A gold and silver gem

Fresnillo is the world’s leading silver producer and one of Mexico’s largest gold producers. It has a near 500-year history of mining precious metals in South America. Its mining concessions extend to approximately 1.7 million hectares where it operates both underground and open pit mines.

In 2021, revenue was $2.8bn, representing a 9% increase on the previous year. This was mainly down to average realised silver prices, which rose 16% during the year.

It possesses a rock-solid balance sheet. Its earnings before income tax depreciation and amortisation (EBITDA) stands at $1.2bn. With a net debt of $1.1bn that means its net-debt-to-EBITDA ratio is negative.

Silver – a versatile metal

Like its more expensive cousin gold, silver is predominantly viewed as a monetary metal. However, it also has many industrial applications too. With the greatest electrical and thermal connectivity of all metals, silver is a key component in solar panels, semiconductors and electric vehicles.

Decarbonisation of the global economy together with the ‘internet of things’, in which hundreds of billions of physical devices are connected to the internet, are two unstoppable megatrends that should ensure silver remains in high demand well into the future.

Silver also acts as an inflationary asset. In the early 1980s, when inflation was rampant, the price of silver hit $50 an ounce. More recently, during the Covid crash, silver prices rose as the general stock market tanked.

What I like about silver is that the metal looks historically undervalued relative to other commodities, including gold. That’s why I have been buying shares in Fresnillo over the last few months as I don’t know when it’s likely to bottom. But in light of the structural forces highlighted above, it’s a fair bet that Fresnillo’s share price should be higher in the long term.

Challenging environment

As one would expect of a cyclical commodities business, Fresnillo’s dividend has ebbed and flowed over the past decade. However, it has increased its dividend for the past three years. Its policy is to pay out between 33% and 50% of profit after tax each year. In 2021, the payment was $245m.

Like so many mining companies, Fresnillo has been particularly impacted by soaring energy prices, which it relies on to fuel its transport fleet.

And last year, the Mexican government introduced a law that prohibited the use of contractor labour. This hit the business particularly hard. Long term though, it’s likely to provide it with greater operational resilience.

Overall, I believe that the prospects for the company are good. Later this year, a major new mine, Juanicipio, comes on-line. This will boost gold and silver production significantly. As Fresnillo’s share price languishes at multi-year lows over recessionary fears hitting silver demand, I recently bought more shares for my Stocks and Shares ISA.

The post Why Fresnillo is one of the best UK shares to buy now appeared first on The Motley Fool UK.

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Andrew Mackie has positions in 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.

So why did the FTSE 250 gold miner’s share price crash? And what should an investor do about it?

Centamin: Reduced production outlook

The reason behind the miner’s share price tumble today is that the company has announced it is reducing its production forecast for the fourth quarter of 2020.

In an operational update, Centamin advised that it has detected movement in a localised area of waste material in its Sukari mine. As a result, it has decided to immediately defer open pit mining operations in this zone. This decision is a preventative measure to protect the health and safety of its workforce and the long-term potential of the Sukari gold mine.

It expects that production for the fourth quarter will be reduced to approximately 70,000 ounces. That compares to preliminary gold production for the third quarter of approximately 120,000 ounces.

Gold stocks are a risky way to invest in gold

This update today from Centamin is a great example of why I don’t invest in gold stocks and generally advise investors to steer clear of them.

Gold stocks like Centamin can perform well when the gold price is rising. The higher the gold price, the higher the potential profits for a gold miner. But there’s no guarantee they will perform well. This is because there are so many moving parts to a gold mining company from an operational point of view. So many things can go wrong. 

All it takes is one operational blip, like we have seen today from Centamin, and the share price of a gold mining stock can crash 20% or more in the blink of an eye. A setback or delay in production can result in nasty losses for investors, even if the gold price is rising.

I learned this the hard way. A little over a decade ago, I owned a number of gold mining stocks. Most turned out to be very poor long-term investments. Today, I avoid the sector completely.

Better ways to make money from shares

If you’re looking for growth stocks, my suggestion is to forget about gold mining stocks and focus on stocks in other sectors of the market. Gold stocks are just too unpredictable.

