US Edition Hochschild Mining
658p +37
Questor says HOLD
Just one month after the second round of quantitative easing (QE), the Federal Reserve chairman raised the prospect of another round of asset purchases – or QEIII. This has caused investors to fret about prospects for the dollar – boosting precious metals prices. This has prompted shares of all miners in the sector to rise, including Hochschild.
When Questor last gave an update on the Latin American-focused silver miner at the start of October, the shares were rated as a hold. It was argued that the valuation looked pretty full and there could be a rally in the dollar that would hit silver prices.
Unusually, the price of silver has kept charging ahead, despite some strengthening of the dollar last month. This has caused Hochschild shares to continue to surge – and they have risen by more than a quarter in the two months since Questor last said hold.
The prospect of more QE certainly looks like a negative for the dollar – and investors continue to worry about European sovereign debt and the future of the single currency. Against this backdrop, it is not surprising that precious metals are seen as a safe haven against devaluing currencies.
Yesterday, RBC Capital upgraded its rating on the shares to "outperform" from "sector-perform" after it had updated its models. The bank increased its 2011 silver forecast to $25 (£16) an ounce from $18 and its long-term silver price assumption (2015) was raised to $17.50 from $15, with $20 forecast for 2014.
Hochschild recently sold its remaining 6pc stake in Lake Shore Gold, raising C$80m (£50.2m). This represented a 37pc profit on its initial investment and it will strengthen the group's balance sheet and help fund its exploration plans. Hochschild has also recently bought into another exploration programme in Chile.
The company has raised confidence in its prospects by increasing the mine life of its operations by finding new resources. This had been a major focus of investor concern. In the first half of this year, the company increased its total mine life by 11pc to 7.9 years. At the end of 2008, the mine life figure stood at just 5.9 years. In its third-quarter update, the company did not restate its mine life but this is expected to grow further in the second half after the company materially increased the resource life of the San José property from 8.4 to about 12.5 years.
The shares are trading on a December 2010 earnings multiple of 36.3, falling to 18.6 next year. There is no doubt that this rating is high, but if the silver price stays at these levels then the shares will continue to outperform.
They were first recommended on August 23 last year at 284.2p and they are up 132pc compared with a FTSE 100 up 20pc.
However, Questor is cautious. Should the silver rally come to an end, it is likely to see a sharp correction as investors cash in this year's substantial gains.
Questor thinks it prudent that if investors want to buy into the company, they should wait and see what happens. Should the silver price dip, buy Hochschild.
For now, the rating remains as a hold.