In today’s article I’ll ask whether the green shoots of recovery are starting to show in the gold and diamond mining sectors.
Are there any buying opportunities among these companies?
By slashing capital expenditure and focusing on the highest-grade areas of its mines, Russian gold miner Petropavlovsk (LSE: POG) has become highly cash generative. Last year’s refinancing reduced the firm’s net debt to $707m at the end of March. Since then, cash generated from operations has enabled the firm to reduce its net debt by a further $90m, to $610m.
The group’s production is expected to be flat or slightly lower in 2016, at 460,000-500,000 ounces. However, unless the price of gold rises above its current level of $1,099/oz, Petropavlovsk’s average sale price may fall slightly from last year’s $1,178/oz. The group’s hedging coverage is coming to an end and will only cover about 15% of this year’s production at $1,116/oz. The rest will be sold at market prices.
The bullish view on Petropavlovsk is that the group’s falling debt should drive steady share price growth. However, there are risks. Petropavlovsk will eventually have to spend more to maintain its production capacity, while the pace of debt reduction could slow if the price of gold fails to rise.
Diamond miner Petra Diamonds (LSE: PDL) looks quite cheap on a 2015/16 forecast P/E of 10.9, falling to 5.2 for 2016/17. The shares also offer an appealing forecast yield of 3.1%, rising to 5% next year.
The question is whether the firm can deliver. Petra said today that sales during the final six months of 2015 were $154m, 28% less than during the same period of 2014. Today’s figures also suggest that the group has a lot of catching up to do during the next six months if it’s to hit full-year revenue forecasts of $417m.
Petra’s production rose by 2% to 1,629,403 carats during the last six months. The group says that its calendar of diamond sales is more heavily weighted to the second half of its financial year, which runs to the end of June. This means sales should be significantly higher over the next six months, giving Petra a chance of meeting its full-year forecasts.
Petra shares have edged higher this morning, suggesting the City agrees with the firm’s outlook.
Egypt-based gold miner Centamin (LSE: CEY) is a rare beast — it’s a low-cost gold miner with rising net cash and stable profits.
The group’s legal troubles — which at one point appeared to threaten the loss of its mining licence — are still rumbling on. However, they now seem so far in the past that I suspect many investors have forgotten about them.
Is this wise? I’ve no way of knowing how the legal case against Centamin will be resolved. Past reports did suggest that the original case was politically motivated, and that a shift to a friendlier regime has neutralised the threat to the company. But there is still some risk.
Centamin stock trades on a 2015 forecast P/E of 13, falling to 12.2 for 2016. The shares offer a 2.6% forecast yield. With all-in sustaining costs of just $900 per ounce of gold, Centamin should remain profitable. I think the shares are fully valued and probably rate as a hold.
However, the outlook for the wider mining sector remains uncertain. There could be more profitable opportunities elsewhere in today's market.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.