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By Chris Bailey of Financial Orbit | Sunday 9 August 2015
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
“Toast”. I nearly spat out my breakfast when I heard the CEO of Randgold Resources (RRS) use that word to describe the majority of his competitors in the gold mining space at prevailing commodity prices.
For what it is worth I could not agree more with his judgement but in today’s politically correct world it is rare to hear such candour. But Randgold is a different type of company to its peers predominately because it can still make money and generate cash at prevailing gold prices.
At the end of last year I tipped Randgold as one of my stocks of the year with the observation that ‘(T)he key to understanding the Randgold Resources investment story is based on three central investment tenants: (1) low cost, growing production; (2) a debt free balance sheet and; (3) a management team that know what they are doing’. In an industry where most companies struggle to fulfil even one of this criteria these remain compelling positives.
Take Thursday’s second quarter numbers. The benefit of only building gold mines when they have the capability to make a decent return on capital at a gold price of US$1,000/ounce is that you can still make money today. Even better you can still generate cash. In one of the more striking observations from its conference call Randgold confirmed that the current net cash balance of just over US$100m would grow by between US$500-700m over the next two-and-a-bit years if the gold price stayed in the US$1100-1200 range. That’s a 5% free cash flow yield or the sort of cash flow generation boring but steady consumer staples companies generate when their shares are a bit beaten up.
Production during the quarter was at a record and organic growth is primed to continue for the next few years. The company’s presentation document focused for the second quarter in a row on the large number of interesting prospective mines on the company’s land. Given Randgold has found, built and developed all its current mines apart from one you would not bet against them finding another ‘elephant’. Alternatively a “toast” industry may well provide acquisition opportunities if – and only if – the Randgold production criteria is met. That’s the advantage of having cash and being profitable during a time of sector strife.
What I am trying to say is that Randgold is clearly (still) the best larger cap gold company in the world. Almost all of the other larger cap names need higher gold prices to pay down their debts or fully justify their mines. Given trends over recent years in global credit creation and Chinese gold buying this could well happen and the deeply depressed gold sector (including Randgold) will catch a very, very impressive performance bounce. But that might be 2017 rather than 2016 and during an elongated interim period the number of names sliding towards “toast” status will rise. So you stick with quality and that’s Randgold: a gold miner that’s chucking off cash and paying a dividend even at the prevailing gold price. I strongly reiterate my tip of the year.
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