Don’t you just love gold and other precious metals? Actually, I’ve never really understood the desirability of them myself. To me, gold just seems like a useless yellow metal that’s not even especially attractive, and it doesn’t have the tangible value that underlies truly great investments.
But I can’t deny the profits it’s possible to make from gold and silver.
A storming performance
And even I can’t argue with the 150% rise in Hochschild Mining (LSE: HOC) shares over the past 12 months — or their six-bagger status since their low point of January 2016.
Hochschild, which mines for silver and gold mainly in Latin American countries, has been running at a loss for the past few years but has just reported a return to profit for the year ended December 2016. With revenue of $688.2m (up from $469.1m) and adjusted EBITDA reaching $329m (from $138.8m), the firm turned 2015’s pre-tax loss of $256.2m into a pre-tax profit of $108.3m. And it reversed a 14 cents per share loss to earnings per share of 11 cents.
The suspended dividend was reinstated, at 2.7 cents per share for the year — only a 1% yield, but it should be indicative of future rises.
Getting debt down has been the order of the day, and the company repaid a total of $127.4m in 2016 with a further $25m repaid in February 2017. As of December, Hochschild’s net debt-to-adjusted EBITDA ratio stood at 0.57 times, which is a lot more manageable than the 2.5 times recorded a year previously.
Chief executive Ignacio Bustamante called it an impressive performance, saying it was “driven by a first full year from our flagship Inmaculada mine, a strong overall cost performance and a more favourable pricing environment.“
Where will Hochschild go from here? Analysts are forecasting a big EPS rise over the next two years, and if they’re right we should see the P/E drop to around 16 by 2018. Depending on where the prices of silver and gold go, and on your appetite for unpredictability, that could still be a bargain.
If you prefer to focus just on gold, the Africa-based Randgold Resources (LSE: RRS) has rewarded shareholders with a near doubling since September 2015 to 7,015p — though the performance going back further has been decidedly bumpier.
Again we’re looking at a recovery situation, and after three years of falling earnings we finally saw a return to EPS growth in 2016 with further rises forecast for 2017 and beyond. The company said it “increased production for the sixth successive year in 2016 while reducing total cash cost per ounce.” And the stronger price of gold in 2016 certainly helped too — leading to a 38% profit increase to $294.2m and a 52% hike for the dividend.
Debt isn’t a problem for Randgold. In fact, the firm ended the year with no debt and with $516.3m in cash.
Investing in gold mining shares is taking a bit of a gamble on the price of the shiny stuff, and though we’re looking at a price of around $1,200 per ounce at the moment, that’s about the same as it was seven years ago after reversing the huge spike that came along in between.
But Randgold does have a decent safety buffer in its total cash cost per ounce of $639, and we’re heading for a few years of political and economic uncertainty. Randgold could do well for you.
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Alan Oscroft 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.