Is This the Best Gold Mining Stock?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past decade, the one asset class that has been kindest to investors’ portfolios has been gold bullion, which has appreciated at an average annual rate north of 40 percent since 2002. In comparison, the major American indices have returned around 4 percent per year, while U.S. Treasuries have exhibited similar gains, depending on the variant. Looking toward the near term, analysts are betting that the gold rally is not finished; most estimate that prices will hit $1,900 an ounce if the Fed does embark on QE3. To learn more about other ways to prepare for quantitative easing, continue reading here.
Aside from performing the laborious task of buying actual bars of gold bullion, there are easier ways for investors to get into the metal. Next to gold ETFs like the SPDR Gold Shares, PowerShares DB Gold Fund, and ProShares Ultra Gold, the most obvious play is gold mining stocks. With an $8.2 billion market cap, Randgold Resources (NASDAQ: GOLD) is not the largest gold miner, though it is certainly one of the industry’s fastest growing stocks. An investor holding $10,000 of GOLD ten years ago would currently hold nearly $300,000; this amounts to an average annual return of over 250 percent. Randgold has achieved this price appreciation through extraordinary earnings growth. Since the recession, the company’s EPS has increased by 96.4 percent a year, trouncing the industry average (26.0%) and mid-tier competitors like Anglogold Ashanti Ltd (NYSE: AU), Gold Fields Ltd (NYSE: GFI), Harmony Gold Mining Co. (NYSE: HMY), and Eldorado Gold Corp (NYSE: EGO).
Much of this growth can be attributed to Randgold’s ever-expanding network of West African mines, most notably its Gounkoto and Tongon pits in Mali and Cote d’Ivoire. Altogether, the company produced almost 700,000 ounces of gold in 2011 at a total cost of $716 an ounce. This compares favorably to its 2010 figures, which were 440,000 oz. at $700 each. Now, a near 60 percent jump in production is enormous compared to competitors AU (2.9%), GFI (4.0%), HMY (22.0%), and EGO (31.0%). This growth may be driven by the fact that Randgold is able to extract more return from its invested capital, as it sports a higher ROIC (20.5%) than AU (18.9%), GFI (11.5%), HMY (2.0%), and EGO (7.5%).
Despite this advantage, Randgold’s total production was still dwarfed. In terms of ounces, AU (4.5M), GFI (3.5M) and HMY (1.5M) all produced more gold; only EGO (656K) was smaller in size. In our opinion, Randgold’s rate of expansion is more important than its total size – after all, the company will close this gap if it maintains even a fraction of its current growth rate. Estimates for 2012 production are between 850,000 and 865,000 oz., while 2013 production is expected to eclipse 1 million oz.
From a valuation standpoint, Randgold is trading at a price-to-earnings multiple (19.3X) above that of AU (10.9X) and GFI (10.6X), but below HMY (50.8X) and EGO (21.1X). Moreover, GOLD’s P/E is below the industry average (23.4X) and its own 10-year historical average (45.8X). When earnings growth is factored into the equation, the stock looks to be undervalued, as its P/E Growth ratio is 0.8. Typically, a number below 1.0 signals that a particular stock is under-appreciated by the markets. In fact, Randgold’s earnings have historically traded at a 170 percent premium to the S&P 500’s average over the past decade. This year, they appear much cheaper, trading at just a 37 percent premium. Interestingly, the same can be said about Randgold from a cash flow perspective, even though the company more than quintupled its operating cash flow in the past year and holds no long-term debt, two clear advantages over its aforementioned competitors.
In the first quarter Randgold missed analysts’ earnings estimates by nearly 10 percent, though the company is still expected to report a year-end EPS of $5.78, up from $4.27 one year earlier. Assuming that this consensus holds, fairly valued shares of GOLD should rise above $135 by next summer. Heck, even if the stock stays at its current valuation, it will eclipse $110 a share. It currently trades in the $90 range, making a 20 percent return a very attainable goal. WealthLift’s Sentiment Index rates Randgold as a strong buy, with 88.89 percent of users placing an over-perform rating on the stock.
Fool blogger Jake Mann does not own shares in any of the companies mentioned above.