Is Now The Time To Buy Randgold Resources?

Published in Company Comment on 26 December 2012

Should you buy Randgold Resources (LSE: RRS) today?

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Randgold Resources (LSE: RRS) (NASDAQ: GOLD.US) to determine whether you should consider buying the shares at 6,200p.

I am assessing each company on several ratios:

Price/Earnings (P/E): Does the share look good value when compared against its competitors?

Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

StockPrice3-yr EPS growthProjected P/EPEGYield3-yr dividend growthDividend cover
Randgold Resources6,200p470%19.510.6%135%10.7

The consensus analyst estimate for this year's earnings per share is $5.10 (up 19%) and dividend per share is $0.50 (up 25%).

Trading on a projected P/E of 19.5, Randgold appears significantly more expensive than its peers in the Mining sector, who are currently trading on an average P/E of around 6. That said, Randgold's sky-high P/E and high growth rate give a PEG ratio of around 1, which implies the share is fairly priced for the near-term earnings growth the firm is expected to produce.

Offering a 0.6% yield, the dividend is significantly less than the Mining sector average of 2.7%. However, Randgold has a three-year compounded dividend-growth rate of 135%, implying the payout could soon catch up and overtake that of the company's peers.

Indeed, the dividend is more than 10 times covered, giving Randgold room for huge payout growth.

Strong historic growth, but is Randgold expensive?

I believe Randgold is not currently expensive. Although Randgold's projected P/E is significantly higher than the sector average, Randgold's PEG ratio does highlight the strong near-term growth the firm is expected to produce. I believe this potential justifies the high P/E.

Indeed, one of the best-performing shares over the past decade has been Randgold. Trading down at 400p during 2004, Randgold shares have since seen a gain of 1,460%. The performance has been down to Randgold's explosive revenue and earnings growth.

I believe 2012 has seen Randgold achieve record gold production -- the company is currently producing around 850,000 ounces of gold per year. However, I believe Randgold is targeting 1.2 million ounces a year by 2015.

That said, Randgold is operating within some unstable countries, which has affected production. In particular, production at Randgold's Tongon mine in the Ivory Coast was impacted during the last quarter due to power grid problems.

Randgold also reports in US dollars. However, operating costs are split 40:60 between the Central African Franc (CFA) and the US dollar. The CFA is fixed against the Euro, which could mean any further weakness in the US/Euro exchange rate could push up costs for Randgold and reduce operating profits.

Anyway, taking into account Randgold's strong historic growth, next year's predicted growth and the share's PEG ratio, I believe now looks to be a good time to buy Randgold Resources at 6,200p.

More FTSE opportunities

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In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Rupert does not own any share mentioned in this article.

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Comments

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.

sagrace 26 Dec 2012 , 11:00pm

Not a word about a possible gold price crash?

RHargreaves 27 Dec 2012 , 1:56pm

Neither is there any mention about a further sustained rise in the price of gold. Both of which could magnificently change Randgold's outlook.

The analysis would be very complicated if I had factored both issues in.

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