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Metal exploration (LSE:MTL) is a barely known penny stock that I think has the potential to deliver my best-ever gains.
He AIMThe listed gold explorer is trading at 2.7 pence per share as of February 21, 2024, that's not much.
But after digging, I see record profits on their financial statements. And one of my favorite value metrics is to show a purchase.
Any price-to-sales (P/S) ratio less than one is considered a good value. Metals Exploration is trading with a P/S ratio of 0.46.
gold mining
The company is the sole owner of the Runruno gold mine in the Philippines. And the company is expanding.
CEO Darren Bowden announced in January 2024 that the company will acquire a 72.5% stake in YCM. It owns the rights to the Abra property, a 62-square-mile gold development 130 miles north of Runruno.
Historically, the region has produced more than 40 million ounces of gold.
Profit with purpose
This year Metals Exploration forecasts profits five times higher than any year since 2017, at $58.5m (£46.4m).
When the FTSE 100-If the obsessed market realizes this fact, the company's stock price could skyrocket.
The other thing I really like is an extraordinarily high return on capital employed (ROCE). This is a measure of how much money the company makes from what it spends. In the last 12 months the mining company has produced an ROCE of 86%.
Its fourth-quarter results to December 31, 2023 also show record annual positive free cash flow of $72.3m (£57.3m). And earnings per share are expected to rise from 0.45 cents to 2.40 cents.
Resulting facts
Metals Exploration's latest half-year results through June 30, 2023 show:
- Record operating profit, up 231%
- Record gold production, up 45%
- Debt reduced by 47%
The last time I looked at Metals Exploration, I found that net debt of $92.9m was too high to consider as an investment. Reducing that figure to $48.8 million seems like a sensible move.
Factor in risks
At this end of the market there is less liquidity: fewer buyers and sellers. There is some currency risk here as well: the company also reports its earnings in US dollars. And net debt is certainly a factor.
But adding new licenses to its suite of mining operations seems like a solid move to me. And a price-earnings ratio of just two suggests:
- The market has little confidence in the stock.
- The market is mispricing the stock dramatically.
I'm leaning towards the latter. Its annual revenue of £125m is more than double its market capitalization of £55m.
And from less than £1,000/oz in 2017, gold now sells for more than £1,600/oz. Therefore, the current high price of gold in the market will boost everything from profits to the ability to pay down debt.
Smaller is better
Investor James O'Shaughnessy famously touted “tremendous returns”of small actions. This strategy carries higher risk, but produced a 20.05% compound annual return over 40 years.
The FTSE 100 has returned an average of 6.9% per year over the same period.
I know from experience that penny stocks can vastly outperform. But only if I choose on the basis of booming profits and solid management.
