Opportunities in Gold & Coal?
Uncertainties remain one of the key driving factors in the market, and with laws from central banks and governments changing rapidly; there is an opportunity for investors to capitalize on the volatility it produces.
Here is a look at companies that deal with coal and gold, which are highly influenced by the commodity price, and may provide better returns for short- to long-term investors as uncertainties continue to take a toll on the market focus.
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Gold - DRD Gold Limited (JSE:DRD)
Gold can be a safe haven against inflation.
Starting CY20 in a bearish position, a number of gold stocks have retreated to a 52-week low point. This comes after central banks started eyeing the reversal process of "free cash" in the global economy. This was implemented as a result of the global pandemic which pushed central banks to print money in an attempt to save lives and the economy at the same time.
In 2020, with the COVID virus creating ripple effects in the global economy, inflation rose, providing support to the gold prices - as more money was being printed.
Considered to be a medium-cap for now, with a market capitalization of R11,23 billion, a share price of R13 and 864,59 million shares, DRDGold outperformed the spot gold price and competitors within the 2020 calendar year (CY) period before retreating to its 52-week low point. This took place as monetary policies changes challenged the confidence of investors in the overall gold market.
Financials
DRDGold reported a 26% revenue increase to R5,2 billion in its six months, ending on June the 30th, 2021, vs. 4,18 billion in the previous comparative period (PCP). Profits from operations were up by 39% to R2 billion from R1,5 billion in pcp.
The group's earnings grew by 104% to R1,68 within the period compared to R0.82 EPS in the pcp.
Using the current price of around R13 per share and trailing twelve months EPS of R1.68, this provides a P/E ratio of 7,74 for the group and an intrinsic value (fair value) of around R19 per share.
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Coal - Thungela Resources Limited (JSE:TGA)
Coal prices continue to soar as demand increases and supply lags, topping a 120.50% Year to date (YTD) rise. The commodity price reached $177 per tonne (p/t).
Considered a risky investment, coal companies have recently started being part of disposal plans in diversified portfolio mining companies and disinvestment plans in institutional investors. While fear may start to dominate the market as many countries attempt to discontinue coal plants, according to various analysts, the commodity may still be with us for a longer period despite anticipated plans to discontinue energy from coal.
Coal has proven to be a commodity not to be forgotten in a day, many countries that have set policies to curb carbon emission by banning coal have seen themselves reversing the process of generating energy using coal.
Recognized as one of South Africa's largest thermal coal producers, Thungela, an independent business from Anglo American, recently listed at an initial value of around R20 per share.
This is influenced by the coal price, which makes up 79% of the group's 2020 fiscal year (FY20) total revenue. Thungela reaped the benefits of the soaring coal prices within its six months period that ended on June the 30th, 2021.
Financials
The group reported a revenue increase of 500% to R10.04 billion from R1.6 billion and profits from operations reaching R990 million vs. R52 Million of the previous comparative period (pcp), representing an 1803% increase. EBITDA was up by R1.8 billion within the period compared to R247 million in the pcp. The group's earnings per share (EPS) improved to R3.13 compared to a loss of R1.93
Thungela's net cash position was R3.13 billion within the period, after achieving independence for its operations from Anglo American.
Looking at how much investors are currently paying for earning:
Trading around R60 per share, with trailing twelve-month (TTM) earnings of R6.00 per share, Thungela’s P/E ratio is 10.11 and has a net asset value (NAV) of R88,28 per share with a Price-To-Book (P/B) ratio of 1.6
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Informed decision
Coal and gold may experience more volatility within the period as laws are passed and demand increases.
Considering what various analysts forecast with a buy consensus view on gold, the commodity may shift focus closer to the end of the year, experiencing more volatility due to uncertainties on taper talks and economic demand. Coal may provide returns due to economic demand and a lag in supply that may drive its value higher as more countries return to coal use, although it still carries the risks of facing a downfall.
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Sources – EasyResearch, JSE Sens, Thungela Resources Limited, DRD Gold Limited, Trading Economics
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