Given the negative correlation between the price of the precious metals and stock markets in general, having at least a proportion of your capital invested in companies focused on extracting and selling the shiny stuff can be a smart move in times of economic uncertainty.
That said, investors still need to tread carefully. For evidence of this, just look at what’s happened to the share price of one mid-cap this morning.
Not so golden?
Gold and silver miner Hochschild Mining (LSE: HOC) has performed brilliantly for risk-tolerant investors over the last 18 months or so. When commodities dipped across the board back at the beginning of 2016, you could pick up its shares for just 40p each. Fast-forward to yesterday and the very same stock was trading at 330p.
Today, however, this great run of form has come to a grinding halt with shares falling over 15% in early trading. It would appear that the company’s latest set of interim numbers has given investors the jitters.
Although H1 revenue for the six months to the end of June was almost exactly the same as that achieved over the same period in 2016 ($341m), pre tax profit came in at $40m — far lower than the $60m achieved a year ago, thanks to higher costs.
Clearly, the message that Hochschild had delivered a “robust operational performance” wasn’t heard by the market. That’s despite the company stating that it was on track to deliver record production of 37m silver equivalent ounces in the current financial year, to continue to make progress at its Pallancata deposit once permits arrive, and to ramp up its drilling programme at several brownfield sites over the remainder of 2017.
Safety in size
With a market cap of £1.4bn, Hochschild certainly isn’t the smallest gold miner on the market. Nevertheless, FTSE 100 constituent Randgold Resources (LSE: RRS) still towers above it. Does this make the latter a safer bet?
Quite possibly. Thanks to its relatively low break-even price, Randgold has shown an ability to remain profitable during commodity slumps — something that can’t be said for all of its listed peers. What’s more, recent Q2 and half-year results compare favourably to those issued by Hochschild this morning.
Profit of $103m over the last quarter was 21% higher than that achieved in Q1 with half-year profits 53% greater (at $188m) than over the same period in 2016. Production levels were 16% larger than at this time last year, while total cash cost per ounce declined by 13% to $595.
Although a valuation of 29 times forecast earnings means that shares in Randgold are undeniably pricey, they’re still cheaper to those of its smaller peer. At 2%, the forecast dividend yield is also more than double that being offered by Hochschild.
In addition to this, Randgold’s finances look in far better shape. Over the six months to the end of June, the former’s cash pile grew to just under $573m. While the $145m of cash currently on Hochschild’s balance sheet is hardly inadequate, it’s still significantly less than the $630m it had six years ago. Free cash flow per share also looks healthier at Randgold.
While the temptation to grab a ‘bargain’ can be strong, I’d be inclined to go for size and balance sheet stability when it comes to investing in this part of the market. As a result, I’ll be avoiding Hochschild.
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Paul Summers 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.