Why Randgold Stands Out Among Gold Miners
Over the past couple of years while several of the larger gold miners were writing down assets, slashing their dividends and seeing their profits shrink to virtually $0, Randgold Resources (NASDAQ:GOLD) performed incredibly well. True, the company saw its profits fall like any other gold miner. But given the company’s extremely conservative business model, strong growth, and low cost structure, this decline was at worst a mild setback in one of the sector’s strongest investments.
Randgold Resources has been an exemplary performer for many years now. Over the past ten years the shares have gained over 800 percent in value. The reasons for this are simple: First, the company has a strong balance sheet — as of the end of 2013, the company had $170 million in working capital and no debt.
Second, the company has grown and plans to continue to grow its production. Production was nearly 700,000 ounces in 2011, nearly 800,000 ounces in 2012, and more than 900,000 ounces in 2013. Furthermore, in the fourth quarter, Randgold saw production commence at its joint-venture Kibali project in the Democratic Republic of Congo. Randgold’s 45 percent interest “AngloGold Ashanti (NYSE:AU) owns 45 percent and Sokimo owns 10 percent” should generate nearly 250,000 ounces of production per year for several years. This means that the company expects to exceed 1.1 million ounces of production in 2014.
Third, the company has been a low-cost producer with cash costs at roughly $700 per ounce. Furthermore, the newly producing Kibali mine produces gold at less than $500 per ounce, which means that we will see the company’s overall production costs fall as Kibali contributes to the company’s portfolio in the coming years. We have already seen evidence of this in the fourth quarter of last year, during which cash costs fell by about $80 per ounce.
All of these points reflect the company’s conservative and disciplined strategy of continuing to grow production but by doing so only through high-quality, low-cost projects in Africa. As we can see by looking at the company’s history of value creation, the strategy has worked.
Before investing, however, I should point out a couple of risks to owning Randgold shares. First, the shares are not cheap. The company trades at around 20-times forward earnings. While this is somewhat in line with the S&P 500, we need to keep in mind that mining companies are generally valued on a discounted cash-flow basis, which takes into consideration both near-term production and cash flow, but these companies’ mines’ ability to generate cash flow into the future.
While Randgold typically has long life mines, the company doesn’t have long enough lives to justify the current valuation. The current valuation is therefore not just a function of the company’s cash flow potential, but of its strong performance history and of the market’s belief that this will continue. While there is no reason to believe that this performance won’t continue, one has to consider the possibility when evaluating Randgold as a potential investment.
Second, Randgold operates in Africa. While mining company investors typically shy away from African companies given the perceived political risk, they have not shied away from Randgold, which again trades at a premium to its intrinsic value. This means that if something happens in Africa that scares away investors, Randgold shares will be especially vulnerable to the downside while its peers are less vulnerable given that such risks are more or less priced in. Therefore investors who are looking to companies operating in Africa because they are pricing in political tension should look elsewhere.
With that being said there is little doubt that Randgold stands out as a best of breed gold miner. If the gold price continues to perform well, Randgold shares will perform as well. Furthermore, Randgold offers protection to the downside should the gold price fall. While the stock isn’t cheap based upon tangible metrics we must keep in mind that it is often worthwhile to pay a premium for a company’s shares assuming that this company’s management has a strong history of execution. Therefore investors looking to add a high-quality gold mining stock to their portfolios should consider taking a position in Randgold Resources.
Disclosure: Ben has no position in any of the stocks mentioned in this article.
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