The dream of most investors when paying pennies for a share is that the price will soar until it is worth pounds. That could be what is about to happen for one penny share. It has already moved up 179% in the past year and is now tantalisingly close to the £1 price mark.
Gold focus in South America
The company in question is Serabi Gold (LSE: SRB).
It has actually been around for a while. Over five years, the share has grown 40%. Looking back further, though (when it traded as Serabi Mining), and the price chart is a horror show!
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Still, as the recent price surge suggests, many investors seem to think that things are now looking up for Serabi. Gold prices have been going gangbusters, which is good news for a miner of the yellow metal.
Yesterday (28 November), Serabi released unaudited accounts covering the first nine months of the year. They contained lots of reasons to be cheerful.
Gold production was 9% higher than in the equivalent period last year. The company held cash at the end of September of $20m, equivalent to around 22% of the company’s current market capitalisation. It expects a larger cash pile by year-end.
Post-tax profit soared 387% to $18m. On an annualised basis, that means Serabi is now trading on a price-to-earnings ratio of less than four.
Why I’m hesitant to invest
Clearly, Serabi is in clover right now. Given how close the stock is to the pound threshold and how strong its earnings have been so far this year, I think a higher valuation could easily push the shares past the pound mark – and beyond.
But while I think the profit performance is very impressive, I have no plans to add this one to my portfolio.
Why? Put simply, I do not like the lack of diversification.
Serabi is plainly focused on gold mining and development in Brazil. For that to continue to be a lucrative business (or at least lucrative in the way it has been lately) I think two things needs to hold. Gold prices need to remain buoyant. Also, Brazil needs to continue to be a good place for the company to do business (you cannot move a mine, and tax-hungry governments know that very well).
What the gold price will do from here is unknown, but clearly there is a risk that it will not sustain its recent high level over the long term. Meanwhile, while gold producers make hay, I see a risk that the tax and regulatory environment in Brazil could eat into profitability.
Despite the incredible price rise over the past year, I see this stock as a potential bargain even now. But the risks involved simply exceed what I am comfortable with as an investor.
