Should You Buy Perseus Mining at This Share Price?

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What happened to the PRU share price?

Perseus Mining Ltd[ASX:PRU] was up by 6.32% by early afternoon trading today. Since December 2015, the stock has outperformed the ASX200 benchmark index by more than 50%.

At the beginning of May, the stock had a 100% out performance over the index. The stock has pulled back since that time. The pull back in May is reflective of the general softening in gold price momentum.

This presents a great opportunity for short term traders.

Why did PRU shares do this?

I am expecting the gold producer to generate more sales this year and in the next. However, I also expect to see earnings capped. Although the company is in a healthy financial state with a high current ratio and a low debt to equity reading, the return on equity on the company is actually less attractive, at 2.36% (TTM).

What investors need to realise is that gold stocks such as PRU are, naturally, extremely sensitive to the changes in the gold price. Over the last five years, the commodity bear market has punished PRU severely.

In the first four months of 2016, gold has had a rare-occurring rally. The price of gold outperformed other commodities in a big way. This has caught the attention of a lot of momentum investors, and I believe the strong rally in April is evidence of that. However, in comparison to a stock such as AngloGold Ashanti [ASX:AGG], investors have been relatively late to discover PRU. It was well into the month of April when investors started to drive the rally in PRU. This was eventually capped and reversed in the recent softening of the gold price.

As far as fundamentals are concerned, Perseus does not have a very promising outlook. I believe commodity prices are going to provide a level of support to Perseus, but it will not be enough to produce another rally like the one we have just experienced. Remember, a lot of the recent hype in gold has been driven by volatilities in other markets. With more capital following back to risky assets, gold is poised to calm down.

What now for PRU?

Over the long run, I am not overly optimistic on PRU. I believe the price of the stock will gain, but it will be a prolonged process. Relative to stocks such as Newcrest Mining Ltd [ASX:NCM], PRU also lacks on momentum.

Over the short term, PRU is extremely oversold, and I believe this presents an opportunity to short term traders. I believe today’s rally was due to more bargain hunters stepping into the trade. You would want to have a long position in the stock and anticipate a short rally.

A useful technical indicator called the Relative Strength Index (RSI) can be used to measure the degree of overbuying and overselling in a stock such as PRU. Short term traders may want to offload a potential long position after PRU RSI returns to a reading near 50 points.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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