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Why the Saracen Minerals share price surged in 2018

Friday was another underwhelming day on the Australian equities markets. The S&P/ASX 200 closed 0.2% lower, putting its total loss for the first trading week of 2019 at 0.6%. A potential slowdown in Chinese economic growth, coupled with the almost unprecedented announcement of a profit downgrade from US tech giant Apple, rattled global markets early in the new year.

At home, the announcement of weaker than expected Christmas sales figures by Kathmandu Holdings Ltd (ASX:KMD) dragged down the whole retail sector. Kathmandu shares plunged 16% lower for the week, while JB Hi-Fi Limited (ASX:JBH) lost 8% and Myer Holdings Limited (ASX:MYR) declined by a little over 7%.

Key local tech growth stocks also took a hit last week. Afterpay Touch Group Limited (ASX:APT) and Altium Limited (ASX:ALU) both fell by about half a per cent, while Appen Limited (ASX:APX) lost 1.5%, and Nextdc Limited (ASX:NXT) shed 3%.

But there were some big winners as well. Saracen Mineral Holdings Limited (ASX:SAR) closed the week up over 11%, continuing a stellar run in which shares in the West Australian gold miner have risen over 80% since September. Fellow gold miners Newcrest Mining Limited (ASX:NCM) and St Barbara Limited (ASX:SBM) also enjoyed strong starts to the year. Newcrest shares surged almost 12% higher, while St Barbara rose a little over 6%.

Fears of a global bear market have meant investors increased their holdings in safe haven assets like gold. The precious metal is now valued at US$ 1,300 an ounce, its highest price since June. This has driven up the share prices of gold miners, which tend to act as a pure-play on the price of the commodity. While Saracen has been the big winner over the period since September, shares in St Barbara have risen over 50% and Newcrest is up by about 25%.

So what sets Saracen apart from the other gold miners?

All three of the gold miners recorded strong financial results for FY18. Newcrest posted underlying profit of $459 million, a 16% increase on the prior year’s profit of $394 million. St Barbara achieved a record profit of almost $227 million, driven by record annual gold production of over 400,000 ounces.

Saracen also achieved record production numbers in FY18, but at a little over 300,000 ounces this was short of St Barbara’s output, and far less than Newcrest’s 2.3 million ounces. Saracen’s FY18 NPAT was $78 million, an increase of 175% on the prior year, but it was still well shy of its larger competitors.

But Saracen’s small size gives it a lot more room to grow over the longer term by expanding its annual production. The company has been steadily ramping up its output, and after achieving record figures last year, the company now forecasts production for FY19 to be in the range of 325,000 to 345,000 ounces.

What really differentiates Saracen from its peers is how it finances its operations. Saracen has no debt on its balance sheet, instead choosing to use its own internal cash flows to fund its projects. Compare this with Newcrest, which had net debt of $1 billion on its balance sheet at 30 June 2018. Especially for a small, growing company, this makes Saracen a much lower risk investment.

Foolish takeaway:

So far, 2019 has basically picked up where 2018 left off, continuing the trend of global market volatility that has many investors fearing bear claws.

However, even in these turbulent times there are success stories. For investors seeking some degree of safety from the volatility, an investment in a company like Saracen could protect – or maybe even grow – their wealth.

Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO and Altium. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and Appen 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.

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