With gold expected to continue the trend we have seen over the last six months, investors will continue to soften their holdings in publicly traded gold mining companies.
One of the miners I would suggest selling is Acacia Mining PLC (LSE:ACA, Financial), the African subsidiary of Barrick Gold Corp. (ABX, Financial). The larger Canadian gold producer has a 63.8% equity interest in the mine operator.
The stock was trading around $1.93 at market close on Oct. 19, reflecting a nearly 34% decline over the previous 52 weeks. Acacia Mining has underperformed the VanEck Vectors Gold Miners Exchange-Traded Fund (GDX, Financial) by nearly 20%, as illustrated by the chart from Investing.com. Acacia is one of the worst performers since the bullion started its downtrend.
Source: Investing.com
Because the company has a lot of weaknesses, the stock is still too expensive. The closing share price on Friday was over the 200-, 100- and 50-day simple moving average lines and nearly 60% above the 52-week low of $1.22. The 52-week high is approximately $2.7.
Source: Investing.com
Currently, the stock is a sell for the following reasons. Acacia is placing a lower volume of metal on the market than in 2017. As an indication, the miner produced 136,640 ounces of gold in the third quarter, reflecting a nearly 30% decrease from the prior-year quarter. Lower production means a lower sales volume of about 135,875 ounces of gold and, consequently, lower revenue. The miner recorded $166 million in revenue, reflecting a 3% decline on a year-over-year basis.
To invigorate the profitability of Acacia Mining’s operations, the commodity needs to stay at least $1,300 per troy ounce, as it was for the 52 weeks through the second quarter of 2018. At this level, Acacia Mining has outperformed most of its peers in terms of a higher trailing 12-month earnings before interest, taxes, depreciation and amortization margin. Acacia Mining’s margin was 39% of total revenue versus an industry median of 24%.
With the commodity expected to stay below $1,250 per troy ounce until 2019, the odds the miner will continue to surpass the industry are extremely low. In fact, during the third quarter, when the bullion averaged $1,212.75 per troy ounce on the London Bullion Market, Acacia Mining produced an adjusted EBITDA of $44.6 million, which was over 40% lower than in the year-ago quarter. The bullion averaged $1,278 per ounce during that period.
A lower gold price combined with lower production will produce a negative impact on the cash balance of $117 million, of which 30% will be used for capital expenditures.
As of Sept. 30, the miner's total debt amounted to $42.6 million.
The progressively challenging mining environment in Tanzania, in addition to the rising risks to the workers’ safety and security, are also weighing on Acacia Mining’s outlook. Investors are concerned about the ongoing disputes the company has with the Tanzanian government about the Bulyanhulu and Buzwagi mines and criminal charges brought against some employees of the company.
The company's third mine is the North Mara gold deposit, which is also located in Tanzania.
For full fiscal 2018, the company is targeting production to be a little over 500,000 ounces at an all-in sustaining cost of $935 to 985 per ounce.
The stock was down 1.69% at 1.455 British pounds ($1.89) on the London exchange on Monday. The market capitalization is approximately 649.37 million pounds.
Disclosure: I have no positions in any securities mentioned in this article.
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