The two gold stocks I previously wrote about
are up as much as 167% in just three months

Impala plant Zimbabwe

If you followed me into the two gold stocks I wrote about back in April, you should be grinning from ear to ear.

Since then, Medusa Mining (MML on the Australian Securities Exchange) is up from the mid A$0.50s to A$0.765.

Medusa operates the Co-O mine on the island of Mindanao, in the Philippines. Its costs are thus predominantly in Philippine pesos and US dollars. Recent Australian dollar strength will not have crimped its margins.

On the contrary, with gold prices surging by about 10% since my original article, from $1,700 to more than $1,870 per ounce, I expect Medusa will be enjoying even wider profit margins now.

The stock was as high as A$0.90 per share earlier in the year, before the coronavirus swoon in the market in March and April. I don’t see why that level won’t be hit again, as the company and industry fundamentals are now even better.

Medusa’s shares are at A$0.765 now. If I am right about them reaching my A$0.90 target, there’s a further 18% upside.

I am up about 50% on my average entry price thus far. I am holding on for now.

The other very cheap gold mining stock I mentioned in the same column, Caledonia Mining (listed on the TSX, NYSE, and London Stock Exchange), which operates the Blanket Mine in Zimbabwe is up by even more. It was trading on just 2.5x earnings back then.

I hold some shares for a client account I manage. That position is up from US$9.08 to US$24.09, per share or…

A stunning 167% gain in just a few months

It’s time I lock in some of this gain. Nothing goes up in a straight line. After a 12% pop in Caledonia’s shares on Wednesday alone, I would not be surprised to see a pull-back.

I mention this in case you bought shares alongside me and want to take some profits, too.

Gold itself is surging and is now closing in on the all-time high price of $1,917 which it hit only briefly back in August 2011.

With the unprecedented amount of money the Federal Reserve has pumped into the financial system since the March market panic, adding trillions of dollars to its balance sheet, the US dollar has been losing value quickly of late.

People appear to be buying gold and other precious metals to hedge against the decline in the dollar. At the same time, supplies of gold from the world’s mines remains tight, affected by the on-going impact of the Covid-19 pandemic in some key producing countries.

Gold spot-usd chart

I have no way of knowing how high gold will go. While I would not be surprised to see a pull-back, I think $1,800 is now a key level of support. Should gold break through the $1,900 resistance level and go on to hit all-time highs, then it could be blue skies ahead.

But I’m a value guy. Any time a stock is up 167% and the P/E multiple has gone from 2.5x to 6.7x (in the case of Caledonian), it’s time to scrape some winnings off the table.

Caledonian is still not expensive. But it operates in a difficult jurisdiction and should trade at a considerable discount to industry peers.

While on the subject of Zimbabwe, I note with dismay that the country’s economy appears to have entered a fresh downward spiral, amid uncertainty surrounding the parallel exchange rate.  

Hyperinflation has again reared its ugly head. But the government would appear to be in denial. In crisis however, there is opportunity…

A Zimbabwean precious metals miner to consider, trading on about 5x earnings

I have again recently bought shares in Zimplats (ZIM.AX), an ASX-listed platinum, palladium, gold, and rhodium producer that operates on the Great Dyke in Zimbabwe.

Zimplats appears to be firing on all cylinders. With palladium prices even higher than gold prices, rhodium prices in the stratosphere, and platinum prices on the move higher as well, Zimplats looks poised to report stellar results in 2020.

Output grew by 31% in the January-March quarter, while costs declined by 18% (from the December quarter).

The company’s majority shareholder, Impala Platinum, owns 87% and it has a very small free-float of just 13%. It is a bit of an orphan stock in Australia too, as it is a Guernsey-incorporated company, operating in Africa. Most investors can’t find a home for it in their portfolios. It’s not in the most popular Australian stock market indices, either. So index funds don’t chase it.

However, in my view, all that does is make the stock better value, as it flies under the radar. If prices for platinum group elements (PGEs) go high enough, the market will not be able to ignore it. Indeed, at the top of the last big boom in platinum, Zimplats shares went as high as A$18 per share, or more than double the current price.

At A$9 now, and on a mid-single-digit price to earnings (P/E) multiple, it looks good value. Very few publicly-traded PGE miners are listed or operate anywhere outside of South Africa, where platinum mining operations frequently suffer from power outages and labour unrest.

Zimplats has been an exceptionally good contributor to the Zimbabwe economy for many years, and it has good relations with the government there. They’d be very stupid to do anything to harm this golden goose.

I bring this chart with me on every business trip to Africa…

Click on the image to enlarge.

I whip it out whenever someone wants to denigrate the accomplishments of the mining industry on the continent and argue that mining harms rather than benefits Africans.

Sadly, there is a lot of misinformation on this topic. When mining is done right, it can be a huge source of wealth and promote economic development in Africa.

As you can see, of the US$6.6 billion in lifetime cash utilized by Zimplats’ mining operations in Zimbabwe, between 2002 and 2019, US$884 million has gone to the government in direct taxes and royalties, and a further US$630 million has been paid to Zimbabwean employees (on which the Zimbabwe government has also collected income tax).

Remember, this is HARD currency, US dollars, in a country that has been in economic freefall with hyperinflation for many of the years during which Zimplats has been successfully operating its mines in the country.

By comparison, US$103 million has been paid to Zimplats’ South African and foreign shareholders in dividends over the years.

Even the most battle-hardened anti-mining activist would have trouble arguing that mining is harmful, when presented with this sort of evidence.

Zimplats does it right. I salute them! And I’m proud to be shareholder.

Do you have any gold or other precious metals stocks in your portfolio? How have your results been in recent months? Did you invest in my suggested picks?

I’d love to hear about it.

Until next time,

Good Investing!

Tim Staermose

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