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This small-cap has turned £5,000 into £32,500. Time to buy?

Today I’m looking at two small-cap stocks that appear to be attractively cheap. One company trades at little more than its breakup value.

My second company has a single-digit price/earnings ratio, despite having delivered a 560% share price rise since April 2016.

Trouble down the pit

Not so long ago, mining firm Petra Diamonds Limited (LSE: PDL) was a FTSE 250 stock. The group, which owns the famous Cullinan mine in South Africa and also operates in Tanzania, has been trying to expand over the last few years. But the company has faced a number of headwinds and has now cut its guidance for the year ahead.

In a trading update today, Petra said that production had been suspended in a section of its Finsch mine, due to unstable rock conditions. As a result, the firm has cut its 2019 production guidance from 5.0m-5.3m carats to 4.6m-4.8m carats.

The group’s 2018 revenue is expected to be broadly in line with expectations, at about $577m. But costs seem likely to be higher than expected, due to adverse exchange rate movements and lower-than-planned mine production. I believe full-year profits may now be lower than current forecasts suggest.

Bargain buy or value trap

In its half-year results in February, Petra Diamonds reported a tangible net asset value of about 51p per share. The stock was trading at about 48p at the time of writing, so the shares look cheap relative to the value of the firm’s assets.

They also look cheap relative to 2019 forecast earnings, which suggest a forward price/earnings ratio of just 5.2.

My concern is that we could still see more bad news. Net debt remains high at $436m, despite Petra raising $178m in a rights issue earlier this year. And the company is still locked in a costly tax dispute with the government in Tanzania.

In my view, these risks make the stock a potential value trap, and one to avoid.

Chairman says “stay tuned”

Shares of China-focused zinc and gold miner Griffin Mining (LSE: GFM) have risen from a low of 21p in February 2016 to more than 140p at the time of writing. Shareholders who’ve been on board for this ride have seen gains of about 560% over this period, turning a £5k investment into a £32.5k position.

Supporters of the stock say that it’s still cheap, thanks to a debt-free balance sheet and the long-awaited award of a mining licence to expand into a new zone of its Caijiaying Zinc-Gold Mine.

Expectations are high among shareholders, but of course it will take a period of time and some expense to develop this section of the mine and bring it into production.

A good China stock?

AIM-listed companies operating in China have had a bad reputation in recent years. But Griffin has been listed in London since 1997 and appears to be profitable and well run.

One risk is that the firm’s operations are centred on just one mine. So if political or operational problems stopped mining, revenue could crumble.

However, Griffin shares currently look cheap on a 2018 forecast P/E of 7.7. There’s also a forecast maiden dividend yield of 0.7%. This yield is expected to rise to 2.4% in 2019, giving long-term shareholders the prospect of a growing income.

This stock isn’t without risk, but it may be worth a closer look if you specialise in mining shares.

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Roland Head has no position in any of the 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.