Over the past few months, stocks in the gold mining sector have fallen dramatically. This has provided an excellent opportunity to investigate companies in this sector for investment purposes. One company worth considering is Randgold Resources LTD (NASDAQ:GOLD). While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze Randgold's total debt, total liabilities, debt ratios and WACC. From this analysis we should get an idea if the company is highly leveraged, how much it is paying for its debt, what it's paying in taxes and how much to expect in return for investing in this company over the long term.
Gaining knowledge about a company's debt and liabilities is a key component in understanding the risk of a company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. Taking into account the debt side of a company might not reveal the "pop" on the upside that an investor would like, but it will help ensure that the company is able to keep its capital and use it for growth in the future.
Randgold Resources is an African focused gold mining and exploration company with listings on the London Stock Exchange and NASDAQ.
Source: company website
In the article below, I will calculate important ratios in understanding the amount of debt and liabilities the company has incurred. From this analysis we will understand more about the company's debt, liabilities and financial risk. If this summary is compared with other companies in the same sector, such as Newmont Mining (NYSE:NEM) or Kinross Gold (NYSE:KGC), you will be able to see which company has the most debt, thus adding to the company and investor risk. If you would like a direct debt-side comparison please read: Newmont Mining: Strong Company But Timing Is Everything or Kinross Gold: Low Debt And An $11 Price Target.
1. Total Debt = Long-Term Debt + Short-Term Debt
Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt due within one year.
- 2008 - $4 million + $1 million = $5 million
- 2009 - $3 million + $26 million = $29 million
- 2010 - $3 million + $0 million = $3 million
- 2011 - $3 million + $0 million = $3 million
- 2012 - $13 million + $1 million = $14 million
Randgold's total debt has increased over the past five years. In 2008 Randgold posted a total debt of $5 million while in 2012 the company posted a total debt of $14 million. Even though this signifies an increase of 180.00%, the amount of total debt compared to the company's size is very low.
2. Total Liabilities
Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities are the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.
- 2008 - $147 million
- 2009 - $174 million
- 2010 - $202 million
- 2011 - $348 million
- 2012 - $508 million
Over the past five years Randgold's liabilities have also increased. In 2008, Randgold reported liabilities of $147 million while in 2012 Kinross reported liabilities at $508 million. This marks an increase of 245.59%.
In analyzing Randgold's total debt and liabilities, we can see that the company currently has a total debt of $14 million and liabilities at $508 million. From the numbers above, we can see that over the past five years Randgold Resources' total debt has increased by 180.00%, while the total liabilities have increased by 245.59%. As the company's amount of debt and amount of liabilities have increased, the next step will reveal if the company has the ability to pay them.
1. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.
- 2010 - $3 million / $1.994 billion = .002
- 2011 - $3 million / $2.533 billion = .001
- 2012 - $14 million / $3.127 billion = .004
Randgold currently has a total debt to total assets ratio of .004. The total debt to total assets ratio has increased over the past three years. As the total debt to total assets ratio has increased, this indicates an increase in risk to the company. Because this number is extremely low, this metric indicates very low financial risk to the company.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.
- 2010 - $202 million / $1.994 billion = .10
- 2011 - $348 million / $2.533 billion = .14
- 2012 - $508 million / $3.127 billion = .16
In looking at Randgold's total liabilities to total assets ratio over the past three years, we can see that this ratio has also increased. The ratio has increased from .10 in 2010 to .16 in 2012. As the 2012 numbers are still below the 0.50 mark, this indicates that Randgold has not financed the company's assets through debt. As the number has increased, so has the risk to the company.
5. Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
- 2010 - $202 million / $1.792 billion = .11
- 2011 - $348 million / $2.184 billion = .16
- 2012 - $508 million / $2.619 billion = .19
Compared with 2010, Randgold's debt-to-equity ratio has increased. The ratio has increased from .11 to .19. As the ratio is currently well below 1, this indicates that shareholders have more invested than suppliers, lenders, creditors and obligators. 0.19 indicates a low amount of risk for the company. As the ratio is below 1 and considered low, so is the risk for the company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells the investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
- 2010 - $3 million / $1.795 billion = .002
- 2011 - $3 million / $2.187 billion = .001
- 2012 - $13 million / $2.632 billion = .005
Over the past three years, Randgold's capitalization ratio has increased from .002 to .005. As these ratios are extremely low, financially this implies a very low amount of risk to the company.
