Commodity markets are notoriously volatile, reflecting the competing dynamics of supply, demand, and exchange rates that dictate price movements. Yet in the current uncertain macroeconomic and geopolitical climate, I think buying UK gold shares is worth serious consideration.
One such stock that’s grabbed my eye is Pan African Resources (LSE:PAF). The gold miner’s risen exactly 40% in value in the year to date, carried higher by a booming bullion price. But I think it still looks dirt cheap at current prices of 49.9p per share.
Here’s why I think it could be one of the best cheap UK shares to consider today.
Leveraged gains
There’s multiple ways that investors can try to gauge the cheapness of a company’s shares. In the case of Pan African Resources, I believe it looks like a brilliant bargain when considering its expected profits trajectory.
Predictions of rapid annual earnings growth (20%) leave the company dealing on a forward price-to-earnings (P/E) ratio of 9.6 times. On top of this, it has a P/E-to-growth (PEG) ratio of just 0.5.
Any reading below 1 implies that a share is undervalued.
But why purchase gold stocks like this instead of buying the metal itself or a bullion-tracking fund? One reason is the potential for supersized gains — when commodity prices rise, miners’ earnings can increase more sharply thanks to their largely fixed cost bases.
This leverage effect was evident in Pan African’s results for the 12 months to June 2024. Back then, annual profits rose by 30.2%, far ahead of a 16.8% increase in revenues.
Production rises expected
It’s important to note, however, that it hasn’t all been plain sailing for Pan African Resources of late.
Shaft commissioning delays at its Evander Mines project meant output dropped 3.3% in the six month to December, to 84,705 ounces. Revenue dipped 1% as a result.
Hiccups like this can occur at all stages of a mine’s life, presenting a constant threat to producers’ earnings. But with said delays now in the past, things at the moment look a lot rosier for the company on the production front from this point.
It’s predicting production of 215,000 gold ounces in fiscal 2025, up 16% year on year. This is tipped to jump even further next year, to 270,000-308,000 ounces, as production begins at its Tennant Consolidated Mining unit in Australia.
Gold rush
This all leaves Pan African well placed to capitalise on gold’s multi-year run.
Of course there’s no guarantee that gold prices will keep surging (bullion’s just breached $3,300 per ounce for the first time ever). But growing geopolitical uncertainty and macroeconomic stress, combined with a gloomy outlook for the US dollar, mean things are looking good for the yellow metal.
And with prices holding above $3k an ounce, gold is trading comfortably above Pan African Resources’ projected production costs. All-in-sustaining costs (AISC) are expected to fall to between $1,450 and $1,500 an ounce for the six months to June, with further declines likely (approximately half of next year’s output is set to come from low-cost surface operations).
