Join our community of smart investors

FTSE 350: Cash buffers and politics should support precious metals stocks

Gold and silver prices have had a weak start to 2017, but there are still reasons to believe precious metals will shine
January 26, 2017

The US election result was the most significant example of a trend of unexpected political events that largely benefited investors in precious metals in 2016. Few expected a win for the Republican candidate to cast an uncertain pall over gold and silver prices. Surely – the logic held – such a step into the unknown for the world’s most powerful nation would spark a flight to the relative safety of the yellow metal.

We think that effect could come through in the coming year, although the pullback in precious metals since November has effectively brought the share prices of most gold miners back to the levels seen immediately before the EU referendum. But even if 2017 did not start on a high, the relative strength of gold and silver prices over the past 12 months has greatly improved the health of many sector constituents. Wider profit margins have left many gold miners’ balance sheets awash with cash, further supported by the continued strength of the dollar against many of the currencies in which gold mining costs are denominated.

That could either mean special dividends, or an uptick in corporate activity in the precious metals space, particularly in light of the paucity of exploration work carried out by the majors in the past few years. Ultimately, however, gold miners are leveraged plays on the gold price. So which way is the metal heading?

From potential European political turmoil to inflationary concerns in the US, 2017 promises no shortage of Brexit-style shocks that could once more spark a surge in futures trading in gold. Although markets greeted Mr Trump with open arms, it’s hard to believe that continued disruption to economic and political consensus could hurt precious metals.

That said, we are of the view that physical markets will have a larger role to play in the early months of this year, with tightening Chinese and Indian government controls on capital outflows forming a potential impediment to demand. That doesn’t necessarily spell bad news for prices but, together with the likelihood of the Federal Reserve tightening monetary policy, it means gold could be a bumpy investment this year.

Price (p) Market value (£m)PE (x)Yield (%)1-year change (%)Last IC view
Acacia Mining4321,77249.70.8168.1Hold, 556p, 22 Jul 2016
Centamin1521,75125.52.0142.2Buy, 135p, 22 Sep 2016
Fresnillo1,44710,663285.80.6114.5Hold, 1,930p, 2 Aug 2016
Hochschild Mining2411,224NA0.0503.5Hold, 295p, 17 Aug 2016
Polymetal International9484,060171.878.9Speculative buy, 1,137p, 25 Aug 2016
Randgold Resources6,7606,33836.60.754.6Hold, 8,010p, 5 Aug 2016
 

Favourites: Gold stocks tend to move in lockstep, but we think there’s good reason to believe that Egypt-focused Centamin (CEY) is likely to do better than most of its peers if there is an improvement in prices this year. Regardless of whether the better-than-expected grades seen last year can be maintained, Centamin’s low-cost and growing production has been good for free cash flow and the balance sheet. The presence of a half-decent dividend yield also puts the group ahead of its peers.

Outsiders: Separating the wheat from the chaff in the gold sector is a tricky task, but not all operations and mines are created equal. The travails of Randgold Resources (RRS) were testament to this last year, as the gold giant struggled to hit production and cost targets, and now faces an uphill battle.