One sector that offers a lot of attractive opportunities right now is technology. Many UK tech companies are benefiting from the digital revolution the world is experiencing. Some names that stand out to me in this sector include ASOS and Boohoo, which are both benefiting from the shift to online shopping, and Softcat and Gamma Communications, which are both benefiting from the work-from-home trend.

In my view, these kinds of highly profitable businesses are much better long-term investments than gold stocks such as Centamin.

The post Centamin’s share price just crashed. Here’s what I’d do now appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in ASOS, Boohoo, Softcat, and Gamma Communications. The Motley Fool UK has recommended ASOS, boohoo group, and Softcat. 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.

Why are people investing in gold?

Gold is a hedge against uncertainty and inflation. Traditionally in volatile markets, investors pile in and buy the metal because it’s considered to maintain its store of value if the value of money drops. Currently, the economic uncertainty surrounding Covid-19 is stimulating gold demand.

In addition, persistently low bond yields reinforce this response to uncertainty and inflation. With inflation rising, investors in gilts and other government bonds will likely lose money over the longer term. Hence, gold is a very attractive investment. And with $14t of global debt carrying a negative yield, many investors believe gold prices will continue to climb.

Moreover, if the gold price is high, so are the margins of mining stocks. The Greatland Gold share price explosion is a good example. And investing in gold miners offers advantages over buying the commodity directly.

The advantages of mining stocks

Mining stocks have three main advantages over buying physical gold.

Firstly, their strategies can be adapted to suit the changing environment. Gold production can be ramped up or down as required.

Secondly, profitable gold miners may pay a dividend, whereas gold transportation and storage cost money.

And thirdly, mining businesses produce financial statements, strategy reports, and other documentation that enable analysis and sound decision-making. In contrast, there is limited data about gold demand.

So, how does Greatland Gold stock weigh up as an investment case when measured against these advantages? 

How does the Greatland Gold share price stack up?

Firstly, Greatland Gold isn’t yet producing any gold. Consequently, its production processes can’t be altered accordingly, and its margins won’t grow with increasing gold prices. In addition, it doesn’t even seem to be setting itself up for gold production.

Recently, Greatland commenced systematic drill testing at its Scallywag prospect area in the Paterson region of Australia. And things are looking good.

But, according to its farm-in agreement, if it manages to develop its product, it could sell it to its partner Newcrest. Alternatively, it could process the mined deposits at Newcrest’s nearby Telfer mine. Outputs from this mine go to the Perth mint, or are shipped as cheaper copper-gold concentrates to East Asia. Whichever route it chooses, Greatland Gold producing gold directly is unlikely.

Secondly, Greatland Gold hasn’t yet turned a profit, meaning there is no dividend either. This is in stark contrast to Buffett’s choice of gold stock, Barrick Gold.

Greatland did, however, produce the right documentation for me to weigh all this up!

So, although there is a market demand for investing in gold, I don’t think Greatland Gold is in the best position to take advantage of it. But, it’s this same gold-optimism that appears to be driving the Greatland Gold share price explosion. Consequently, this is one mining stock I won’t be buying into.

The post Is now the right time to buy the Greatland Gold (LSE: GGP) share price? appeared first on The Motley Fool UK.

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Rachael FitzGerald-Finch 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.

In the UK, there are many gold stocks listed on the London Stock Exchange (LSE). Whether you’re looking for a large-cap FTSE 100 gold miner or an under-the-radar small-cap gold explorer, you have plenty of options. Here, I’ll provide a concise overview of some of the main UK gold stocks. 

Large-cap UK gold stocks

In the large-cap area of the UK stock market, there are a few companies that produce gold. One of the major players is FTSE 100 firm Polymetal International. It’s a top-10 global gold producer with a market capitalisation of £7.7bn.

Also in the FTSE 100, there’s Antofagasta and Fresnillo. Both of these companies produce gold, however, it is not the main commodity they focus on. Antofagasta’s primary focus is copper, while Fresnillo’s is silver.

Mid-cap LSE gold miners

In the mid-cap area of the market, there are a number of companies that are engaged in the mining of gold. One of the best known mid-caps is FTSE 250 gold miner Centamin. It’s focused mainly on mining gold in Egypt and has a market cap of nearly £2bn.

