Image source: company presentation
In my previous article about Randgold Resources (NASDAQ:GOLD) from February 5, I recommended the stock arguing that Randgold's stock is well positioned to achieve high capital gain when the gold price recovers. Meanwhile, the gold price has climbed 10.4% since my article was written from $1,143.9 per ounce to $1,263.1 on June 23, and another 4.7% to $1,322.4 per ounce on Friday after the referendum results showed that Britain voted to leave the European Union. Randgold's stock has surged even more by 34.5% to $101.17 from $75.20 on February 5. It is not surprising that Randgold's stock has increased much more than the gold price since the company's earnings depend on the production margin (average realized gold price minus production costs) and not on the absolute price of gold.
Randgold Resources is engaged in the exploration and development of gold deposits in Sub-Saharan Africa. The company was founded in 1995 and is based in St. Helier, the Channel Islands.
Source: Randgold Resources website
Since the beginning of the year, GOLD's stock is already up 63.4% while the S&P 500 Index has decreased 0.3%, and the NASDAQ Composite Index has lost 6.0%. However, since the beginning of 2012, GOLD's stock has lost 0.9%. In this period, the S&P 500 Index has increased 62%, and the Nasdaq Composite Index has risen 80.7%.
Randgold Daily Chart
Randgold Weekly Chart
Charts: TradeStation Group, Inc.
Latest Quarter Results
On May 4, Randgold Resources reported its first-quarter 2016 financial results, which beat earnings-per-share expectations by of $0.01 (1.8%). Randgold has shown earnings-per-share surprise in three of its last six quarters, missing estimates in the three other quarters, as shown in the table below.
Data: Yahoo Finance
While production was down 11% from the previous record quarter at 291,912 ounces, the profit of $63.9 million was 19% higher than that of the previous quarter and 25% up year-over-year. Production of gold fell due to operational problems at two of the company's African mines. Randgold mined 291,912 ounces in the first three months of the year, down from 326,430 ounces in the last quarter of 2015. However, the company said that it maintained a full-year target of 1.25 million ounces to 1.3 million ounces.
In the report, Chief Executive Mark Bristow said that it had been a busy and demanding quarter for Randgold but in addition to dealing effectively with operational challenges at the mines it had also continued to reinforce the foundations of the business to ensure that it is in good shape to cope with the cyclical nature of the gold mining industry:
With our strategy, plans and projections intact, we are able to continue delivering value at current and even lower gold price levels. We're quite bullish about gold's medium to long term prospects, and when the cycle turns, the work we do now will have equipped us to capitalize fully on the upside.
Randgold's average realized gold price in the recent quarter was $1,187 per ounce, an 8.8% higher than in the prior quarter, and the total cash cost was $648 per ounce, a 2.5% greater than in the previous quarter. As such, the gold production margin of $539 per ounce in the first quarter of 2016 was higher by 17.4% than in the fourth quarter of 2015, and by 6.3% than in the first quarter of 2015, as shown in the table below. That explains the better earnings in the recent quarter. Moreover, I believe that the production margin will increase considerably in the current quarter due to higher average realized gold price.
Trying to figure out the average realized gold price for the current quarter, I have calculated the average daily gold price thus far in the current quarter and the first quarter of 2016, as shown in the table below.
According to my calculations, the average gold price thus far (June 24) in the current quarter is up 6.1% from the previous quarter. As such, I assume that Randgold's average realized gold price in the current quarter will be about 6% higher than in the prior quarter, and higher earnings can be expected in this quarter.
Gold recent price of$1,322.4 per ounce is already up 25.3% from its seven-year low of $1,055.4 per ounce on December 02, 2015.
Gold fundamentals remain positive. Gold is benefiting from a rush to safe havens amid volatility on stock markets. Global central bank policy, continuous reduction in near-term U.S. and global economic growth projections, supportive investment and official sector demand, are all positive for gold. Also, improved investment demand through ETFs, China and Indian purchases and a 5% decline in mine supply by 2020 have been supportive drivers of the improved gold price witnessed since December 2015. Moreover, the turmoil in the markets on Friday after Britain voted to leave the European Union caused gold price to soar another 4.7%.
The World Gold Council said in an update on June 24:
With Britain voting to exit the European Union, we expect to see strong and sustained inflows into the gold market driven by the staggering level of protracted uncertainty that investors now face.
Gold August 2016 Leading Contract With 50 Day Moving Average
Chart: TradeStation Group, Inc.
Although Randgold's trailing P/E is high at 48.87 and the forward P/E is also high at 30.53, it is worth noting that the company has no debt at all, and its current ratio is very high at 3.80.
In addition, most Randgold's Margins, Growth Rates and Return on Capital parameters have been much better than its industry median and its sector median, however, not better than of some S&P 500 median parameters, as shown in the tables below.
The company pays a dividend. The forward annual dividend yield is at 0.65%, and the payout ratio is only 31.6%.
Although production of gold was down 11% from the previous record quarter due to operational problems at two of the company's African mines, Randgold delivered first quarter earnings that were better than analysts' expectations. Randgold's average realized gold price in the recent quarter was $1,187 per ounce, an 8.8% higher than in the prior quarter, and the total cash cost was $648 per ounce, a 2.5% greater than in the previous quarter. As such, the company's gold production margin of $539 per ounce in the first quarter of 2016 was higher by 17.4% than in the fourth quarter of 2015, and by 6.3% than in the first quarter of 2015. Moreover, I believe that the production margin will increase considerably in the current quarter due to higher average realized gold price. Although Randgold's trailing P/E is high, it is worth noting that it has no debt at all, and its current ratio is very high. In my view, GOLD's stock is well positioned to achieve high capital gain as gold price continues to soar.
Disclosure: I am/we are long IAG.
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.