Randgold Resources: Still A Quality Gold Miner

Randgold Resources produced its 4th quarter results and held its conference call on Monday 5th February.

The results were very badly received by the market and the shares are down over 7% as I write.

Projected p/e and price to book ratio below.

Details of the companies 4 producing mines can be found at www.randgoldresources.com.

The dividend has been doubled to $2 per share.

Randgold resources (GOLD) results have been badly received by the markets, primarily I guess, due to disappointment with the projected gold production figure of 1.3-1.35m ounces for 2018, at total cash costs of between $590-640. In 2017 the company produced 1.315m ounces of gold at a total cash cost of $620 per ounce. There are no new mines due to come to production before 2021, although the management re-affirmed that it will have concrete plans to develop 3 new mines before the 2021 deadline date. In the meantime, the company is engaged in exploration drilling in several areas close to the present 4 mines to prolong the life and/or increase production at those mines.

All information used in this analysis comes from the results and the conference call.

Price to Book

Randgold's net assets are $3,992,269,000 and the company has 94,125,000 outstanding shares. At the present price of $91.89, the price to book ratio is 2.17. The sector average is 1.2, so this is a rich valuation.

P/E ratio

Earnings for the 2017 year were $2.92 per share. At a share price of $91.89 the TTM p/e is 31.5. For 2018, the midpoint of guidance is 1.325m ounces at cash costs of $615. This should produce an extra 100,000 ounces over 2017 with cash costs of $5 less than last year. The difference in profit is therefore negligible. The average realized gold price by Randgold for 2017 was $1258 to produce the $2.92 earnings per share. If we factor in a gold price of $1325 for 2018 the extra profit assuming that all other factors remain the same is 1.325 x 67 (1325-1258) or $88m. The tax rate is 30%. Profit for 2017 was $335, so 2018 profit should be 335+62 (88 less 30% tax)=$397m. Using the outstanding share count above, earnings per share would be $4.21, so at a share price of $91.89 the prospective p/e is 21.8. Please note that this prospective p/e is a rough estimate to get some idea of valuation.

The Dividend

The dividend has been doubled to $2 for the 2018 year and in the conference call the CEO Mark Bristow suggested that in the future, the company was happy keeping a cash surplus of approximately $500m, so that they can fund any of the 3 mines that the company has promised to develop. He suggested that they also have an undrawn facility of $400m, so have liquidity of approximately a billion dollars for future projects. At present the company has $720m but has to pay $190 for the $2 proposed dividend. All future cash flows can therefore be passed on to shareholders in the form of future dividends. The depreciation charge was $182.9m in 2017 and capital expenditure was $304m so cash flow was approximately 304-183=121 less than profit of $335m. There is a timing issue of tax and dividends to take into account but it is not unreasonable to expect that in 2019 the cash available for a dividend will be 397 (see above profit figure) - 121 (assuming capital expenditure is constant) or $276m. This would equate to a dividend of $2.93 for a yield of 3.2%.

Conclusion

The share price fell heavily after the results, as the 2018 projections disappointed the markets. The shares are not cheap on a price to book of over 2 and a prospective p/e of just over 20. With the present yield of 2.2% and likely increases in the future, the question is 'are the shares good value?'. The company has earned its premier valuation over many years of solid performances and in the conference call the management seemed very focused on delivering 3 new projects before 2021 and maximising the present 4 operations so that they can produce substantial free cash flow and return this to shareholders in the form of dividends. I wish all management teams that I encounter had such a clear picture of the way forward for their company. There is reasonable technical support around $90 and the shares are very oversold on the daily charts. If they fall to $90 this would seem to be a good entry point. Randgold is still a quality company, despite the latest results and in my opinion deserves its premier rating. The increasing yield is an added bonus.

Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.

Disclosure: I am/we are long GOLD.

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.