Venture: Mid Cap Gold Miner
Issue 8;
A leveraged recovery play on a rising gold price.
Hochschild (HOC) is a London-listed gold mining company, with mines in Chile, Brazil and Peru, and exploration elsewhere in Latin America. With Federal Reserve signalling peak rates, the outlook for gold has improved, and this recommendation for HOC follows my recent piece on Centamin (CEY).
Yesterday, Panmure Gordon upgraded to buy as the Immaculada mine in Peru has extend its life for another 20 years, which means there is plenty of gold to be mined in the future. Furthermore, they added that the Mara Rosa mine in Brazil will move into production early next year. Their price target is 121p, which does not allow for much upside, but the analysts are not factoring in the potential for a higher gold price. Adding that would be a gamechanger.
Should gold break much above $2,000, and capture the world’s attention, then all that matters is that a miner can produce enough gold to enjoy the rally. Like CEY, the price to sales ratio is on the floor compared to its history. A higher gold price would have a double whammy. It would immediately boost margins, which have been falling, the root cause for the derating, and lift sentiment.
Hochschild Grows Production on a Low Valuation
HOC has had its problems, mainly post-pandemic, but the belief is it will grow. It is majority owned by a single family, and other shareholders include the Ruffer Gold Fund.
HOC barely makes money but is expected to next year. There’s no dividend, which I like when it’s a turnaround because it accelerates recovery. Cashflow has been negative during the pandemic, but that too is expected to improve. The balance sheet is strong enough, notwithstanding higher borrowing to cover the pandemic. The share count has been stable since 2015, so the company has not yet raised capital.
This is not a robust, undervalued, high dividend, value investor story. It is an opportunity to take advantage of a higher gold price, from a company with high operational gearing. The chart is strong as HOC is leading the gold mining sector.
HOC Outperforms Gold Miners
Risk
This is a simple way to outperform gold in a bull market. If there is no bull market, expect to be disappointed. Risks include operations, energy costs, pandemics, governments and more. I deem this to be high risk.
Venture Update
RWS had results last week. The guidance was revised downwards, and the analysts followed. The shares fell 25% on the news, but that has already eased to 10%, which is a good sign. The shares are undervalued, and I remain bullish.
Venture started in September, and the market has been a rough ride so far, with the FTSE Small caps down 6% in October. Please bear that in mind.
FTSE Small Cap Index Under Pressure
Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.
Many thanks,
Charlie Morris
Editor, Venture
Venture is issued by ByteTree Asset Management Ltd, an appointed representative of Strata Global which is authorised and regulated by the Financial Conduct Authority. ByteTree Asset Management is a wholly owned subsidiary of CryptoComposite Ltd.
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