The gold price rally proved to be a big catalyst for Semafo [stock_market_widget type="inline" template="generic" color="default" assets="SMF.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] in the first half of the year, but the stock has lost momentum after gaining as much as 90% for 2019. Semafo has pulled back big time and sits on gains of “just” 37% for the year at present. But does this pullback make the stock a buy? Let’s find out.
What’s Caused the Collapse in Semafo Stock?
Semafo reported in August that it has suffered a pit wall failure at the Mana mine in Burkina Faso. The company had to stop mining from the mine as a result, which is why its guidance for 2019 had to be scaled down.
Semafo pointed out that it now expects production from Mana to fall short by 40,000 ounces to 50,000 ounces as compared to the original outlook. More specifically, Semafo now anticipates production in the range of 130,000-140,000 ounces at Semafo as compared to the earlier guidance range of 170,000-190,000 ounces.
Semafo says that its all-in sustaining costs won’t increase as a result of the pit wall failure. However, the bad news is that the production bottleneck is a speed bump to Semafo’s fast-growing output.
In the first half of the year, Semafo has produced just over 202,000 ounces of gold. This is a massive jump over the 91,000 ounces of gold the company had produced in the prior-year period. What’s more, Semafo’s all-in sustaining cost per ounce of gold sold has actually dropped in 2019. The first half AISC stood at $739 per ounce as compared to $1,093 an ounce in the year-ago period.
So, Semafo was strong from an operational viewpoint before the tragedy at Mana happened. But the good news for investors is that Mana should be back in operation post-October. Given this, is it a good idea to buy Semafo, or should investors wait for a further pullback?
Time to Buy
Semafo stock is currently trading at 25.6 times last year’s earnings. This multiple is less than half of the company’s five-year average P/E ratio of over 52. The forward price-to-earnings ratio of 7 indicates that analysts expect Semafo to deliver strong earnings growth in the next year. In fact, the company is expected to deliver a profit of $0.31 per share in 2019 as compared to a small loss last year.
In 2020, Semafo is expected to clock earnings of $0.41 per share. Given this potential earnings growth in the cards, it would be a good idea for investors to keep accumulating Semafo shares in case the pullback continues.
That’s because the company is expected to deliver impressive earnings growth on the back of higher production and stronger gold prices, and it is also trading at an attractive valuation. In all, now looks like a good time to go long Semafo given the future upside potential the stock holds.