It’s been a tough year for investors in FTSE 350 gold stocks. The price of the precious metal has fallen from $1,320 at the start of the year to around $1,210.
As a result, the share price of FTSE 100-listed silver and gold miner Fresnillo (LSE: FRES) has declined by 30% since the start of the year, while FTSE 250-listed Centamin (LSE: CEY) and Hochschild (LSE: HOC) have fallen by 27% and 35% respectively. They are therefore the FTSE 350’s worst-performing gold shares of 2018. Looking ahead, is there recovery potential?
Fresnillo: changing production guidance
Of course, the best time to buy any asset is when few other investors want it. That situation could now be present for gold, as it is unpopular and many miners have seen their valuations fall. For example, Fresnillo has a price-to-earnings growth (PEG) ratio of 1.4, with investors having been disappointed with its reduction in silver production guidance for the full year. Although this is being offset by higher than expected gold production, it could mean there is added volatility in the company’s share price in the near term.
Overall, though, the company’s production and financial performance are on track for the full year. With it having invested heavily in new operations which are set to offer increasing production over the medium term, the stock could have strong turnaround potential. Its plans to raise dividends per share by 12% next year could make it more appealing to a wide variety of investors, since it is due to have a dividend yield of 2.4%.
Hochschild: share sales hurt sentiment
Meanwhile, silver and gold miner Hochschild’s PEG ratio is just 0.2. The company’s share price has been hit by aggressive selling from a major shareholder, with this having significantly hurt investor sentiment in recent months. In the near term, the stock could come under further pressure from additional sales, with a falling silver price also hurting its overall outlook.
However, Hochschild is still on track to meet production guidance for the full year. Its cost base remains relatively low, and this could mean it is able to offer impressive growth even during a period of lower precious metals prices. With the company having an asset base which offers a degree of diversity and growth potential over the long run, it could offer a favourable risk/reward ratio relative to its industry peers.
Centamin: production disruption to end?
Centamin’s PEG ratio of 0.7 suggests that it may also be undervalued. It has experienced production disruption in recent months, which has contributed to its share price fall. Indeed, the first half of the financial year has been disappointing for the company, with gold production declining by 25% in the second quarter.
However, it remains on track to meet production guidance for the full year, with the company expecting a significant ramp-up in production in the second half of the year. Although it is reliant upon the Sukari mine, the asset offers significant production potential over the long-term, as well as a relatively stable political outlook. Alongside a dividend yield of 3.8% which is covered 1.6 times by profit, its overall return prospects seem to be high.
With the potential for a full-scale trade war between the US and China, investor sentiment could easily come under pressure in future. In such a scenario, gold shares such as Fresnillo, Hochschild and Centamin could become increasingly popular after what has been a disappointing 2018 (so far).
Peter Stephens owns shares of Centamin and Fresnillo. The Motley Fool UK has recommended Fresnillo. 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.