By Gary Newman | Sunday 18 September 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Gold has been showing signs of weakness but I am yet to be convinced that this is justified and I think the market has over-reacted, which means that there are some good opportunities around for gold bulls.
The slide in gold prices back towards the key $1300 support level has been largely as a result of the speculation surrounding an interest rate hike in the US, even though in all probability that won’t happen until at least December, if at all.
The Dollar has responded positively to news that a hike is still on the agenda at next week’s policy meeting of the US Federal Reserve, even though most economists view it as unlikely, and in turn that has hit gold prices, along with many other commodities.
In turn gold producers have also taken a hit to their share prices in many cases, and have seen fairly significant pull-backs from the highs they reached in early July, with even the larger miners pulling back 20-30% from that peak.
My top choice amongst them would have to be Randgold Resources (RRS), a company which I was a bit too cautious on previously when gold was testing the $1200 area back in February prior to breaking out – although I did mention to watch for a break of resistance around there.
With gold at this level I can see plenty of value and upside in Randgold at the 7,360p area it currently sits at as long as gold continues its bull run – and with plenty of concerns over the state of the world economy and growth in the next few years I see it as likely that it will do, although I’m not predicting anywhere near the highs that I’ve seen some talking about.
I still believe that it is the best run producer around, given the way that it has managed its existing reserves in terms of exploiting them relative to the gold price at the time, whilst continuing to spend money on exploration to replenish those reserves.
The last operational and financial update showed production to be down slightly for Q2 2016, up to the end of June, and was 4% lower at 281,000oz or so, due to lost production at a couple of its operations, and although total cash cost per ounce rose to $727/oz (operating cost of $661/oz) it is still one of the lower cost producers in the world.
The company made a net profit of over £58 million for the quarter, and net cash generated from its operations was up 6% to $101 million, and cash in the bank stood at $272 million.
Analysing this purely on the most recent figures would show that the shares look expensive with a PE ratio in the high 40s, and earnings for the quarter having fallen rather than growing – although that has been largely as a result of the operational problems I mentioned.
But in reality this is purely a leveraged play on the price of gold, and in my view if you are bullish on the metal then there are few, if any, better equities than Randgold in which to take advantage of that.
It may well dip lower in the coming week if gold does have a serious test of the $1,300 area, but providing there is no surprise interest rate rise in the US, then following the Fed meeting I would expect gold to bounce, and that will send Randgold higher.
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