Gold and silver miner Hochschild (LSE: HOC) has released an upbeat production report for the three months ended 30 September. It shows that the company is making strong progress with its strategy. As such, its share price looks set to rise further following its year-to-date gains of 438%.
Hochschild’s production in the third quarter reached record levels. It produced 9.9m silver equivalent ounces, which is a 19% rise on the same quarter of last year. Hochschild also produced 133,900 gold equivalent ounces and has upgraded its production forecast for the full year. It now expects to produce 35m silver equivalent ounces and 470,000 gold equivalent ounces.
Hochschild has a significant brownfield exploration plan in place, which is expected to increase the ‘life of mine’ and also deliver additional low cost growth. Its financial standing has improved through the repayment of $58m of debt in the third quarter. This brings its net debt down to $230m from $366m at the end of 2015. This reduces Hochschild’s risk profile and means that it’s better prepared for a potential downturn in the precious metals market.
In the short run, there’s a good chance that the prices of gold and silver will fall. US interest rates are expected to rise over the next year and could move higher before the end of the year. This would make gold less appealing due in part to a stronger US dollar. However, the market seems to have priced in a US interest rate rise since the price of gold has fallen by 5% in the last month.
Looking cheap
Looking ahead, Hochschild is forecast to increase its bottom line by 102% in the next financial year. This puts it on a forward price-to-earnings (P/E) ratio of 13.2, which shows that it offers excellent value for money. In fact, it’s cheaper than sector peer Rio Tinto (LSE: RIO). It has a forward P/E ratio of 15.8, although Rio Tinto’s risk profile is lower than that of Hochschild.
For example, Rio Tinto’s earnings are mostly made of up iron ore production. However, it has exposure to other commodities such as aluminium which provides it with a degree of diversity. This contrasts with Hochschild, which is a pureplay precious metals miner. Furthermore, Rio Tinto has a stronger balance sheet and superior cash flow than Hochschild, which could allow it to make acquisitions or develop its asset base over the medium-to-long term.
Therefore, Rio Tinto offers a superior risk/reward ratio than Hochschild. However, this doesn’t mean that Hochschild lacks appeal. It remains an improving business, which offers significant growth prospects at a relatively low price. With global uncertainty being relatively high, holding gold and silver miners such as Hochschild could be a logical move over the medium term.
