I always keep an eye on the big movers among FTSE stocks. Any shares that are up 100% or more over the course of a year usually have some good reasons behind it. It could be related to high growth, an acquisition, a transformation, or something else.
But sometimes, a rally can be fuelled by little actual reason and make it overvalued. Here’s one case that I think investors need to watch out for.
Reasons for the jump
I’m talking about Hochschild Mining (LSE:HOC). The performance of the stock has been strong and does have some fundamental reasons behind it that can be flagged up.
The company focuses on the exploration, mining, processing, and sale of gold and silver in the Americas. Therefore, the price of gold and silver heavily impact the performance of the business. Particularly over the past six months, both precious metals have soared in value. Silver recently hit the highest price since 2021, with gold going one step further and hitting all-time highs last month.
Further, the first Brazilian operation gold mine for Hochschild successfully came online in March. It has the potential to produce between 83,000 and 93,000 ounces of gold a year. If this can indeed be achieved, the revenue benefit could be large.
Due to the jump in the share price following this news, I think some investors are already building expectations of this in their minds.
A bit of hot air
Some think that the stock is becoming a bit of a joke. I’m inclined to agree with them, based on a few factors.
The boost due to the increase in gold and silver prices is great, but it all depends on production levels. The 2023 report showed that during the year, gold production was down 10% versus 2022, with silver down 14%. It doesn’t really matter what the price is if the company isn’t producing as much as it can!
Another point is the fact that the firm actually lost money in 2023. This is put down to exceptional items, which included impairment charges taken on various different projects. I’m used to seeing impairments on one location, but to have it (in the tens of millions of dollars) on Azuca, Crespo, and San Jose isn’t great. It also had to write down the value of other investments.
Further, I don’t see this as a growth company that is really pushing on with momentum. After posting revenue of $811.39m in 2021, the business has shrunk revenue in the past couple of years. It’s now down to $693.72m. Granted, new mines and projects can help to raise revenue going forward, but it’s not a great sign for long-term investors.
Bringing it all together
If I wanted to get exposure to a mining stock, I think there are much better options out there. For example, I own shares in Glencore. Hochschild Mining is certainly a hot stock right now. But I don’t really get the reasons for all the hype, so I will be staying away.
