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It has been an excellent year for shareholders in FTSE 250 firm Hochschild Mining (LSE: HOC). The Hochschild Mining share price has soared 106% so far this year.
Over five years, the gain has been a more modest 39%. Still, I regard that as a solid performance. The FTSE 250 is actually down 4% over that time period, so Hochschild is well ahead of its peers.
After such a strong performance in 2024, is Hochschild a share I think investors should consider as we head towards the end of one year and start of another?
Favourable conditions have helped lift the share price
The company has been helped this year by the gold price going gangbusters.
That helps explain why in the first half, attributable production volumes grew 11% year on year but revenues jumped 25% and the company recorded pre-exceptional profit before income tax of $69m, whereas in the equivalent last year that number had been a $66m loss.
So far, so good.
If gold prices remain high – and the current level of global geopolitical risk is one reason to expect that they may do – then I think Hochschild could keep reaping the benefit in terms of profitability and also demand.
I like the fact that the company is well-established, has some diversification across different mines (though is concentrated in the gold and silver space) and is already a proven volume producer as opposed to merely being at the exploration phase.
Weighing some risks
But there are a couple of things that concern me about the FTSE 250 share.
One is its valuation. The share price more than doubling so far in 2024 is clearly good news for existing shareholders. But it means that the company now trades on a price-to-earnings ratio of 45. That looks high to me. As the jump from last year’s loss to this year’s profit at the interim stage demonstrates, the earnings picture for Hochschild can be volatile.
So, if gold prices keep pushing up, profits might grow further. But given that gold prices have already been at a historically high level recently, my fear is that at some point the yellow metal will fall in value – and with it, Hochschild’s share price. The company’s heavy exposure to gold is a double-edged sword.
Risk-to-reward ratio does not attract me
So, although I like a number of things about Hochschild Mining’s business and its commercial prospects, I do not own the FTSE 250 share. Nor do I have any plans to add it to my portfolio.
As for whether investors should consider the share, I think there could be more attractive shares elsewhere when it comes to risk-to-reward ratios.
A soaring gold price has been brilliant for Hochschild’s performance so far in 2024, but the opposite could also turn out to be true when the tide turns on gold pricing.
