These 2 mid-cap gold miners could have further to go

Egyptian gold miner Centamin (LSE: CEY) expects gold production to hit the upper end of its target range this year, according to this morning's Q3 update. The FTSE 250 firm said that gold production was 6% higher at 148,674 ounces during the third quarter, compared to the second quarter.

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It's the latest in a long run of good news from Centamin. Like those of its mid-cap peer Pan African Resources (LSE: PAF), shares of Centamin have risen by more than 140% so far this year. Rising production has combined with a stronger gold price and a weaker pound to provide a massive boost to the value of these stocks.

Despite this, shares in both firms still look quite affordable. In this article I'll explain why I believe both companies could have the potential to deliver further gains for shareholders.

Gold looks well supported

The price of gold has fallen back from a peak of $1,375 per ounce earlier this year to its current level of $1,275/ounce. But according to trade body the World Gold Council, demand for gold was 17.6% higher during the first half of this year than during the same period last year.

Over the same period, gold supply has risen by just 7.5%. This suggests to me that the balance between supply and demand is likely to be tightening in favour of gold miners. In my opinion, gold is more likely than not to rise from current levels.

Will these risks threaten profits?

Choosing between Centamin and Pan African isn't quite so easy. Both companies face local political and operational risks that could cause problems in the future.

Although they seem largely forgotten, the legal troubles that threatened Centamin's licence to mine in Egypt in 2012 are still ongoing. An unfavourable outcome seems less likely than it did then, but there's still a risk of further problems.

Pan African operates in South Africa, so the risk of industrial unrest and rising wage costs can't be ignored. There's also the possibility that a future government might change ownership requirements under the existing black economic empowerment regulations.

Exchange rate fluctuations could also affect profit margins at both miners.

I remain positive

Today's third-quarter update from Centamin showed that the firm's balance of net cash and cash equivalents rose by $85m to $417m during the period. That's equivalent to about 19% of Centamin's market cap, or 30p per share.

All-in sustaining costs for the full year are expected to be towards the lower end of the firm's guidance of $720-$750 for an ounce. With gold at $1,275/ounce, these low costs should ensure that Centamin remains profitable and cash generative even if the gold rally slows.

Centamin shares trade on 9.5 times 2016 forecast earnings. I remain keen -- although it's worth noting that a profit-sharing agreement with the Egyptian authorities is expected to reduce profits slightly next year.

On balance, I think Pan African Resources may be a slightly more attractive pick. The company has almost no debt and trades on a forecast P/E of just seven. A prospective dividend yield of 5.1% should be backed by free cash flow, and is more than double the 2.3% expected from Centamin this year.

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Although the outlook appears to be positive for gold investments, I believe it still makes sense to run a diversified portfolio.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.