Gold mining company Acacia Mining(LSE: ACA) has surged by 11% today after reporting a 25% rise in production for the third quarter. Its strategy appears to be working well and it has a bright long-term future. But is now the time to buy it, given the uncertain outlook for gold?
Acacia's gold production rose to almost 205,000 ounces, which is 25% up on the same quarter of the previous year. This drove revenue higher by 48% and when combined with a reduction in cash costs of 26%, it had a positive effect on Acacia's profitability. The company's EBITDA (earnings before interest, tax, depreciation and amortisation) was $104m higher than in the third quarter of 2015 at $125m. And with its net cash position having increased by $32m to $203m, Acacia is in a stronger financial position than it was just a few months ago.
Looking ahead, Acacia is forecast to increase its bottom line by 53% in the next financial year. Despite this rapid rate of growth, it trades on a relatively low valuation. For example, Acacia has a price-to-earnings (P/E) ratio of 19.6. When combined with its earnings growth outlook, this equates to a price-to-earnings growth (PEG) ratio of only 0.4. This indicates that now is a great time to buy Acacia.
Of course, the outlook for the price of gold is uncertain. US interest rates are forecast to rise before the end of the year and this would have a negative impact on the gold price. That's because interest-producing assets would become more popular relative to gold, which could dampen demand for the precious metal.
Furthermore, the US election result may now be swinging towards a Clinton victory. If this occurs, there may be a more predictable outlook for US government policy. That's because we've had eight years of a Democrat President, so it would probably be more akin to a continuation rather than a change. This could also reduce demand for gold, since the precious metal tends to be popular during uncertain periods.
Clearly, Acacia lacks diversity. Therefore, less risk-averse investors may prefer to buy a mining company that has a lower risk profile in this respect. For example, Rio Tinto(LSE: RIO) produces a range of commodities including iron ore and aluminium. This helps to diversify its income stream and makes its risk profile lower than that of Acacia.
In addition, Rio Tinto offers good value for money. It trades on a forward P/E ratio of just 15.3 and has significant growth potential thanks to its sound financial footing. This provides it with substantial cash flow that can be invested in developing its asset base to produce higher profitability in future. And with Rio Tinto yielding 3.3% from a dividend covered 1.9 times by profit, it's a better income stock than Acacia, which yields 1.2% from a dividend covered 4.4 times by profit.
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Peter Stephens owns shares of Rio Tinto. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.