Gold mining company Acacia (LSE: ACA) has today released an operations update. It has sent the company’s shares downwards by 10%, but could offer guidance as to whether Acacia is now a better buy than mining sector peer Rio Tinto (LSE: RIO).
Acacia’s shares have fallen heavily because of continued disruption to its production. Part of this was pre-planned, but further challenges were unexpected and have therefore caused investor sentiment to come under pressure.
For example, the two-week shutdown of Acacia’s vertical shaft at Bulyanhulu for refurbishment and modernisation was planned. However, Acacia has been unable to run the plant consistently since the shutdown. That’s because of repeated overheating of the ball mill trunnion bearing. At the moment, there’s no set timeline for the asset coming fully back onstream.
Clearly, this is disappointing for Acacia but nevertheless, it has maintained guidance for the full year. It’s expected to return to profitability this year and then record a stunning rise in earnings of 50% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which indicates that it offers growth at a very reasonable price.
Despite the risk involved in buying a mining company such as Acacia in terms of commodity price falls, gold miners provide a useful hedge against a deteriorating outlook for the global economy. With US interest rates now unlikely to rise at a rapid rate following weak economic data and the US election just around the corner, it wouldn’t be a surprise for the gold price to rise over the coming months. In this situation, Acacia would be likely to rise and with its shares being cheap, there’s significant scope for it to do so.
A better buy?
However, Acacia lacks the financial strength and diversity of sector peer Rio Tinto. Rio Tinto’s balance sheet and cash flow mean that it should be able to outlast the vast majority of its sector peers should commodity prices fall. And with it having an ultra-low cost base, Rio Tinto’s long-term profit outlook is highly positive.
Unlike Acacia, however, Rio Tinto isn’t expected to deliver stunning growth over the next couple of years. Its bottom line is due to flatline next year, but its exposure to a wide range of commodities means that its risk profile is more appealing than that of Acacia. Furthermore, its new CEO is likely to attempt to diversify the company to an even greater extent, which should provide a more stable and consistent level of profitability in future years.
Of course, demand for iron ore has come under pressure due to the economic challenges experienced by China. Demand for steel could stay below previous levels due to the country’s gradual transition towards a more consumer-focused economy. But with infrastructure growth likely to remain high across the emerging world, Rio Tinto should be able to deliver strong profit growth in the coming years. Allied to its stronger finances and greater diversification, this makes it a better buy than Acacia at the present time.
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Peter Stephens owns shares of Rio Tinto. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.