Finding Value In GOLD

Jan.11.12 | About: Randgold Resources (GOLD)

Gold has seen recent uncertainty eat away at its price primarily due to the strengthening of the dollar, which recently appreciated more than 15 percent in a time span of 2-3 month; this in turn lowered the purchasing power of major buyers such as China and India. However, as noted by Jon Nadler, senior analyst at Kitco.com, the strong dollar isn't expected to persist due to specific steps taken by countries such as China and Brazil to add liquidity to the global monetary system. Heavy selling by speculative traders in the futures markets, profit-taking by firms and weak investment demand in the fourth quarter also took a toll on gold prices, but a continued European sovereign debt crisis and the positioning of gold as a risk-aversion asset leaves many investors positive on gold's 2012 prospects. In fact, there has been an increase in Chinese and Indian buying during the first week in January and analysts such as Oliver Pursche, co-portfolio manager at the GMG Defensive Beta Fund, have set their forecasts for gold at around $1800.

Gold investors can invest in one of the 21-some gold ETFs, most of which invest in the commodity and attempt to mirror gold prices; for example, the SPDR Gold Shares (NYSEARCA:GLD) ended the year with 1,254 tons of gold. Gold ETFs have had positive returns: GLD is up 17.2% from a year ago, PowerShares DB Gold ETF (NYSEARCA:DGL) is up 15.8%, ProShares Ultra Gold ETF (NYSEARCA:UGL) is up 27.5%, and iShares Gold Trust ETF (NYSEARCA:IAU) is up 17.3%. However, I believe that investing in strong gold-related companies, especially Randgold Resources Limited (NASDAQ:GOLD), is a better alternative for investors.

Randgold Resources Limited

Randgold Resources is a company with a strong history of growth that has been buoyed by a strong correlation to gold prices. It engages in the exploration and mining of gold mines in west and central Africa, where it has controlling interests in such mines as the Loulo and Morila mines in Mali. The company has seen its stock price increase 35.7% last year and displays strong fundamental performance.

For the third quarter of 2011, Randgold Resources reported a huge 342% increase in EPS year-over-year. This increase is even more significant considering the figure eclipsed the average EPS growth of the last 3 quarters, which stands at 225%. Randgold Resources has had 3 consecutive quarters of EPS Acceleration and EPS estimates for the current quarter represent a 413% increase over EPS figures from the same quarter a year ago. Production also rose 80% in the third quarter to 182,362 ounces. Analysts at Collins Stewart have noted that "the underground mines show improvements in development, which bodes well for planned production in the final quarter and into next year."

From a long-term perspective, Randgold Resources is also extremely attractive. It has a 3-Year EPS Growth Rate of 76% and has had 2 consecutive years of Annual EPS Growth. EPS estimates for the current year represent a 289.38% increase over last year's EPS figures. Randgold Resources also has a solid 3-Year Sales Growth Rate of 35%, growth which it continues to exhibit in the form of a 167% increase in 2011 3Q sales year-over-year. The company also has a healthy Annual Pre-Tax Margin of 30%, but lags in its annual ROE, which stands at a paltry 6%.

Despite the extraordinary growth, there are some downsides to this company. It is somewhat susceptible to conflicts and unrest in West Africa; recently, some gold shipments had been delayed in one of its Ivory Coast mines due to unrest in the country. Also, Randgold Resources recently its earnings outlook due to bad weather, power supply disruptions and labor strife. However, these are only temporary and relatively minor setbacks, and Randgold Resources is poised to continue on its path of growth throughout 2012.

The Verdict

Randgold Resources is an excellent play for people who believe gold prices will see renewed strength in 2012. It is not only one of the few stocks whose performance indicates a direct correlation with the strength of gold, but it also has significant earnings and sales growth that will provide a buffer to any potential hiccups in gold. The seasonal profit-taking and the temporary nature of the strengthening dollar have contained gold prices, but, with a rosy prospect for gold in 2012, Randgold Resources is a solid buy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOLD over the next 72 hours.