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

Perhaps the two cheapest gold mining stocks on the planet

Perhaps the two cheapest gold mining stocks on the planet

Gold has been in the headlines a lot lately amid the coronavirus induced stock market crash and the Federal Reserve’s unprecedented bailout to stem the market free-fall in March. 

Gold has rallied to nearly $1,700 per ounce.  For companies that were making good money at $1,500 an ounce on their gold production, current conditions in the gold market are a bonanza.  And they may get better still.  Many pundits are calling for gold to take out its all-time highs, of more than $1,900.  I don’t have a crystal ball, but based on the evidence before me, I tend to agree. 

Not only that, one of the biggest input costs when mining gold, along with wages for mining personnel, is diesel fuel to run mining and drilling equipment.  With oil prices sinking like a stone in response to the coronavirus pandemic as well, gold miners are in a real sweet spot.  Revenue is increasing and costs are falling.  Margins are thus expanding.  Doubly so for those gold mining companies based in countries where the local currencies they pay part of their expenses in are low versus the US dollar.

That includes the two gold mining companies I’ve recently been buying.  One trades on a multiple of approximately twice this year’s likely net profits.  The other is even cheaper.  It trades on less than 1.5x this year’s likely net profits.

Why are they so cheap?  I don’t know, but I can hazard a guess.  Firstly, many market participants are still shell-shocked from the epic, 30%+ crash seen on most stock markets in March.  It was the fastest, most destructive short-term wipe-out of stock market wealth since the Great Depression.

Gold stocks crashed right along with everything else.  So, understandably, many investors are treading gingerly, even if the fundamentals for many gold stocks are actually even better now than in March. 

The other reason is the two stocks I’m talking about, as is often the case with gold miners, operate in politically risky jurisdictions.  Also, they each have only one flagship mine.  So, if something shuts down that mine, or if the jurisdiction they operate in faces turmoil, the losses for shareholders could be severe.

To be clear, I think either of those risks are low-probability events.  Otherwise, I would not have risked capital in these stocks. 

I also think you have to balance the operational and political risks against the excellent geology, long operating histories and increasing production recently seen from both of these companies’ mines. 

To spare you any further suspense, the first company I’m referring to is Caledonia Mining (listed on the TSX, NYSE, and London Stock Exchange).  Caledonia operates the Blanket Mine, in Zimbabwe.  Yes!  Zimbabwe.  I did warn you it was not without risk.

The other is Medusa Mining (MML on the Australian Securities Exchange).  It operates the Co-O mine on the island of Mindanao, in the Philippines.

Positively, both companies have recently reported excellent first-quarter production results.  Both companies have balance sheets free of debt and chock-full of cash.  The prices they are selling their bullion at have risen sharply over the course of April.  And, both companies have been allowed to continue operating under the present coronavirus lockdown in their respective jurisdictions.

Regional governments aren’t stupid.  When large local employers, who pay lots of tax to both regional and federal governments are able to operate safely without putting their employees at any greater risk than normal, chances are that requests to keep operating during coronavirus lockdowns will be met with a “yes.”

I’m not suggesting anyone runs out and blindly buys shares in either Caledonia or Medusa.  But, if you’re inclined to do your own research on them, I think you’ll come to agree with me that the risk reward stacks up very well right now. 

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