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Global Value Hunter

Picking the best low-hanging fruit where few others look -- for cents on the dollar

Still the two Cheapest Gold Producers on the Planet

Plus, a highly profitable platinum miner selling for
under 3.5x earnings, to add to your watchlist

Cheapest gold stocks plus platinum miner

Last year, I wrote about possibly the two cheapest gold stocks — at a time when the stock market had just seen the sharpest sell-off most of us have ever witnessed, due to the onset of the Covid pandemic. The Dow Jones lost 10,960 points in just over a month and had its biggest 1-day plunges history.

In response to this uncertainty, people started turning back to gold which would then later drive the price up from $1,474 (the lowest in March) to as high as $2,067 an ounce in August.

Today, despite some recent jitters on the stock market the situation is reversed. The Dow Jones recently hit an all-time high above 32,000, while gold is hovering around $1,700.

However that’s still a very healthy gold price. And it was enough for . . .

Medusa Mining to report half-year earnings up 64%,
which sent its shares up 26% in a week

The Australian gold miner operating in the southern part of the Philippines, Medusa (MML on the Australian Securities Exchange) has reported solid increases in its results across the board.

The mine produced 12% more gold compared to the previous year. Medusa is an unhedged gold producer, meaning they have not locked in any prices by forward-selling any of their gold. As a result, they reaped the full benefit of last year’s higher gold prices, and were able to sell their gold at an average of $1,896 per ounce in 2020.

What’s more, the ore mined in the first half of 2021 came in at a much higher quality at 7.34 grams of gold per tonne. Meanwhile the company managed to reduce their all-in sustaining costs to $1,057 an ounce.

On the news, the stock shot up from A$0.77 to A$0.97 cents in less than a week. Mr. Market’s excitement has now subsided and the stock last traded at A$0.915 cents. At this price, if you were able to snap up some shares last year, you’d be up as much as 78%.

In a follow up article last year, my target was around A$0.90 which has now been hit. But in my opinion, the stock is still excellent value, and at the rate profits are coming in right now, should that continue, you’d earn back the purchase price of your shares in less than two years, if I am not mistaken.

The company also announced a dividend of A$0.05 per share if you own shares by 16 March 2021.

Medusa’s target for 2021 is to produce 90,000 to 95,000 ounces of gold and sell it for between $1,200 and $1,250 an ounce, which seems a low price target given gold is nearly $1,700 now. I suspect management are under-promising and hoping to over deliver.

Having produced more than half of that already and sold it at much higher prices, I think this is a shoo-in. My Australian investment company owns shares in Medusa. I intend to hold them and potentially add to our position.

Caledonia Mining reported record annual gold production
at its Blanket Mine in Zimbabwe

Here’s a statement from the CEO of Caledonia, Steve Curtis:

"I am delighted by Blanket Mine's continued strong operating performance in the Quarter and that we were able to hit the top end of our revised annual production guidance.

"Despite the challenges of the Covid-19 pandemic, 2020 was a record year for Caledonia operationally, and we are on track for commissioning of Central Shaft to be completed in the first quarter of 2021. In December we also announced that we had entered into option agreements on two properties in Zimbabwe, delivering on our strategy of organic growth, while increasing the dividend for the fourth time at the start of January to 11 cents a share, creating genuine value and returns for our shareholders."

The official earnings report for 2020 is yet to be released but I am expecting some good numbers as the company was able to adapt and continue its operations even with Zimbabwe in lockdown.

Caledonia Mining (listed on the TSX, NYSE, and London Stock Exchange) also recently declared a 10% increase in its quarterly dividend payout to $0.11 per share. They have been consistently increasing their dividend payouts since 2019.

Back in July, when I saw that the stock had soared as much as 167%, I said it was time to lock in some gains. That turned out to be a good call. The stock is now $15.68. Its 52-week high was $29.39. For a value guy like me, this signals it’s time to consider getting back in.

If you do buy shares, and are not a US person, buying it via the London Stock Exchange (ticker CMCL) may be most tax-efficient as the UK doesn’t levy withholding taxes on dividends.

My colleague, Peter Tan has written extensively about this at his Double Digit Dividends website. (Peter’s fund is launching soon, and if you’re looking to get more income you’re your portfolio, I can recommend you take a look.)

Zimplats is another highly profitable miner operating in
Zimbabwe worth keeping on our watchlist

Zimplats (ZIM on the Australian Securities Exchange) is another stock I’ve previously mentioned. I bought it for my Australian investment company for as low as A$9 during the Covid crisis. It closed Friday at A$20.40.

The company has got much going for it. Revenues are up 79% for the first half of 2021, thanks to both higher production and higher metals prices. Zimplats produces all the platinum group elements (PGE) from its mines on the Great Dyke in Zimbabwe, including platinum, palladium, rhodium, ruthenium and iridium.

It also produces silver, gold, nickel and copper in significant quantities from the same multi-element ore.

While palladium prices have been sky-high in recent years, it’s platinum which has been on tear lately, rising by about 30% in the past six months, even after the recent correction.

Platinum 6-month chart

As a result, Zimplats is generating huge profits and despite the recent share price rally, still sells on a modest multiple of likely future earnings of less than three and a half times, by my quick estimates. It has also been paying out substantial dividends.

For the last six months of 2020, the company saw profit before income tax increase 197% to US$375.4 million. Earnings per share came to US$2.33 for the half year, versus US$2.43 for the full year ended June 30, 2020.

So, as you can see, with the company on track to earn just as much, if not more in the second half of the fiscal year ending June 30, 2021, or more than A$6.05 per share, at A$20.40 the shares still sell for only 3.4 times forward earnings.

The company also just paid an interim dividend of A$0.527 per share. The full year dividend should end up well over A$1 per share based on current trends for platinum and palladium prices.

It’s a stock well worth keeping on your watch list, and considering investing in on any dip in price. I’d be a buyer of more shares around A$18.15.

Things are also less uncertain now
in Zimbabwe’s foreign exchange market thanks to new rules…

While Zimplats is a Guernsey-domiciled company listed in Australia and most of its hard currency transactions take place outside of Zimbabwe, the company does import foreign exchange to pay its local bills. So, it’s worth mentioning that the Reserve Bank of Zimbabwe just introduced a new market-based foreign exchange trading system where institutions, firms, or individuals are able to bid on the Reuters Foreign Currency Auction System on what they think are the appropriate exchange rates for sums between $50,000 and $500,000.

The auction system then uses the weighted average of all the bids to determine the market exchange rate until the next such auction. This new system aims to build market confidence and narrow the gap between the fixed exchange rate and black market rate.

Zimplats benefited from this new system slashing their foreign currency exchange losses from $5.6 million to $0.1 million last year.

The exchange rate situation in Zimbabwe is one reason I’ve been avoiding investing there for the African Lions Fund. So it’s good to see a move in the right direction. But, risks remain elevated.  

That said, Zimplats, regardless of its location, is a well-run company with strong fundamentals. And, as I say, my Australian investment company owns a significant stake in it.

Until next time,

Tim Staermose signature

Tim Staermose
Global Value Hunter
African Lions Fund

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