Head To Head: Fresnillo vs Randgold Resources

Published in Investing on 22 October 2012

Which precious metals giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are the world's largest primary silver producer Fresnillo (LSE: FRES), which is headquartered in Mexico, and African gold giant Randgold Resources (LSE: RRS).

The FTSE 100 index is up 4% over the past three months, but gold and silver prices have been even stronger -- into double digits -- driven by the announcement of the Central Bank's 'unlimited' purchase of government bonds in the eurozone and the Federal Bank's further round of quantitative easing in the US.

Miners tend to be a leveraged play on metal prices: thus, Fresnillo's shares are up 34% over the period and Randgold Resouces' shares are up 33%.

Let's take our seats at ringside.

Round 1: earnings

 FresnilloRandgold Resources
Recent share price1,918p7,570p
Last year price-to-earnings (P/E) ratio27.028.3
Current-year forecast P/E30.022.2
Three-year earnings per share (eps) compound annual growth rate (CAGR) (%)8197
Current-year forecast eps growth (%)-1027
Forecast operating margin (%)5348

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Randgold Resources edges the first round, with strong historic and forecast earnings growth, and a lower forecast P/E. It's worth mentioning that precious metals miners tend to have higher P/Es than most other industries and that Fresnillo's and Randgold's ratings are not unusual in the sector.

Round 2: dividends

 FresnilloRandgold Resources
Last year dividend yield (%)3.50.3
Current-year forecast dividend yield (%)1.70.4
Three-year dividend CAGR (%)9645
Current year forecast dividend growth (%)-5027
Forecast dividend cover1.910.3

Sources: Digital Look, Morningstar, company reports. Winners in bold.

Dividends are rarely the first priority for precious metals miners. Nevertheless, even the small dividends of Fresnillo and Randgold offer investors an infinitely better income than physical silver and gold, which, of course, have a zero yield.

Fresnillo's relatively high yield last year was due to it paying a second interim dividend in addition to the usual interim and final. Even excluding the second interim, though, the yield -- 2.1% -- is still superior to Randgold's, as is the historic CAGR, which falls to 65% from 96%. On the same basis, Fresnillo's forecast dividend growth improves from -50% to -16%, but remains inferior to Randgold's.

In summary, with or without Fresnillo's second interim, the points tally in the dividend round comes out the same, and gives Fresnillo a narrow win.

Round 3: balance sheet

 FresnilloRandgold Resources
Price-to-book (P/B) ratio10.34.9
Net gearing (%)-37-22

Sources: Digital Look, Morningstar, company reports. Winners in bold.

It's all square in the final round. Randgold takes the point for P/B, while Fresnillo scores on gearing. The negative gearing number for both companies indicates they have net cash on their balance sheets.

At the end of the contest, each company has won one round outright and one round has resulted in a draw. The overall points tally is six a-piece.

Post-match assessment

This was as tight a head-to-head contest as we've seen in the series. If the companies are hard to separate on the numbers in the tables above, what else could investors consider?

First, there's the gold-to-silver price ratio. The current ratio is over 50, but the long-run ratio is about half that, suggesting silver -- and silver miners -- may be the better value.

Second, from time to time the valuations of gold and silver miners' disconnect from the prices of the metals. So, buying miners when they're at a discount to the historical norm offers something of a margin of safety. There has been such a disconnect in the past couple of years, but the recent bull run in the miners' shares has seen a reversion towards the historical mean. On this basis, a good opportunity to buy miners may already have passed.

Third, the 64,000-pound question: are gold and silver prices going to rise or fall on your investing horizon? I can't tell you the answer to that one! Search the web and you'll find myriad opinions on where precious metal prices are headed next; and on their medium- and long-term prospects.

Finally, if you do want exposure to gold or silver -- and you want it through miners -- then is investing in an individual company, such as Fresnillo or Randgold, the best way to go about it? You could consider spreading your risk across many companies by investing in an exchange-traded fund, such as iShares S&P Commodity Producers Gold (LSE: SPGP), or in an open-ended investment company, such as BlackRock Gold & General or CF Ruffer Baker Steel Gold.

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> G A Chester does not own shares in any of the companies mentioned in this article.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

johandesilva 22 Oct 2012 , 10:41am

I sold my Fresnillo on the rise for nice profit and with gold in short term falling I think profit taking may continue. All my focus is on the junior section and you have a hidden dividend paying nugget in Pan African Resources (PAF) who have a strong balance sheet and margin.

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