be the first metal discovered by humans. With such a long history, it’s unlikely demand will reduce in the near future. Should Metals Exploration continue to secure valuable gold deposits, it will be in a good position to benefit from this industry.

Current forecasts still expect revenue and earnings to decline by 11.4% and 23.6% per year, respectively. However, if the new Cordillera mine proves profitable, I expect these figures to turn positive.

For now, I’m putting Metals Exploration on my penny stock watchlist with the intent to buy if the forecast improves.

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.

Mark Hartley 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.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »