These 2 gold stocks are ridiculously cheap

Over the years I’ve come to form the opinion that investors generally have a love/hate relationship with mining stocks. On the one hand huge profits can be made during the boom phase of a commodities cycle, if timed correctly of course. And on the other hand the political risks that often come with operating in less stable countries means that some investors feel more comfortable shunning mining firms altogether.

Export ban

A good example of the latter comes in the shape of Acacia Mining (LSE: ACA). Things seemed to ticking along nicely for the Tanzania-focused gold miner, which earlier this year reported a 21% uplift in full-year revenues for 2016 at $1.05bn, with earnings of $415m more-than-double those reported for the previous year. But less than a month after announcing such glittering results, the FTSE 250-listed miner was hit by a ban imposed by the Tanzanian government on the export of gold/copper concentrate.

Acacia happens to be Tanzania’s largest gold miner with gold/copper concentrate accounting for 30% of group revenues. Little surprise then that the company’s share price fell sharply following the announcement back in March. Unfortunately this was just the start, as the share price plunged further in May after a presidential committee accused the London-listed miner of grossly under-reporting the value of its gold exports.

Licking their lips

The Tanzanian government has agreed to hold talks with Acacia’s majority shareholder Toronto-based Barrick Gold, the world’s largest gold mining company. No doubt management will be keen for Barrick to help resolve the dispute as quickly as possible, with estimates suggesting the company is losing $1m a month as a result of the continued export ban.

On Friday, it confirmed that it would be willing to pay a higher royalty payment of 6% to the Tanzanian government, up from 4%, as well as the recently imposed 1% clearing fee on exports, in the interim in a bid to minimise further disruptions to operations. But this dispute if far from over, and I believe the direction of the share price hinges on the outcome of the ongoing discussions between Barrick and the Tanzanian government.

The shares are now trading at a 45% discount to a year ago, and look remarkably cheap at below 10 times forecast earnings. Brave contrarians might well be licking their lips at a potential recovery play, but this is certainly not one for the faint-hearted.

A safer alternative?

Perhaps a less risky alternative to Acacia could be Polymetal International (LSE: POLY). The Russia-focused gold and silver miner is also trading on a very attractive-looking valuation with earnings forecast to rise by 34% over the next two years.

In its latest trading update it reported increased gold production during the first quarter of the year following recent acquisitions and it remains on track to deliver its production and cost targets for the full year.

The recent pull-back in the share price means the shares are trading a fifth lower than a year ago and look good value at just 10 times forecast earnings for 2017. A near 5% dividend yield should also help to add a little sparkle to the investment case.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.