7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
- 2010 - $108 million / $3 million = 36.00
- 2011 - $570 million / $3 million = 190.0
- 2012 - $494 million / $14 million = 35.29
The 2012 cash flow to total debt ratio is slightly less than the 2010 ratio. As the ratio is about the same and the current cash flow to debt ratio is well above 1, this implies that the company has the ability to cover its total debt with its yearly cash flow from operations.
Based on the five debt ratios listed above, we can see that Randgold Resources is a very financially stable company from a debt point of view. As the price of gold looks to be strong in 2013, the ratios above indicate that company Randgold Resources should be able to make money on its assets and not be burdened by massive amounts of debt and debt obligations. The next step will reveal how much the company will pay for the debt incurred.
Cost of Debt
The cost of debt is the effective rate that a company pays on its total debt.
As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing. This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.
8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating. (Currently, Randgold has no bonds issued).
To find the cost of debt I have used the Current 30 year long term-bond rate.
- Long Term Bond Yield = 2.9%
- Current cost of Debt as of April 9th 2013 = 2.9%
9. Current tax rate
- 2010 - $25 million / $145 million = 17.24%
- 2011 - $52 million / $485 million = 10.72%
- 2012 - $58 million / $568 million = 10.21%
2010 - 2012 3-year average = 12.72%
From 2010 - 2012 Randgold Resources has averaged tax rate of 12.72%.
10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)
The effective rate that a company pays on its current debt after tax.
- .029 x (1 - .1272) = Cost of debt after tax
The cost of debt after tax for Randgold is 2.53%
Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders) to compensate for the risk they undertake by investing in their company.
- Risk Free Rate = U.S. 10-year bond = 1.74% (Bloomberg)
- Average Market Return 1950 - 2012 = 7%
- Beta = (MSN Money) Randgold Resources Beta = 0.48
Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
- 1.74 + 0.48 (7- 1.74)
- 1.74 + 0.48 x 5.26
- 1.74 + 2.52 = 4.26%
Currently, Randgold Resources has a Cost of Equity or R Equity of 4.26%, so investors should expect to get a return of 4.26% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.
(Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2012 at 7%, the U.S. 10-year bond for the risk-free rate, which is susceptible to daily change and Google Finance beta.)
Weighted Average Cost of Capital or WACC
The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.
As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk. By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances. For this calculation, you will need to know the following listed below:
Tax Rate = 12.72%
Cost of Debt (before tax) or R debt = 2.9%
Cost of Equity or R equity = 4.26%
Debt (Total Liabilities) for 2012 or D = $508 million
Stock Price = $80.51 (April 9th, 2013)
Outstanding Shares = 92.13 million
Equity = Stock price x Outstanding Shares or E = $7.417 billion
Debt + Equity or D+E = $7.925 billion
WACC = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - .1272) x .029 x ($.508/$7.925) + .0426 ($7.417/$7.925)
.8728 x .029 x .0641 + .0426 x .9359
.0016 + .0401
Based on the calculations above, we can conclude that Randgold Resources pays 4.17% on every dollar that it finances, or 4.17 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0417 plus the cost of the investment for the investment to be feasible for the company.
Debt Side Summary
All indications above reveal that Randgold Resources has very little risk from a debt point of view. As all of the ratios indicated above are very low, this indicates that Randgold Resources shows no risk of being highly leveraged, or in any financial distress. The CAPM supports the stability of the company by revealing that the investor needs 4.26% year-over-year over the long term to get good value on his or her money.
2013 Operational Guidance
According to Randgold 2013 guidance the company is looking at a strong year moving forward. In this press release Randgold stated it expects to produce approximately 900,000 to 950,000 ounces of gold in 2013 at a total cash cost of production between $700-750.
Analysts at MSN Money are predicting a strong couple of years ahead for Randgold Resources. Analysts are expecting Randgold Resources to have an EPS of $5.71 for FY 2013 and an EPS of $7.92 for FY 2014. Analysts at Bloomberg are estimating Randgold's revenue to increase to $1.6 billion for FY 2013 and $2.1 billion for FY 2014. In January of 2013, BMO Capital Markets gave Randgold Resources a rating of "Market Perform" with a target price of $110.00 while Finviz has a stock price target price of $121.90 for the company.
Chart sourced by FINVIZ
The above analysis reveals that Randgold Resources LTD is a solid company on the debt side. The analysis indicates that the company has very limited debt compared to the assets the company holds. Currently, analysts have a $110.00 to $121.00 price target on the stock with strong growth in earnings moving forward. Based on the chart above, the stock is currently on a strong downtrend. If patience is exercised and the stock price begins to form a bottom and break to the upside, it could prove be an excellent opportunity.
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 Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.