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By Chris Bailey of Financial Orbit | Tuesday 30 December 2014
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.
A year ago I tipped Randgold Resources (RRS) as my ‘FTSE-100 tip of the year’ and despite the volatility in the underlying gold price and desperate performance of the average gold miner the tip has done well and has nicely outperformed the UK’s leading share index.
So why am I reloading for 2015? The simple reality is that Randgold Resources remains materially undervalued.
Now at this point I could go on a long ramble about how gold is materially undervalued versus global money supply creation, is being accumulated by countries like China and India for reasons way beyond satisfying jewellery demand and is a proven safe haven in times of strife over thousands of years.
But you know all of that and have heard it a thousand times from the leading gold bugs around the world.
The 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. The reason why gold stocks large and small around the world have generally had a torrid time in 2014 is that they failed to match up on at least one of the above criteria whilst Randgold Resources continues to achieve all three.
I don’t know where the gold price is going shorter-term but – for some of the reasons given above – I believe it is going to be a lot higher by the end of this decade. In the meantime the reality that Randgold Resources has built all of its mines from the base assumption of US$1000/ounce gold (i.e. a price 20% lower than here) is comforting. That these mines have on average amongst the highest actual and reserve grades in the business and are continuing to ramp production levels is like a huge cherry on a cake. Mix that with no balance sheet debt and you can see why I give the management team – and the share in general - a huge tick in the box.
Of course you cannot talk about Randgold Resources without noting the location of its mines in Mali, Cote d’Ivorie, the DRC and Senegal – countries which over recent years have seen civil war, coups and generalised violence as well during 2014 in some regions ebola. Despite all of these challenges Randgold Resources has not mothballed mines or suspended production over the last few years. Based on strong partnerships with local governments and local workers the company has left behind the ‘them and us’ mentalities meaning that strife in the capital city does not naturally spill over into the often far-flung away gold mining zone.
Of course plenty could go wrong but that is true of any investment. When I look at Randgold Resources I see a value opportunity that few other larger cap securities currently offer me and a still sceptical general backdrop towards gold equities – which is a pretty good combination. Stick with the highest quality company in the space if you already own shares and – if you currently don’t – you should.
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