The gold price has fallen by mid-single-digits in both dollar and sterling terms since the start of the year. However, against this negative backdrop, the share prices of a few of the 30 or so gold miners listed on the London market have flown higher. Can these star performers continue to shine?
The three best
Due to the high fixed costs of mining, operational leverage means that small changes in revenue are magnified at the profit level. As such, movements in the price of gold also tend to be magnified in the movement of miners' share prices. So we shouldn't be surprised that as many as 24 of London's gold miners have seen their share prices fall much further than the decline in the gold price. A 24% drop for FTSE 100 giant Randgold Resources and a 22% drop for mid-cap Centamin are fairly typical.
However, as well as operational leverage, other factors can influence performance, particularly among smaller companies. The five stocks that have risen so far this year all belong to London's junior AIM market. Three of them have posted double-digit gains.
Cora Gold, an £8m microcap explorer, has released a string of positive updates on its drilling in Mali and Senegal. It's shares are up 27%.
Shanta Gold, a £44bn explorer, developer and producer (its flagship mine is in Tanzania), has seen its shares rise 28%. The benefits of management changes last year, bringing a new focus on maximising shareholder returns through cost control and optimisation, have come through in spades this year.
Avesoro Resources, a £196m cap producer, has been the top riser, gaining 32%. This has come on the back of strong operational performance at its mines (one in Liberia and two in Burkina Faso) and good progress on converting mineral resources into reserves and extending mine life.
Clearly, all three companies are doing well, but are their shares worth buying today? Microcap explorers like Cora are too speculative for me but Shanta and Avesoro, while still high-risk, are stocks in which I'd consider a small position at their current valuations. Shanta is forecast to post revenue of £82m this year and earnings per share (EPS) of 1.5p, putting it on a price-to-earnings (P/E) ratio of just 3.7. Avesoro is expected to generate revenue of £240m and with forecast EPS of 47p, is on a P/E of 5.1.
Finally, if I were looking for lower-risk exposure to gold, a stock I'd be happy to buy today is ETFS Physical Gold (LSE: PHGP). This provides a simple and cost-efficient way to gain exposure to the gold market by providing a return that mirrors the gold price (less the management fee). The ongoing charge is a reasonable 0.39%.
There are a number of similar vehicles on the market but there are a couple of things about ETFS Physical Gold that appeal to me. It's the UK's largest, with a market value of close to $6bn. And unlike some of the alternatives, which mirror the movement of the gold price synthetically with derivatives, ETFS Physical Gold, as its name suggests, is backed by physical gold. This is held by HSBC Bank as custodian. Each physical bar is segregated, individually identified and allocated.
Whether you prefer your gold safely locked up in a vault or the excitement of exploration, the London market caters for it.
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G A Chester has no position in any of the 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.