North Korea’s latest missile launch has sparked a wave of anger around the world. The US has decided to take a “more measured approach” to the country’s actions this time around, rather than throwing fuel on the fire. But US Ambassador to the UN Nikki Haley told the Security Council yesterday that “the US will not allow this lawlessness to continue,” hinting that Donald Trump and his team are, in fact, considering military action.
With uncertainty growing, investors have sought safety in gold. Since the beginning of July, the price of gold has added nearly 10% thanks to steady demand, and if tensions escalate, there could be further gains to come.
However, rather than buying gold itself, I believe gold stocks are a better option for investors seeking safety.
Safe haven
Unlike gold, mining stocks offer investors levered exposure to the price of gold through operating leverage. Also, unlike gold, which costs money to store, most miners offer dividends to shareholders so that you can benefit from both rising gold prices and income.
Centamin (LSE: CEY) is a great example. Shares in this Egypt-based gold miner currently trade at a forward P/E of 17.4 and support a dividend yield of 3.3%. For the past four years, as the company’s earnings have grown and as the balance sheet has improved, the firm’s dividend payout has more than doubled.
Last year, the company paid out regular and special dividends totalling 11.9p for a one-off dividend yield of 9.1%. The company recently announced that it was raising its interim dividend by 25% thanks to higher gold prices and cost cuts, which will push the all-in sustaining cost of gold production for 2017 down to $790/oz, compared to today’s gold price of $1,310.
As well as producing a haven asset, Centamin could be called a safe haven company itself. At the end of the first half, the company had $333.6m in cash and bullion on hand, roughly £256m or 14% of its current market value. This cash balance should ensure that the business can remain afloat and continue to produce an income for shareholders.
Silver margins
If Centamin isn’t for you, Hochschild Mining (LSE: HOC) is another safe haven miner.
Unlike its peer, Hochschild mainly produces silver, although gold is also on the menu with 121,000 ozs of the yellow metal mined during the first half of the year.
For full-year 2017, it is targeting production of 37m equivalent silver ounces at an all-in sustaining cost of between $12.2 and $12.7/oz, so this company is more of a play on rising silver prices than Centamin. Over the past few years, as silver has traded below $20/oz, it has struggled, but now prices are heading higher the miner’s margins will expand, and it should be able to rebuild its balance sheet and improve shareholder returns.
Shares in Hochschild currently support a dividend yield of 1.2%, which isn’t much compared to the wider market, but it’s more than you would receive from most interest-bearing accounts today.
