Over the last three years, many gold-mining investors have been disappointed. Most gold shares have gone nowhere, while the metal has appreciated by 50%. In many cases the cost of getting gold out of the ground has offset the rise in the gold price, meaning profits have struggled to grow. But that means there are some decent bargains to be had.
Take Russian miner Petropavlovsk. Investing in Russia is notoriously risky and some critics have questioned the quality of its gold reserves, while a large investment programme during the last few years has seen it rack up a lot of debt.
Two and a half years ago, Petropavlovsk shares were changing hands at over 1,300p, compared with just 345p today. The shares have halved in value during the last year and are trading at very depressed levels. Nonetheless, I think this company is worth a punt.
Petropavlovsk (LSE: POG)
It has a good track record of growing its gold production, which increased by 13% to 710,000 oz in 2012. Growth of between 4% and 10% is expected in 2013. With over ten million ounces of proven and probable gold reserves, there’s a good chance it can keep growing.
New pressurised oxidation techniques mean that it will be able to extract its more complex refractory reserves without incurring huge costs. It also has a stake in an iron-ore company called IRC. Recent Chinese investment should provide a ready market for its output and will reduce the risk arising from its debts.
Finally, Petropavlovsk is cheap. It trades on five times this year’s earnings and offers a decent, well-covered dividend of 3.1%. Its equity is being valued at 0.6 times its book value. With its investment programme past peak levels, cash flow should rise. Further rises in the gold price would make it worth a gamble.
Verdict: speculative buy at 345p