Disclosure: Roland owns shares of Highland Gold Mining, Kingfisher and Millennium & Copthorne Hotels.
I’ve been on something of a spending spree recently, adding three new stocks to the portfolio so far in May.
You can see all the details on my portfolio page, but in short the companies are B&Q owner Kingfisher, FTSE 250 group Millennium & Copthorne Hotels and Russian gold miner Highland Gold Mining Ltd (LON:HGM).
I’ve thought long and hard about whether to invest in gold. I’m not a gold bug, but the market for gold now seems fairly stable. On that premise, a number of cash generative and low-cost gold producers have started to show up in my value screens.
Highland Gold Mining has emerged as the winner from a short list of three:
- Pan African Resources
- Highland Gold Mining
Centamin: I ruled out Centamin because of its ongoing legal problems in Egypt. The biggest worry is that a case challenging the validity of its mining licence will go against the firm. I also feel that on 17 times forecast earnings and 1.7 times book value, Centamin stock is quite fully valued at the moment.
Pan African Resources: I’v nothing against this South African/Zimbabwe-based miner, but free cash flow has lagged behind earnings over the last few years. Plus I find PAF’s RNS announcements unnecessarily confusing and difficult to read. I also have concerns about the ongoing labour relations problems afflicting South African miners. These are justified, in my opinion, but nevertheless are a deterrent from an investment perspective.
Why Highland Gold?
Having ruled out Centamin and Pan African Resources, I decided to go with Russia-focused Highland Gold Mining. This is something of an oligarch stock, with backers including Roman Abramovich and former Sibneft president Eugene Shvidler.
The company was founded in 2002 “for the purpose of acquiring, consolidating and developing a portfolio of quality gold mining projects in the Russian Federation”. It’s been reasonably successful. In common with most Russian miners, costs are low by industry standards. Cash generation is strong and the firm pays generous dividends.
One downside of HGM’s ownership profile is that the free float is only 50%. But Highland Gold has traded continuously on AIM for 14 years. It has a far better trading record than many more freely-held commodity stocks. I’m also reassured by the presence of Canada’s Barrick Gold on the shareholder register. Barrick has a 20% stake in HGM, which would seem likely to give it the casting vote in the event of any corporate action.
The stock looks affordable to me
I’ve not carried out an in-depth analysis of the quality of Highland Gold’s mines or reserves. Such a task is outside my competence and would take more time than I have available. So I based my decision to buy on key performance measures and valuation metrics.
- Spot gold price 12/05/17: $1,228/oz
- 2016 all-in sustaining cost AISC: $652/oz
- P/B: 0.8
- Trailing P/E: 12.2
- Trailing P/FCF: 7.5
- Earnings yield (Op. profit/EV): 11%
- Net debt to net profit: 4.3x
- 2017 forecast P/E: 10.8
- 2017 forecast yield: 6.5%
In my view, these are all attractive values, with the possible exception of the net debt. However, net borrowing fell from $231m to $205m last year. The group’s cash generation leads me to expect further reductions this year. I don’t think this level of gearing is likely to cause a problem.
My overall view is that HGM looks good value at current levels. The yield is attractive and the group’s low mining costs should help to ensure a reliable stream of free cash flow, regardless of the price of gold. On that basis, I recently added Highland Gold Mining to my value portfolio.
Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.