Saracen Mineral Holdings Limited (ASX: SAR) might not be a company you often see making front page news but shares in this Australian gold miner have soared over 30% higher this month. Saracen shares briefly hit a multi-year high of $2.56 during Wednesday afternoon trading before coming off the boil towards the end of the week. At the close on Friday, Saracen shares were valued at $2.44.
Saracen currently operates two gold mines in Western Australia: the Carosue Dam Gold Mine south of Laverton, and the Thunderbox Gold Mine south-east of Leinster. According to Saracen, both operations have long useful lives and the possibility of expansion through additional exploration.
But the big question is why has the share price of Saracen soared so high this month? Biotech growth stocks and tech heavy-hitters like Cochlear Limited (ASX: COH), CSL Limited (ASX: CSL), Altium Limited (ASX: ALU) and Appen Ltd (ASX: APX) have all been tumbling, spurred on by a global selloff of equities. So how has Saracen managed to avoid the rout?
There are two key reasons. The first – and probably most important – is the price of gold. Saracen focuses exclusively on gold mining and can be considered a pure play on the commodity. When share markets become volatile – as they are right now – the price of gold tends to rise. This is because physical commodities – and gold in particular – are considered by many investors to be safe haven assets that tend to be a good store of value during times of market turbulence.
Saracen’s share price has historically been highly correlated with movements in the price of gold. And after declining steadily for most of this year, there has been about a 4% uptick in the US price of gold so far in October. At the time of writing, gold was fetching just under US$ 1,233 an ounce, up from US$ 1,189 at the beginning of the month.
Most ASX-listed gold miners have benefited from the recent turnaround in the price of gold. Shares in ANGLOGOLD/IDR UNRESTR (ASX: AGG) and Evolution Mining Ltd (ASX: EVN) have risen about 18% so far in October, Northern Star Resources Ltd (ASX: NST) and Newcrest Mining Limited (ASX: NCM) are up about 7%, and OceanaGold Corp (ASX: OGC) is up 2%. While most of us have been struck down with panic attacks every time we turn to the financial pages, shareholders in the gold miners would have been wondering what we’re all so anxious about.
But even amongst the gold miners, Saracen’s recent performance has been pretty remarkable. Which leads to the second reason for the recent surge in the company’s share price, the company itself.
Saracen currently has no debt on its balance sheet, instead choosing to finance its projects through internal cash flows. With no nasty creditors chasing up interest payments, Saracen is in a much better position to deliver value to its shareholders.
The company has also been steadily ramping up its output. FY18 gold production reached a record 316,453 ounces, with production for FY19 expected to be in the range of 325,000 to 345,000 ounces. Revenues for FY18 jumped 21% to $511 million, while NPAT surged 175% higher to $78 million.
Should you invest?
While there is no guarantee that the gold price will continue to climb, Saracen’s recent share price performance does demonstrate how vital it is to diversify. Those with portfolios skewed towards growth stocks like Appen, Afterpay Touch Group Ltd (ASX: APT) or WiseTech Global Ltd (ASX: WTC) have been hit especially hard this month.
Having a portion of your portfolio invested in resource companies that act as pure plays on certain commodities, like gold, can help your portfolio hold up during times of market stress.
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Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO, Altium, Cochlear Ltd., and WiseTech Global. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, and WiseTech Global. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.