Buying gold when the chips are down is probably one of the best-known trading ideas out there. In times of uncertainty, the gold price tends to rise. This is exactly what we saw as the Russia-Ukraine war started. It is a mistake, however, to think that gold mining stocks’ prices always mimic gold prices. Like in the case of this FTSE 250 penny stock.
Centamin’s underwhelming update
I am referring to Centamin (LSE: CEY), which dropped below 100p more than a month ago. And after its latest production update, I am not sure if it is headed back up anytime soon irrespective of where gold prices are. Let me elaborate.
The company just reported an 11% decline in gold production in the first quarter of the year. While this was a result of planned changes, the fact is that a production drop could reflect on its financials. Its revenue for the quarter is down by 8% even though its realised gold price is up by 6% from the same quarter last year. This means that the decline in production has dragged down its revenues, despite some support from firm prices.
A FTSE 250 penny stock to buy
Yet, I believe that there could still be a case for me to buy the FTSE 250 penny stock over the next few months. Centamin expects higher production in the next quarters, and for this reason it has kept its guidance unchanged. In other words, it expects to make up for the lower production in the coming quarters.
While the gold price has subsided since the initial days of war, I reckon that expected weakness in global growth could still keep it relatively elevated. The International Monetary Fund has just slashed its forecasts by almost a percentage point for global gross domestic product. Gold is a traditional hedge during bad times, and from the looks of it, they might just come around soon enough. So we are looking at both steady production and high prices, which might be a positive for Centamin’s revenues.
High dividend yield
Centamin is not just a hedge, however. Its dividend yield is a pretty high 7.6%, which makes a pretty decent case for the penny stock just by itself. This is almost triple that for FTSE 250 stocks on average. Further, it is actually higher than inflation, which came in at 7% on an annual basis in March. This is not an easy number to beat. Moreover, the stock has paid dividends steadily for a long time now, so I can generate passive income with some dependability.
The downside
Its share price has been a downer in the past year, though. Centamin was no penny stock in April 2021, but after falling more than 20% since, it has been one for a while now. Despite that, at 13.5 times, its price-to-earnings (P/E) ratio is not exactly low. This caps the upside to the stock, especially because its revenues have not grown either recently.
What I’d do
I think there are compelling arguments both for and against the stock. But after the latest numbers, I am more inclined to err on the side of caution. I will wait and watch, instead of buying it now. Another update from it could change my mind, though.