10 speculative mining stocks for gold bugs

Stockpedia’s Ben Hobson has built a list of the highest-ranking gold stocks as the yellow metal rallies.

For many investors the metals and mining sector has some uniquely appealing traits that make it a portfolio diversifier like no other.

On one hand, the UK’s quoted miners are a popular source of small-cap punts. It’s a sector packed with speculative exploration plays that pay off rarely, but serve up lottery-like profits when they do.

Then there are the mega-cap global producers, which generally benefit from very little domestic exposure. When turmoil hits the economy and markets slide, these integrated miners tend to hold up better than most. Their prices surge when the macro picture is bright, and they pay market-leading dividends to boot.

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So when Coronavirus emerged earlier this year, it wasn’t easy to know how the sector would respond. China was, it seems, the source of the pandemic and in terms of global supply/demand dynamics, that looked like bad news. That’s because China is easily the world’s largest consumer of industrial metals - and it’s also a major producer of a lot of them. So the prospect of blockages both ways rattled equity prices.

But it wasn’t just China. Around the world, countries and companies have moved to suspend operations to protect workers. And while some mining projects are easy to mothball, others are much more difficult and expensive to put on hold.

For the average investor, it has been difficult to make sense of it all. It’s hard to predict how this kind of global crisis affects not just the prices of commodities and metals, but also the companies that produce them. But one metal that has behaved as you might have expected is gold.

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Over the past year, the price of gold has risen by nearly 30% to around US$1,781 - a high not seen for eight years. Commentators think there’s more to come. Given that gold is a beloved safe haven in times of trouble, it makes sense that the mining stocks that produce it should do well too.

Past performance is not  a guide to future performance.

The catch is that while the UK market is popular with global mining groups, gold is surprisingly under-represented. Gold producing mega-caps like Barrick Gold (NYSE:GOLD), Newmont Mining (NYSE:NEM), Anglogold Ashanti Ltd (NYSE:AU), Polyus (LSE:PLZL) and Kinross Gold (NYSE:KGC) are all quoted elsewhere. Only FTSE 100 listed Polymetal International (LSE:POLY) into the top 10 global gold producers. 

So to get gold exposure through UK equities the only choice is to look further afield in the market for smaller - in some cases much smaller - opportunities.

This week we’ve pulled together a list of some of the highest-ranking gold stocks based on Stockopedia’s composite StockRank assessment of every share’s exposure to Quality, Value and Momentum - from 0 (poor) to 100 (excellent). Under the London Stock Exchange’s classification, these are all outright gold shares apart from Polymetal, which counts as an integrated mining group, although its main focus is gold and silver production.

Based on six-month relative price strength, these gold stocks have clearly performed very well recently. Names like Goldplat (LSE:GDP), Centamin (LSE:CEY), Pan African (LSE:PAF), Hummingbird Resources (LSE:HUM), Shanta Gold (LSE:SHG) and Polymetal (LSE:POLY) have soared. But as is often the case with mining shares generally, their price/earnings ratios rarely look outrageous, partly because of the cyclical nature of the sector. 

In terms of medium-term price volatility, most of these stocks rate as speculative, meaning that their prices are historically more volatile than average. But overall, their quality-value-momentum rankings are very strong.

Despite the fact that some of these miners are very small and speculative, their exposure to gold has proved to be a big advantage in the current market conditions. In more normal times, these stocks can be prone to volatility, but the gold sector generally has shown why it can be such a useful diversifier when the rest of the world feels like it is falling apart.

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