The stock market has crashed, and an ounce of gold has risen to a little over $1,900. That’s down from an all-time high earlier this month when it edged above $2,060. But with the price around $1,500 just 12 months ago, gold has beaten the FTSE 100 hands down this year. Yet then I ask myself one of my favourite investing questions. Would Warren Buffett buy it?
In this case, no, he doesn’t buy gold. But he has surprised observers by investing in a gold miner. Through Berkshire Hathaway, he’s built a stake of around $560m in Barrick Gold. Here on the London market, gold mining shares have been climbing, and today I’m looking at Polymetal International (LSE: POLY).
The Polymetal share price is up 62% so far in 2020, against a 20% fall for the FTSE 100. Despite that, the share price still looks reasonably valued based on earnings. And the company is paying decent dividends and has been growing them for years. I’m increasingly being drawn to gold miners, if not the metal itself, but I wouldn’t follow Warren Buffett’s choice, simply because I prefer to invest in UK-listed stocks. And I do think Polymetal is one that could fit the bill.
An impressive first half
The company released first-half figures Wednesday, reporting “a strong financial performance amidst a challenging global backdrop.“
The firm produced 4% more gold, but sold 1% less, due to a lag between production and sales. Silver sales dropped 4% in line with production. But that resulted in a 21% rise in revenue, to $1,135m, as a result of higher gold and silver prices. The average realised gold price rose 25%, while silver was up 10%. Opinions are divided on where gold prices might go next, but Warren Buffett sees a period of stability.
It’s easy to think that an investment in Polymetal could falter if gold falls back again. But one thing I like about Polymetal is its costs of production. The company reported an all-in sustaining cash cost per ounce of gold of $880. That’s significantly less than half the current selling price. I’d say there’s a healthy safety margin there, especially if gold remains stable as Warren Buffett suggests.
A Warren Buffett stock?
The half brought in adjusted EBITDA of $616m, up 53%, and the company declared an interim dividend of 40 cents per share. Polymetal also revealed a revised dividend policy, of paying a minimum final dividend of 50% of underlying net income (providing its net-debt-to-adjusted-EBITDA ratio remains below 2.5x). It will also “now have discretion to increase the final dividend amount to a maximum annual payout of 100% of free cash flow.”
Analysts are forecasting a dividend yield of 4.4% this year, rising above 5% next. After seeing this set of results and the new dividend policy, I think we could have better yields than that. With potential for a solid long-term income stream, and a decent cost safety margin, I think Polymetal has the kind of qualities Warren Buffett likes in Barrick Gold. I’d buy with a horizon of 10 to 20 years.
The post Forget gold, Warren Buffett invests in gold miners. I’d do the same appeared first on The Motley Fool UK.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020