One penny stock that caught my eye recently is Anglo Asian Mining (LSE: AAZ). This is because of its mammoth double-digit yield, which is not something you see everyday from small-cap stocks. Should I buy or avoid the shares for juicy passive income?
Mining in Azerbaijan
Anglo is a mining business with its core operations in the country of Azerbaijan. Its primary focus is copper and gold from its projects in the country, which include its flagship Gedabek gold and copper mine.
As a penny stock, Anglo is already prone to more volatility than other shares. However, macroeconomic and geopolitical issues haven’t helped markets in recent times. So I’m not surprised to see Anglo shares heading downwards.
As I write, Anglo shares are down 17% over a 12-month period. They’re trading for 70p, compared to 85p at this time last year.
To buy or not to buy?
Mining stocks are risky due to the volatility that comes from a variety of directions. Firstly, economic volatility can hinder commodities, or even help them surge. For example, demand for gold may rise during times of economic issues but at the same time demand for copper may fall. Conversely, copper is in high demand generally due to its multitude of applications.
For Anglo, I see the fact it is operating in Azerbaijan as a risk as it is at the mercy of geopolitical issues due to its location. This could hinder operations, performance, and any investor returns.
So let’s break this huge dividend yield of 13% down. I believe it’s been inflated by the share price slumping. Taking a look at Anglo’s balance sheet and forecasts, the business has lots of cash but earnings don’t look like they’ll cover such a high yield. I’m not a fan of uncertainty and volatility. However, dividends are never guaranteed and forecasts don’t always come to fruition.
In Anglo’s interim update a few months back, there were some positives to take away. A rise in copper production was positive. When I think that close-by China is one of the foremost copper users, Anglo could find itself in a position to benefit. The flip side of this is the fact that the Asian superpower has had its own economic issues so demand could weaken. Plus, cash on the balance sheet looks healthy to help through the current challenging market we find ourselves in.
A penny stock I’m watching… for now
Amid so much uncertainty and what looks like an over-egged dividend yield, I’m not going to take the plunge and buy any Anglo shares at present.
What I will do is keep a close eye on economic developments and watch the business and its updates when they arrive. This will help me build a better perspective on whether or not the shares could boost my holdings. I may revisit my position in the near future.
The post Should I buy this 13% yielding penny stock? appeared first on The Motley Fool UK.
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Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
