Precious metals prices, which had been seriously depressed for a number of years, have been on a bull run since the back end of last year, as fears about global economic growth, compounded by the shock Brexit vote, have increased demand for ‘safe-haven’ assets.
Silver surfer
Shares of FTSE 100 silver miner Fresnillo (LSE: FRES) have gained a whopping 165% so far this year, and edged higher in early trading following a Q2 production update this morning.
The company said silver production was up 14.5% on the same period last year, with gold production up 19.6%. Management has maintained its full-year silver guidance of 49m-51m ounces, but raised gold to 850,000-870,000 ounces from 775,000-790,000.
Analysts expect earnings this year to rocket from 2015’s depressed 4.7p a share to 30.5p, putting Fresnillo on a P/E of 62 at a share price of 1,890p. There’s a prospective 0.7% dividend yield.
The P/E is high even by the typically elevated standards of precious metals miners, but that may not stop the shares making further gains. Silver is currently trading at under $20 an ounce, but was as high as $50 back in 2011. With other flight-to-safety assets, such as cash and gilts, offering negligible or even negative returns in some cases, demand for precious metals could increase.
Golden goose
Randgold Resources (LSE: RRS) is another of this year’s big risers with a 115% gain to date. Of course, this FTSE 100 gold giant has enjoyed the same favourable backdrop as Fresnillo. And with gold at $1,325 an ounce, still well below its $1,900 peak, there’s considerable scope for jittery investors to push the metal price — and Randgold’s shares — higher.
Furthermore, Randgold’s P/E of 37.5, at a current share price of 8,950p, is considerably more attractive than Fresnillo’s. In addition, Randgold was rather more resilient through the metals depression of 2011-15. Its dividend record for these years reads $0.40, $0.50, $0.50, $0.60, $0.66, although the yield is low (a prospective 0.6%) and cash on the balance sheet fell from $488m to $213m over the period. Still, Randgold strikes me as a better-value proposition than Fresnillo at their current share price levels.
Attractive alternative
The shares of H&T Group (LSE: HAT) haven’t performed as spectacularly as those of the precious metals miners, having gained ‘only’ 44% since the start of the year. However, I believe this company is a highly attractive alternative, as its core business can make good money through thick and thin, with periods of increasing gold prices providing windfall profits.
H&T is in the ancient industry of pawnbroking (and associated services) and is valued at a bit over £100m at a current share price of 282p. Despite gold purchasing profits falling as the price of the metal went through its slump, H&T remained so cash-generative that between 2011 and 2015 it was able to reduce net debt from £29m to £2m and pay out £15m in dividends.
The stock trades on a forward P/E of 15 with a prospective 3.2% dividend yield. And with the potential for a perhaps extended period in which the price of gold bumps up profits, I reckon the current valuation makes H&T an attractive buy.