Precious metal prices have continued to fall over the past 10 months. The gold price is down by 15 per cent on this time last year, but many producers have fared even worse. Take Randgold Resources (RRS), an Africa-focused gold miner, which has shed a fifth of its market value despite record third-quarter production figures and net cash of $168m (£117m).
- Record Q3 production
- Net cash position - no debt
- Low end of industry cost curve
- Global gold output slowing
- US dollar strength
- Gold still in cyclical downturn
Randgold has managed to drive up output at its Loulo-Gounkoto complex in Mali, while total full-year cash costs are expected to fall at the lower end of the industry cost curve, within a $650-$700 an ounce (oz) range. Unfortunately, whatever operational improvements Mark Bristow and his management team at Randgold manage to achieve, the share performance of the 'pure play' gold miner is attuned to the underlying asset price. Although we're not expecting the yellow metal to test its 2011 high of around $1,900 an oz, we do believe that gold could start to ratchet up this year on intensifying worries over paper asset classes and concerns surrounding the macroeconomic outlook.
Current valuations for the sector seem to imply that there will be little or no improvement in earnings over the next few years, and that precious metals' prices will remain under pressure. But latest research from Thomson Reuters' GFMS metals research team indicates that global gold production is likely to decline by 3 per cent this year, putting the brakes on seven years of rising output. Last year was a record year for gold supply at 3,155 tonnes, but the industry is beset by falling grades and a dearth of new discoveries, so we remain bullish on the medium and long-term gold price outlook.
| RANDGOLD RESOURCES (RRS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 4,326p | MARKET VALUE: | £4.03bn | |
| TOUCH: | 4,323-4,327p | 12-MONTHHIGH: | 5,750p | LOW: 3,546p |
| FORWARD DIVIDEND YIELD: | 1.1% | FORWARD PE RATIO: | 27 | |
| NET ASSET VALUE: | 3,410¢ | NET CASH: | $168m | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2012 | 1.20 | 545 | 470 | 40 |
| 2013 | 1.14 | 401 | 296 | 50 |
| 2014 | 1.09 | 353 | 251 | 60 |
| 2015* | 1.03 | 272 | 219 | 60 |
| 2016* | 1.13 | 311 | 232 | 69 |
| % change | +9 | +14 | +6 | +15 |
Normal market size: 500 Matched bargain trading Beta: 0.11 £1 = $1.43. *Investec securities forecasts | ||||
Randgold's management is only too aware that high-quality assets are thin on the ground, but the miner has no intention of cutting capital spending and will continue to invest in order to generate future returns. Nevertheless, the priority would be to fund any large-scale investments, firstly through free cash flow, and secondly through debt - shareholder dilution is to be avoided. In the near term, the group is scheduled to finish mining the current open pit at the Kibali (DRC) complex in March, but there are five satellite pits being evaluated. Randgold is also moving ahead with a joint venture with AngloGold Ashanti Ltd to redevelop the Obuasi mine in Ghana. This could be one to watch as Obuasi contains very high grades and Randgold has a profitable history of working with AngloGold.
Investing in cyclical stocks during a downturn is inherently risky, while continued US dollar strength presents a problem due to the greenback's inverse correlation to the gold price. There is also the threat posed by militant groups in sub-Saharan Africa - Mali, in particular. Nonetheless, Randgold has continued to increase both its dividend and its net cash balance throughout the gold bear market. Management said it is confident that the group would remain free-cash-flow positive even if the gold price exhibited further weakness.
