A top 'turnaround' stock set for take-off

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Gold miner -- and havoc-player with my new false teeth -- Petropavlovsk(LSE: POG) released its annual results today. These show the company's turnaround as being on track and the board looking ahead with optimism.

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The shares are up 6% to 7.75p by late morning and I believe this stock has the potential to be a big winner for investors. It's a higher risk/higher reward proposition, as I'll explain, but for those with a lower appetite for risk, I have another gold stock that could interest you.

Rewards

Petropavlovsk swung into profit in 2016 for the first time in four years. The profit of $31.7m contrasted with a loss of $297.5m in 2015. Total cash costs of $660 per ounce were 12% lower and all-in sustaining cash costs of $807 per ounce were 8% lower. Meanwhile, the average realised gold price of $1,222 per ounce was 4% higher.

Gold production for 2017 is set to increase to between 420,000 oz and 460,000 oz from 416,300 oz in 2016. This will be primarily from the group's established open pit operations. Furthermore, the longer-term future is bright with maiden underground mines set to ramp up gradually in 2017, a pressure oxidation hub scheduled for completion in 2018 and licences with vast untapped resource potential.

Consensus forecast earnings of 0.44p a share for 2017 may see some upward revision, but even as they stand, a P/E of 17.6 looks cheap to me for the potential long-term growth on offer.

Risks

Petropavlovsk's operations are in Russia, so political risk is a consideration, while the company will lose a valuable asset with the upcoming retirement of its long-standing chairman Peter Hambro.

Debt is also a consideration, because although the company refinanced the bulk of it last year, it remains relatively high, with net debt standing at $598.6m at the year-end. The company is also the guarantor of a $234m project finance facility of its Hong Kong-listed iron ore associate IRC Limited.

However, in today's 'going concern' statement, Petropavlovsk said it's satisfied it has sufficient headroom under a base case scenario and is confident it could successfully implement mitigating actions under a reasonable downside scenario.

Gold goliath

On balance, I believe Petropavlovsk could be a great buy at current levels for risk-tolerant investors. However, if you're looking for a lower-risk gold play, £6.4bn FTSE 100 giant Randgold Resources(LSE: RRS) is a solid choice.

The company has operations in four countries across Africa and a feasibility project in a fifth, so geo-political risk isn't as concentrated as for Petropavlovsk. Moreover, Randgold's balance sheet is considerably stronger. At the year-end it had $516.3m cash in the bank and no debt.

Of course, these strengths mean Randgold trades on a higher P/E -- 27.4, based on the consensus earnings forecast and a current share price of 6,820p. There's also a modest but handy prospective 1.8% dividend yield.

With earnings set to rise around 20% annually over the next few years, and the shares trading 30% below the high they reached in the aftermath of the Brexit vote, I believe now could be a good time to buy into this gold goliath.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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