Investors looking for value in underpriced shares are often drawn to the mining sector. Shifts in commodity prices swing dramatically from year to year. The cyclical nature of these ups and downs can create opportune times to buy in at a cheap price. Many investors look towards the big FTSE 100 names like Rio Tinto and Glencore, which have had starkly cheap entry points over the last decade. But smaller firms like those on the FTSE 250 can offer similar rewards for those looking to sniff them out.
Safe havens
One of those to catch my eye recently is Hochschild Mining (LSE: HOC). The headquarters of the gold and silver miner is in Peru but its corporate office and listing are in London. The FTSE 250-listed stock is on a tear this year with a share price that doubled in the last six months. No other stock on the index can match its performance, dividends excluded.
Miners like Hochschild offer a curious investment case due to the nature of the metals they dig up. Gold and silver are considered ‘safe haven’ assets. Their prices rise as global tensions or conflict worsen, which can provide a useful hedge in case things start to go south.
Investing in a miner of such metals offers this hedge-like protection, while also providing the advantage of owning a company that might grow and expand, which metals don’t tend to do.
The shares have been swinging wildly in the last decade or so even compared to companies used to relying on the changing prices of commodities.
The shares hit lows of 41p in 2016 and 54p in 2022, while also hitting highs of 301p in 2022, 331p in 2017, and 581p in 2011. It’s been stormy sailing for the shares and it does make me wonder what value is in the shares at present.
Turnaround
The current story is one of a turnaround after a fairly disastrous 2023. The firm posted its first loss in years after a write-down on a mine in Argentina and $80m impairment charges on various other projects.
The firm accrued a substantial debt on construction of its new Mara Rosa open pit gold mine in Brazil. All this while civil unrest in Peru was hampering operations there too.
Now, Mara Rosa has begun producing and a resumption in the dividend is expected. The situation is Peru looks more stable. The firm received a 20-year permit for its flagship Inmaculada mine. And a new brownfield project in Brazil has been earmarked for further exploration.
Is it worth a buy then? Well, since its last year was loss-making, it is trickier to value. Ignoring earnings and looking at purely at revenue gives us a price-to-sales ratio of 1.8.
A discounted cash flow analysis suggests a fair value of 305p against the current 184p share price, offering a possible 39.8% undervalue. All told, I think it looks attractive. I’ll add the stock to my watchlist.
