Investors looking for value in undervalued stocks often turn to the mining sector. Commodity prices fluctuate wildly from year to year. The cyclical nature of these ups and downs can create favorable times to buy stocks at a low price. Many investors look to large FTSE 100 names like Rio Tinto AND Glincorewhich have had exceptionally cheap entry points over the past decade. But smaller companies, such as those on FTSE 250 may offer similar rewards to those willing to sniff them out.

Safe Havens

One of the ones that caught my attention recently is Hochschild Mining (LSE: HOC). The gold and silver miner is headquartered in Peru, but has its corporate office and listing in London. The FTSE 250 stock has been on a roll this year, with its share price doubling in the past six months. No other stock in the index has matched its performance, excluding dividends.

Miners like Hochschild offer an interesting investment case because of the nature of the metals they mine. Gold and silver are considered “safe haven” assets, with prices rising as global tensions or conflicts intensify, which can be a useful hedge if things start to get worse.

Investing in a company that mines such metals offers protection similar to a hedge, while also providing the benefit of owning a company that can grow and expand, something that cannot be said for metal mining companies.

The company’s stock has seen wild swings over the past decade, even compared with companies that have grown accustomed to relying on volatile commodity prices.

The shares hit lows of 41p in 2016 and 54p in 2022, and highs of 301p in 2022, 331p in 2017 and 581p in 2011. The shares have had a turbulent ride and I wonder what value they are worth now.

Change of direction

The current story is one of turnaround after a fairly disastrous 2023. The company posted its first loss in years after writing down the value of a mine in Argentina and $80 million in write-downs on various other projects.

The company incurred significant debt in connection with the construction of a new open-pit gold mine, Mara Rosa, in Brazil. All the while, civil unrest in Peru was hampering operations there as well.

Now Mara Rosa has started production and is expected to resume paying dividends. The situation in Peru is more stable. The company has received a 20-year permit for its flagship Inmaculada mine. And a new brownfield project in Brazil has been earmarked for further exploration.

Is it worth buying? Well, since the last year was unprofitable, it’s harder to value. Ignoring profits and looking only at revenues, we get a price-to-sales ratio of 1.8.

Discounted cash flow analysis suggests a fair value of 305p compared to the current share price of 184p, offering a possible undervaluation of 39.8%. Overall, I think this looks attractive. I will add the stock to my watchlist.