MaxMarioni
Member Since 23 November 2015
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Last Seen: 16 Nov '19
Posted on 22 January 2016, 7:44 AM

Stairway to a Safe Haven: Investing in a Gold Mining Company

Topics: Commodities, Gold
Other Insights on Related Shares: GOLD.L, RRS.L

It is something of a cliché, during a period of intense volatility such as the present one, for investors weary of an incoming crisis to seek refuge in what is perceived as the safest asset class of them all – gold. This tends to hold true even when commodity prices are falling as in the current situation. However there are ways to invest in gold without accumulating huge bars of the shiny metal in the basement, which are safer and more convenient than owning bullion and carry the possibility of capital gains. Listed gold mining companies are often described as a “safe haven”, and present a “golden” opportunity for investment.

 

The biggest player in the gold industry on the LSE is Randgold Resources (RRS). It is a 21 year old gold mining and exploration company with an extensive presence in Western and Central Africa, operating the 7.5Moz Morila, the 7Moz Yalea and the 5.5Moz Gounkoto mines in Mali, the 4Moz Tongon mine in and the 3.7Moz Massawa mine in Senegal. It is listed in London, where it is a FTSE 100 constituent, and on the NASDAQ. Its earnings per share is £1.33 and its estimated Price to Earnings ratio for Q1 2016 is a breathtaking 33.76 – but this is absolutely normal for the sector, it is a company producing gold after all so you should alreadyfactor in that its stock is highly sought after. Its share value has recently appreciated precisely because it is perceived as a safe haven, and this has brought a flood of money in. It has had a rough couple of years on the stock exchange, largely because of the fluctuations in the price of gold, but recently has recovered and resumed on an upward trajectory, as can be seen below.

 

Total revenue for the group is $1.08 billion, a decrease of 4% from last year; this figure however excludes gold sales from join ventures. Gold sales for the first 9 months of 2015 were $1,040,131, againdown 4% on the comparable figure for 2014 (this decrease nevertheless measures well against the 6% fall in the price of gold). Profits have been similarly hit by the commodity slump.

 

Despite the lacklustre performance, there are reasons why market observers sing the company's praises. In 2014 Randgoldincreased its production to over one million ounces while reducing its production costs by 2%, one of the reasons why it managed to partially offset the fall in price of gold. In Q3 2015 it ramped up production by 1.7% on the previous quarter, producing 305,000 ounce of gold, which is 6% more of its production volume in 2014. It is the fifth year in a row Randgold is able to increase output.

 

 

The company is completely debt free, and has an impressively strong balance sheet, with $168m in cash at the end of September, up from $141m at the end of March. The company last year felt it was in a sufficiently strong position to grant shareholders a 20% increase on the dividend to be paid out this year, which is 39.56p. Also, given the state of uncertainty in international markets is likely to perdure for some time, risk-averse investors will flock more and more to safer assets: the price of gold has already risen by over 2.5% since new year's day, a rise which may well continue and increase in momentum as this über-volatile year progresses.

 

Max Marioni

 

 


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