Gold has been on a roll this year and every piece of bad news makes it look like a smarter investment.
That’s because gold comes into its own when times are hard – and they are particularly grim right now. Gold also does well when interest rates are low – and they are at record lows in most parts of the world today.
Buying gold outright or investing in Exchange Traded Funds offer direct exposure to the metal. But there is also the option of buying gold mining shares.
Coining it: Chief executive Richard Gray in the mine which has already produced commemorative coins
MIDAS UPDATE: There’s even more gold in them thar SCOTTISH hills!
Some investors may find gold alluring but would prefer to keep their cash close to home, supporting businesses and fostering employment on these shores. Scotgold is an intriguing option for anyone falling into this bracket.
The company is just weeks away from commercial gold production at the Cononish mine, located in the Loch Lomond and Trossachs National Park.
The mine is in place, the processing plant has been built and production will officially begin on November 30, with around 10,000 ounces of gold forecast for 2021. Mining for gold in the middle of a national park is far from easy and Scotgold has spent years working with environmentalists and planning authorities to ensure that its operations will not blight the landscape.
Chief executive Richard Gray experienced further delays this year too, as a particularly wet Scottish winter was followed almost immediately by a stringent lockdown. Now, however, the company is set fair. Local communities are on board, ecological concerns have been appeased and production is starting, as the gold price approaches record highs.
The timing is fortuitous, so much so that Scotgold recently raised £3million on the stock market so it can expand more quickly over the next couple of years, more than doubling production to 23,000 ounces annually by 2022.
Gray is also investing in exploration activities. Scotgold has mining rights over more than 700,000 acres of land stretching across the centre of Scotland. Early indications suggest that considerably more gold could be found along this terrain, enhancing Scotgold’s long-term production.
In the near term, prospects are bright. Scotgold will export threequarters of its gold as concentrate to be refined overseas but the rest is smelted on site and refined as Scottish gold. Edinburgh-based jewellery firm Hamilton & Inches and Orkney designer Sheila Fleet have both worked with Scotgold in the past and are keen to take as much Scottish gold as they can, around 2,500 ounces next year.
This will be turned into premium jewellery, with owners knowing that it contains gold produced in Scotland, according to the highest ethical and environmental standards.
Depending on demand – and future production – Scotgold may gradually refine more of its gold locally, possibly at an industrial hub in Central Scotland, such as Grangemouth.
Brokers SP Angel expect sales of around £9.6million next year, soaring to £22million in 2022. Costs are among the lowest in the industry so Scotgold is likely to be highly profitable, with profits of £3million forecast for 2021 tripling to £9million the following year.
Midas verdict: Midas recommended Scotgold a year ago, when the shares were 54p. They have more than doubled since then, to £1.19, as commercial production has moved ever closer. At this level, cautious investors may choose to sell a chunk of stock and bank some profit.
But selling out completely would seem wrong. This is a rare British mining success story, which should deliver strong growth over the coming years. New investors, with a patriotic bent, may want to tuck a few shares away even after the recent strong performance.
Traded on: AIM Ticker: SGZ Contact: scotgoldresources.com or 01838 400 306
Many investors view these stocks with suspicion and choosing the right ones can be tricky. Some are at the exploration phase so they produce no revenue and eat up cash. Some are based in countries that are politically unstable or where the rule of law is open to interpretation. Many tend to overpromise and underdeliver. And sometimes, they just fall prey to bad luck.
Yamana Gold strives to avoid these risks. Based in Canada, it has five operational mines, dotted round North and South America in areas with a strong history of gold mining and laws to protect and support it.
The company has been listed in Toronto and New York for years but recently chose to join the London Stock Exchange too. The shares are £4.50 and deserve a closer look.
Yamana has been headed since 2003 by Peter Marrone, a former lawyer and investment banker. After spending many years working with mining clients, he came across a gold mine for sale in Brazil back in the early 2000s. Interest was limited, Marrone secured a good price and that was the beginning of Yamana Gold. Today, the company is a £4.2billion business, with a 13-year history of dividend payments.
The group still operates in Brazil but it has expanded into Chile and Argentina and owns a 50 per cent share in Canada’s largest gold mine, Canadian Malartic, in Quebec.
Collectively, these assets produce around 880,000 of gold per year. Two sites produce silver as well, at a rate of about ten million ounces annually. Just this month, Marrone upgraded forecasts for 2020 and announced a chunky increase in the dividend, now expected to total 5.5p this year, more than double last year’s figure. Marrone also indicated that the dividend would be at least 8p in 2021, remaining at or above that level for the next three years, even if the gold price dips.
The dividend declaration shows balance sheet resilience but it is also a sign of confidence in the future, underpinned by a well thought out growth strategy.
First, Marrone and his team intend to increase production materially over the next two to three years, by expanding operations at Yamana’s Brazilian mine and processing more gold on the group’s two Chilean sites.
In the longer term, the Canadian mine offers significant potential too. Currently, all the gold is mined from an open pit but recent exploration uncovered 11 million ounces underground, which should translate into annual production of at least 400,000 ounces by the late 2020s.
There are plans for growth in Argentina as well, developing a low-cost copper and gold mine in a joint venture with international mining giants Glencore and Newmont.
Companies that produce gold and other metals often talk about gold equivalent ounces. Yamana currently produces around a million gold equivalent ounces but Marrone’s expansion plans should take that number to 1.5 million over the next few years. Most of this growth will be organic, as the company is loath to splash out on acquisitions unless very clear opportunities emerge.
The firm is consistently mindful of costs. Some gold miners embark on lavish spending sprees when the gold price is high. As a near 20-year veteran of the industry, Marrone knows better than that and all the firm’s plans are devised so they will work even if gold falls significantly from current levels.
Midas verdict: Gold miners have a reputation for recklessness and many failed enterprises would suggest there is some truth in that notion. Yamana Gold aims to be different, offering long-term growth, a conscientious approach to costs and a consistent dividend. At £4.50, the shares should prove rewarding.
Traded on: Main market Ticker: AUY Contact: yamana.com or 001 416 815 0220