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Like many junior miners, AIM listed Highland Gold Mining (LSE:HGM) saw its share price decimated during 2012. The stock traded at 197p at the start of the year. Just before Christmas I flagged this up as a stock to have a nibble at when the share price was as low as 91p. In the three weeks that have followed the shares have climbed back to 102p bit, with a market capitalisation of £334 million they are still a buy.
To read my article of 21st December where I argued that the shares were a buy click here
The 2012 share price slide was down to a number of factors. The whole sector has been about as popular as the Jimmy Savile fan club during 2012 and it is hard to swim against such a tide. However having Barrick Gold dump its 20% stake in the company in April at 120p a share also spooked some investors. And there were operational issues thanks to inclement Russian weather (whatever happened to global warming?) and that impacted net income. But recent news is more positive.
Moreover there is a sectorwide issue. Whether the gold prices pushes past $2000 an ounce as I believe it will or stays at current levels is perhaps not clear at this stage. But given the ongoing printing of money across the West it clearly is not going to collapse. Yet gold stocks were, by the end of 2012 starting to discount a long term gold price of sub $1200. In other words all the bad news that there could be was more than discounted. Gold stocks were pariahs. They were grossly oversold. Investors seem to have twigged that and are now buying into what is clear value. If a gold company has a good story to tell its shares could be re-rated quickly and still not be expensive such was the scale of the 2012 sell off.
FIVE OTHER GOLD STOCKS YOU MAY WISH TO BUY
- Medusa Mining – analysis here
- Shanta Gold – analysis here
- Aquarius Platinum (not a gold stock but on a roll) – analysis here
- Minera – analysis here
- Pan African Resources – analysis here
In terms of Highland, there were two releases made by the company on 29 November, a Project Update and a Drilling Report. The former is purely an announcement reassuring the market that the new stand-alone processing plant at its Belaya Gora project is “progressing well” with commission of this facility to be expected in Q1 of 2013 (even though this is slightly behind schedule given that this was expected to be completed by Q4 2012). It goes on more importantly to reiterate its production guidance of 200,000 to 215,000 ounces of gold (and equivalents) with Belaya Gora to contribute to production guidance of 2013. That is all very encouraging.
The second piece of news related to drilling results for three deposits around the Mnogovershinnoye mine. This mine is Highland’s main gold producing operation and the company is looking to prolong the life of mine by substantially increasing the resource base within the licensing area. Two of the three targets drilled, are open pittable and all show good widths with excellent grades. This is very positive news for the company which remains committed to its near-mine exploration, with all the prospects subject to an independent JORC compliant audit with results expected to be received during Q1 2013.
More recently, on December 10th the company announced the acquisition of a license for exploration and mining rights for the Western Flank, a 3.9 km² property immediately adjacent to the Company’s existing Mnogovershinnoye operations. This new license area includes the highly prospective Chaynoye zone which has good potential to deliver new resources at Mnogovershinnoye with the prospect providing a favourable structural setting near the intersection of two major faults immediately northwest and adjacent to the current Mnogovershinnoye license area.
This area was partially explored in the past and has a historical reported resource of 3.5 tonnes (112,500 oz) of gold. An aggressive trenching and drilling programme in 2013 will upgrade the resource potential of Chaynoye for future exploitation via the Company’s operations at MNV.
According to broker Fox Davies cashflow per share should increase dramatically during the next few years. The forecasts below covering calendar 2011 to 2014) are based in gold price assumptions which are pretty cautious. Clearly if the gold price moves higher as I expect these numbers are low. But The bottom line is that the shares now trade on a cashflow multiple of less than 1.5 times 2013 numbers which, even accounting for Russian country risk looks far too low.
| Cashflow/Share: (p): |
43.1 |
44.9 |
67.8 |
71.7 |
| Gold Price (US$/oz): |
1571.1 |
1638.6 |
1700.0 |
1587.5 |
I would have thought that a three times multiple was not demanding and as such, a valuation of 200p is far from implausible. If I am right about gold the shares should more than double. I am not the only bull. Brokers Fox Davies and Westhouse have issued both published buy notes recently with target prices of 181p and 160p respectively. The shares are a buy.
Tom Winnifrith is a speaker at the UK’s top Investor Show of 2013, UK Investor Show which will be held in London on April 13. Other keynote speakers include Nigel Farage MEP, Nigel Wray, Evil Knievil, Lucian Miers, Mark Slater, Dominic Frisby and Nick Leslau. For full details and to book a free ticket go to www.UKInvestorShow.com
News today that Jan Nelson of Pan African Resources and Paul Atherley of Leyson Resources are also speaking has only added to demand for tickets which are now almost 50% sold out. To make sure you get a free ticket book now HERE