Other UK gold stocks in the mid-cap arena include Petropavlovsk and Highland Gold Mining, which are both focused on mining gold in Russia. There’s also Hochschild Mining, but it has a large focus on silver.

Small-cap gold stocks

It’s the small-cap space that offers UK investors the most choice when it comes to gold stocks. In this area of the market, there are lots of gold stocks. Many of these are listed on the LSE’s Alternative Investment Market (AIM).

Some of the best known small-cap UK gold stocks include:

• SolGold, an Australian gold and copper mining company.

• Greatland Gold, which is focused on gold mining in Australia.

• Pan African Resources, a mid-tier Africa-focused producer.

• Chaarat Gold Holdings, which operates in the Kyrgyz Republic.

• Shanta Gold, which focuses on gold in Tanzania.

• Trans-Siberian Gold, which has a portfolio of gold assets in Russia.

All of these small-caps have a market capitalisation of at least £50m.

What you need to know about UK gold stocks

Of course, before investing in gold stocks, it’s important to understand the risks. One thing you should know about such stocks is that they tend to be volatile. While they can deliver strong returns when gold is rising, they can also deliver big losses if gold is falling.

I’ll also point out that gold mining is a complex business. There are many things that can go wrong. This means that gold stocks don’t always rise when the gold price is rising.

If you’re thinking about investing in UK gold stocks, my advice is to focus on risk as well as return. Spreading your capital over a number of different stocks is generally a smart strategy.

The post Want to invest in UK gold stocks? Here are some LSE-listed companies I’d consider appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any shares mentioned. 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.

Now I’m not its biggest fan as an investment as it doesn’t generate any cash flows or income. That said, having a tiny bit of exposure within your investment portfolio (~5%) as a hedge against uncertainty isn’t the worst idea. If stock markets were to crash, your related investments may provide an element of protection.

But what’s the best way to get exposure to gold? Are companies in the FTSE 100 and the FTSE 250 that mine the yellow metal, such as Antofagasta, Fresnillo, Polymetal, and Centamin, a good way to profit from price movements?

Gold stocks

Having invested in a number of related miners pre-Global Financial Crisis (GFC) – when the gold price was soaring — and losing a LOT of money during the period, I would generally advise investors to steer clear of gold mining stocks. In my opinion, they’re not a good way to profit from movements in the price of gold, nor are they a good long-term investment.

Highly volatile

The first thing you need to understand about such stocks is that they’re essentially a leveraged play on the price of gold. So when the price is moving higher, they can perform very well. However, if the price crashes, gold stocks can be hit hard, meaning they’re quite risky.

A great example of this is Centamin, which mines gold in Egypt. In 2008, the gold price fell from around $1,000 to $712 – a decline of just under 30%. However, over this same period, Centamin shares fell from around 78p to just 22p, representing a decline of over 70%. So, be aware that gold stocks can be highly volatile.

Many moving parts

The other main issue you need to understand about gold companies is there are a lot of moving parts. To be highly profitable, everything needs to click.

For example, a gold company needs to have finance in place. Its mine needs to be operational. Setbacks such as broken equipment or staff strikes need to be minimised. The weather also needs to be good.

Ultimately, there are many different factors that can take their toll on success, and that means you could actually miss out on profiting from gold price gains if the company can’t get its act together. When you invest in gold stocks, there’s no guarantee that you will actually profit even if the price rises.

For this reason, I think you’re better off buying gold bullion (bars or coins), or a gold exchange-traded fund (ETF) if you’re looking to profit from related price movements.

A poor long-term investment

Finally, like all mining companies, gold companies have very little control over the prices they receive for their products. This means that profits can fluctuate significantly which, in turn, means that dividend payouts can fluctuate. From a long-term investment point of view, that’s certainly not ideal.

If you’re looking to grow your wealth, I think you’re much better off investing in companies that are able to generate relatively consistent profits.

The post The gold price is soaring. So are FTSE 100 and FTSE 250 gold stocks a good bet? appeared first on The Motley Fool UK.

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• Suddenly investors can’t get enough of GSK shares! What’s going on?
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• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income

Edward Sheldon has no position in any shares mentioned. 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.