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SMALL CAP IDEA: Are smaller gold mining firms the better option?

On track: In 2020 Serabi shares reached £1.05.  Today they only cost 39p - that's too cheap

Gold is close to a record price and could well be on its way to breaking the historic mark of US$2,000 an ounce.

At the start of the week, the price was holding at just over US$1,920 an ounce.

The only time it was higher was a week earlier when the price briefly hit US$1,930.

At just over £1,550 an ounce, the price of sterling is also at record highs, although there was a rally to current levels in the spring of last year as the Russian invasion of Ukraine combined with chaos in UK domestic politics to encourage investors to move into safe-haven assets.

However, the most creative UK investors didn’t just buy physical gold or ETFs.

On track: In 2020 Serabi shares reached £1.05.  Today they only cost 39p - that's too cheap

Value: Gold could well be on track to break through the all-time high of US$2,000 per ounce. At the start of the week, the price was holding at just over US$1,920 per ounce.

They also turned to equities.

The reasons are quite simple.

Most gold mining companies have reasonably fixed cost bases.

Inflation can shake things up a bit, especially if companies are too indebted to oil for their energy costs.

But, in general, once the overall cost at which an ounce of gold is produced – the all-in sustaining cost – is established, it can often remain quite stable.

And that means that when the price of gold climbs significantly – as it has done by nearly US$300 an ounce since November – all the gains go straight to the margin.

Big gold miners, like Endeavor and Barrick, are doing well. But big investors are already well exposed to it.

It’s mid-cap companies and smaller producers, like Caledonia Mining, Pan African Resources, Ariana Resources, Chaarat Gold, Resolute, Scotgold, Shanta and Serabi that tend to get the real boost.

But there is often a delayed effect as market sentiment catches up with fundamentals and investors determine exactly where the best gains can be made.

No two gold miners are alike of course, which is where stock picking skill comes into the equation again.

Gold companies offer the production of a safe-haven asset with the corresponding downside of operational and – sometimes jurisdictional – risk.

But some companies have a better track record than others in this regard, and the support of an experienced team is likely key to making the right choices in this area.

In Southern Africa, Caledonia Mining (1,135p) and Pan African (18p) look attractive and well seasoned, with long histories of successful gold production and decades of operating experience in the country – Zimbabwe and South Africa respectively. South Africa.

These are not easy jurisdictions at the best of times, and yet these companies make it work.

Caledonia has just completed the expansion of production at its historic Blanket mine in southern Zimbabwe and is currently absorbing the acquisition of the country’s largest undeveloped gold resource.

It has managed to continue to function through the ups and downs of Zimbabwe’s recent history, as it is now a significant player at the national level.

For its part, Pan African also has long years of experience in South Africa, maintaining production in some of the country’s most historic mines.

Managing Director Cobus Loots comes from Black Economic Empowerment and also has a lot of experience dealing with powerful mining unions in South Africa.

Over the years, Pan African has kept its annual production around the 200,000 ounce mark, and although the mines have not always been easy to operate, the company has managed to find a way out.

Shanta (12p), too, has had occasional problems in what has generally been a strong performance over the years at its mines in Tanzania and, like Caledonia, it also has a significant production profile advantage in the form of exploration of several million ounces. potential on the other side of the border.

In North Africa, Centamin (116p) enters and disgrace in Egypt, while in Ethiopia it looks like KEFI (0.75p) could finally be on the verge of getting the long-awaited Tulu Kapi project off the ground.

Other existing London-listed producers worth checking out include Chaarat (10.9p), which has been mining in Armenia for some time and also has a significant advantage from developments in Kyrgyzstan; Serabi (38p), which has production in Brazil; the Australian company Resolute (16p), which has a long production experience in West Africa; and local champion Scotgold (40.5p), with its small mine in the Grampians.

And a nod to Ariana Resources (3.4p), which has interests in small-scale production in Turkey.

Ariana has stayed the course over the years where other more powerful names have fallen, and delivered real returns for shareholders.

Besides the cash it poured in when the trades went through, its stock has also risen significantly over the past few years, although a revaluation in response to the latest strength in gold is only faintly evident.

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