Interactive Investor

Is the shine coming off this gold stock after meteoric rise?

19th August 2020 15:32

Graeme Evans from interactive investor

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Hochschild Mining’s share price soared to a three-year high this month, but has now fallen 10% after cutting its dividend.

A gold price of $2,000 (£1,513.9) an ounce is no guarantee of stock market success after Hochschild Mining (LSE:HOC) shares fell sharply today on the back of its decision not to pay a dividend.

The FTSE 250-listed gold and silver producer has been hit by disruption caused by Covid-19 at its mines in Argentina and Peru, with the lost output resulting in a 35% slide in half-year revenues despite a 28% rise in average gold price over the period.

Hochschild only resumed production at its flagship Inmaculada gold-silver mine located in southern Peru on July 28, with the site due to be at full capacity later this month.

But with the pandemic continuing to cause uncertainty in the countries where Hochschild operates, the company said it would not pay a dividend alongside today's interim results. It previously withdrew its full-year dividend payment in April.

Shares slid more than 10% to 250p today, having rallied from a low of 90p in March to a three-year high of 317p earlier this month on the back of stronger gold prices. 

The upward momentum for gold started last year after the US Federal Reserve cut interest rates for the first time since the financial crisis, and has continued as the yellow metal became a safe haven asset during the pandemic.

Precious metal prices have pulled back from above the $2,000 threshold in recent days, which analysts at UBS said yesterday was no bad thing given the extent of the recent investor frenzy and some unrealistic price expectations.

The Swiss bank added:

“Historically, exponential price rallies rarely turn into a gentle price uptrend and are usually followed by big price pullbacks and price fluctuations.”

UBS has been long on gold since May 2019, when the price was below $1,300, although it admits the upside from current levels looks more limited. However, it still expects gold to revisit its previous highs as real US interest rates go more negative and US dollar weakness continues.

The surging gold price has boosted the stock market fortunes of a number of companies, including FTSE 100-listed Polymetal International (LSE:POLY), after the Russian and Kazakh-based miner increased output at just the right time.

Unlike Hochschild, Polymetal has reported no material impact from Covid-19 on its operations. In fact, depreciation of the Russian rouble and Kazakh tenge has helped to offset higher costs relating to the pandemic. Its shares topped 2,000p for the first time in early August, having almost doubled in value since mid-March.

Among smaller stocks, Greatland Gold (LSE:GGP) has seen its shares surge from below 2p at the start of the year to more than 13p as investors continue to see the potential of its Paterson exploration licences in north-western Australia.

Last year, the company entered into a farm-in agreement with Newcrest Mining (ASX:NCM) to explore and develop the Havieron gold-copper discovery. The site is close to Newcrest's Telfer mine, which has produced millions of ounces of gold but is nearing the end of its life.

Today, shares jumped 8% after Greatland disclosed that it was moving forward with systematic drill testing of other high-priority targets in the Paterson region, starting with the Scallywag prospect.

These targets were identified by previous geophysical and geochemical surveys, with many displaying similar characteristics to the nearby Havieron gold-copper deposit.

Analysts at Hannam & Partners today upgraded their price target on Greatland to 17.8p, based on an updated gold price forecast of $1,950 an ounce and a valuation on non-Havieron assets of $100 million, compared with $50 million previously. 

They added:

“Further increases in the gold price in the current bull market are also likely to have a positive effect on the company's shares.”

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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