Should you own gold in your investment portfolio? Personally I’m not keen on the solid stuff, which requires secure storage and generates no income. But I’m happy to buy shares in well-run gold miners, which can provide attractive income and capital gains.
Today, I want to look at two of the best-known UK-listed gold miners, FTSE 250 firm Polymetal International (LSE: POLY) and its smaller rival Petropavlovsk (LSE: POG).
A hidden bargain?
Russia-based Petropavlovsk trades at a tempting 40% discount to its net asset value of around 14p per share. But the company has experienced a turbulent few years. Problems have included a debt crisis in 2015 and boardroom coups in 2017 and 2018.
Founder Dr Pavel Maslovskiy is now in charge of the firm again and appears to have taken steps to improve performance. Figures released today show the company’s total cash costs fell from $899/oz during the first half of the year to just $650/oz in H2.
As a result, the group’s financial performance improved considerably during the period and Petropavlovsk generated a pre-tax profit of $82.4m last year, compared to $48.9m in 2017.
More importantly, net cash generated by the group’s operating activities rose from $124m in 2017 to $217m in 2018. Is this troubled business finally on the road to recovery?
I’m not so sure
Petropavlovsk’s share price fell when markets opened today. I can see why. The firm’s latest guidance suggests the cost reductions seen during the second half of last year won’t be sustainable. Total cash costs are expected to rise to $850-$950/oz in 2019, compared to $786/oz in 2018.
A second concern is that the firm’s true operating costs may be higher. When looking at miners’ costs, I prefer to use the industry-standard measure of all-in sustaining costs. This takes a broader view of the spending needed to maintain production. It includes capital expenditure on existing mines and administration costs, for example.
Petropavlovsk’s all-in sustaining costs rose from $963/oz to $1,117/oz last year. The firm hasn’t provided guidance for 2019 but, based on the expected rise in cash costs, I’d expect the all-in figure to rise further.
That could be a problem. Based on the current gold price of $1,267 per ounce, I feel Petropavlovsk could struggle to make a sustainable profit in 2019. In my view, these shares are cheap for a reason. I’d avoid them.
My top gold buy
My top pick among UK-listed gold miners is Polymetal International. This much larger FTSE 250 firm enjoys significantly lower costs and more stable profits than Petropavlovsk.
Polymetal’s total cash costs for 2019 are expected to range $600-$650/oz., while all-in sustaining costs are expected to be $800-$850/oz. These figures leave plenty of room for profit on a gold price of about $1260/oz.
I believe shareholders should continue to enjoy attractive returns from this business, which generates plenty of cash. Underlying earnings are expected to rise by 9% this year, while City analysts have pencilled in a 14% increase to the dividend.
These projections value Polymetal shares on 10 times forecast earnings, with a dividend yield of 5.3%. In my view, that’s decent value for a company with a solid track record of delivery. I rate the shares as a buy.
