Robert Stephens, CFA, discusses the investment potential for three FTSE 350 gold miners.
The economic turmoil prompted by Covid-19 has not been bad news for all FTSE 350 stocks. Rising precious metals prices are set to mean higher profits for gold miners. The price of gold has risen by over 20% in 2020 to a record high, which has prompted improving investor sentiment towards the sector.
Further growth could be ahead as weak global GDP prospects, political risks such as Brexit and the continued rise in Covid-19 cases hasten a retreat among investors towards perceived defensive assets. Therefore, while they still trade on fair valuations, FTSE 350 gold miners Fresnillo (LON:FRES), Hochschild (LON:HOC) and Centamin (LON:CEY) could offer capital growth, in my opinion.
Further price rises?
Even though gold now trades at an all-time high, it could yet produce further gains. A variety of threats could cause increasing risk aversion among investors, as well as higher demand for gold due to its perceived status as a store of value.
Risks include Brexit, the US election, weak GDP growth and, of course, the further spread of Covid-19. Their presence may prompt further monetary policy stimulus from central banks, with an extended period of low interest rates reducing gold’s competition from interest-producing assets that also offer low risk profiles. The effect of this could be rising demand for gold that pushes its price higher.
Operational disruption
Very few companies have been completely immune from the impact of Covid-19. Gold miners are no different, and some sector incumbents have experienced operational disruption in 2020.
For instance, Hochschild’s production has fallen this year as a result of the suspension of operations at all three of its mines. It now expects to ramp-up production as they gradually re-open, but it is not providing financial guidance at the moment for the current financial year.
Likewise, Fresnillo’s gold production for the current year is expected to be lower than previous guidance due to Covid-19 working restrictions. However, it is making progress in implementing its mine improvement initiatives, and is set to update the market on its financial performance before the end of July.
Attractive valuations
In contrast to the experiences of its sector peers, Centamin has so far not been materially impacted by Covid-19. It is on track to meet production guidance for the full year. In spite of its 55% share price rise since the start of 2020, it trades on a prospective price-earnings ratio of 14.8. This indicates that it offers fair value for money, given its profit growth prospects.
A gradual return to operational normality could mean that Hochschild and Fresnillo are increasingly able to capitalise on the higher gold price. Therefore, they could also offer investors the prospect of rising profitability that leads to higher share prices.
Undoubtedly, the gold price will not rise uninterrupted forever. A return to improving economic conditions is extremely likely over the long run, which could limit improvements in their financial performance. However, while economic and political risks remain high, the likes of Centamin, Hochschild and Fresnillo could outperform the wider stock market.