I’ve rated dividend-paying gold miners among my best shares to buy for some time. The havoc wreaked by the Covid-19 pandemic and massive ramp-up of money printing by the world’s central banks make safe-haven gold stocks even more attractive right now.
Sure, the price of gold has risen to over $1,700 per ounce from nearly $1,500 at the start of the year, and the shares of miners have enjoyed significant gains. But when I look at UK gold stocks, I continue to see compelling earnings multiples. And profitable producers paying attractive dividends.
My five best shares to buy
Bank of America caused a bit of a stir last month. In a report titled ‘The Fed can’t print gold’ it put an 18-month target on the yellow metal of $3,000 per ounce. However, I think owning shares in gold miners is the way to go. The ones that appeal to me are lower-cost producers. These companies can really make hay when prices are high, but also remain profitable at times when prices are softer. Dividends, which you don’t get from owning the metal itself, are another big attraction.
There are some potential disadvantages to owning gold stocks. Below-par operational performance is one risk. And as the mines of most UK-listed gold companies are in far-flung places, currency risk is another.
However, I reckon the risks can be mitigated by owning a small basket of mining stocks. To this end, my five best shares to buy are Polymetal, Centamin, Highland Gold Mining, Caledonia Mining, and Trans-Siberian Gold
Production and costs
The table below summarises the locations of the operations of the companies, and their guidance on 2020 production (ounces) and all-in sustaining costs (AISC).
|
|
Ounces |
AISC ($) |
|
Polymetal |
1,600,000 |
850–900 |
|
Centamin |
510,000–540,000 |
870–920 |
|
Highland |
290,000–300,000 |
791* |
|
Caledonia |
53,000–56,000 |
951–1,033 |
|
Trans-Siberian |
38,000–42,000 |
900–1,000 |
* Historic performance; no forward guidance.
As you can see, AISC looks good against a current gold price of over $1,700 per ounce. Only Caledonia’s cost guidance range goes above $1,000. And this is set to fall with the completion of a project this year delivering a large uplift in annual production from next year.
Earnings multiples and dividends
Of course, as well as production and costs, the valuation of the companies’ shares is a major consideration. The table below shows their recent share prices and market capitalisations, and their price-to-earnings (P/E) ratios and dividends yields.
The P/Es and yields are based on analysts’ earnings and dividend forecasts for 2020, with the exception of Trans-Siberian. It is releasing its 2019 results next month, and the forecasts are for that year.
|
|
Operations |
Share price (p) |
Market cap (£m) |
P/E |
Yield (%) |
|
Polymetal |
Russia and Kazakhstan |
1,646 |
7,766 |
11.3 |
5.0 |
|
Centamin |
Egypt |
166 |
1,919 |
12.9 |
5.2 |
|
Highland |
Russia |
259 |
943 |
9.7 |
5.0 |
|
Caledonia |
Zimbabwe |
1,223 |
141 |
7.1 |
2.2 |
|
Trans-Siberian |
Russia |
81 |
71 |
8.3 |
6.0 |
The P/Es range from undemanding for the two largest companies (FTSE 100-listed Polymetal and FTSE 250 member Centamin) to cheap sub-10 territory for the other three (all listed on the FTSE AIM market).
Four of the stocks have highly attractive dividend yields of between 5% and 6%. Meanwhile, Caledonia’s 2.2%-yielding dividend is covered over six times by earnings, giving scope for the board to ratchet-up payouts in the future.
Is Covid-19 a risk to my best shares to buy?
The five miners have so far seen no significant impact from Covid-19 on their operations. It remains a risk. However, I think this geographically diversified basket of stocks offers some protection against an adverse development in any one country or region.
