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8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
http://slidepdf.com/reader/full/why-randgold-should-be-your-template-for-seeking-investment-in-gold-stocks 1/15
Why should Randgold be your template for
seeking investment in gold stocks?
Before we assess Randgold’s competitive advantages
over other gold producers and the reasons you need to
copy its approach to mining, you must rst understand
the fundamentals of why other people view gold as an
investment and preservation of wealth.
Lately, gold has come a long way from its lows of
$1,00 per o!. to record its "iggest gains in si# years,
umping to $1,%&0 per o!. in a matter of wee's.
(e 'now it has "een a wea' investment if you measure
the performance against home prices, stoc's and
"onds in the last century, "ut this century "elongs to
gold.
)ou may have heard of the *+hina’s +entury, or the
*-ndian +entury, all it means is that this century will "e
the *olden +entury /no pun intended
2ere’s why
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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0.00
10.00
%0.00
30.00
40.00
0.00
50.00
37.79
31.6%31.4
37.6&42.!
%7.&&29."7
27.#!2!.7"
3#."2
3%.6037.3$
40.3
37.$!
4#.9!
1.40$.24
$".!4
$3.#7$$.44
%o& important is 'hina ( )ndia in the gold market
reater +hina 8 -ndia as a
/9 of world gold demand
*+,
-ource: old.org.
;s you can see, "oth +hina and -ndia is "eginning to
corner the gold mar'et.
(ith the com"ination of rising income per capita,
changes to government policies and a history of gold
ownership in its culture and traditions, you would "egin
to understand why it’s so much in demand.
But most importantly, increasing income per capita is
the 'ey factor in the demand for gold, as - will e#plain.
-f you com"ine the income of "oth -ndia and +hina
*together, you will get this:
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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0.0
1,000.0
%,000.0
3,000.0
4,000.0
,000.0
5,000.0
&,000.0
6,000.0
7,000.0
10,000.0
'ombined income of )ndia and 'hina
+hina and -ndia per capita
/$
<ource: =uandl.com and =uandl.com.
<ince 1761, "oth countries had seen its com"ined
income rising from $4&1 to $7,1&1 in %014.
>eanwhile, gold demand from these countries has
dou"led
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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0.0
00.0
1,000.0
1,00.0
%,000.0
%,00.0
3,000.0
3,00.0
4,000.0
4,00.0
0
%00
400
500
600
1000
1%00
1400
1500
1600
'hinese and )ndian buying up the physicals
reater +hina 8 -ndia
/tonnes
(ord gold demand /tonnes
old /$?ounce*/0ounce,
-ource: old.org.
@he reasons why the demand for gold hasn’t *s'yAroc'eted at the same pace as income per capita of
+hina and -ndia are:
;. @he +hinese government didn’t allow the ownership
of gold to private citi!ens until %003
B. old price /itself has appreciated "y veAfold, since
the lows of %001
+. -ndian Rupee is continuing to depreciate against the
C<D, meaning you need more Rupees to "uy one ounce
of gold.
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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2owever, the ongoing prosperity of "oth +hina and
-ndia means more ordinary people can aEord gold. ;nd
a proection of the future is as follows:
By %0%0, the ->F estimates "oth these giants will have
a com"ined per capita of $14,%5. /@he proection of
+hina’s DG "y %0%0 is $1& trillion and -ndia at $3.44
trillion. ;nd the population of +hina and -ndia is
estimated at 1.411"n and 1.366"n respectively.
By %00, 2<B+ rec'ons that "oth these economies
would have grew that to $%%,617 /at constant %000Dollars.
@here are two o"ective factors to support and "oost
the price of gold:
1. old will "ecome cheaper when incomes, in C<D
terms from -ndia and +hina go up
%. -t will "e more inAdemand as the cost of essentials
/food, clothes and rents drop, in proportion to growing
income.
- guess you got the est of why gold would "e "ullish
this century than the last, "ut if you are interested in it
and want to learn more a"out the factors aEecting the
gold price then ma'e sure to chec' out my article on:
Hditor’s pic': @he driving factors aEecting the gold
mar'et.
Iow, for the main topic
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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2ere is why you should study Randgold Resources, as
the gold miner with the *golden touch and why it will
proof a good template when it comes to investing in
other gold investments.
1ive reasons Randgold Resources is a great gold
miner:
1. -uperior margins
For a capitalAintensive sector, miners have to earn a
"igger margin on goods to pay for capital e#penses not
recorded in the -ncome <tatement.
Randgold is ma'ing a good margin on the price of gold:
0.00
10.00
%0.00
30.00
40.00
0.00
50.00
&0.00
$0.0
$%00.0
$400.0
$500.0
$600.0
$1,000.0
$1,%00.0
$1,400.0
$1,500.0
$1,600.0
argins tell investors if a business can cope &ith price
Iet margin /9
+ash margins /9
old price /$?o!.*+, */0o.,
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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-ource: Randgold annual reports and -nde#mundi.com.
But how do you 'now that these margins will cover
capital e#penditureJ
<imply ta'e its net earnings and cash earnings and
compare that with capital e#penditure.
0
0100
10
%00
%0
300
30
400
4000
'overing cape *most, of the time
+ape# /Km
Iet -ncome /Km
+ash -ncome /Km*5m,
-ource: Randgold annual reports.
Both net income and cash income /alone covers total
cape# /e#cl. disposals with ease, and therefore, the
"usiness can "e suciently internallyAfunded.
%. 'heck on debt increases and the number of
shares issued
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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-f a fully operational "usiness can’t fund its operations,
they must draw down on cash reserves, dispose assets,
or raise money to support its operations.
@he last method /can mean dilution to shareholders
67uity: (hen companies raise funds through placing
then the discount to current share price is a crucial
indicator of a healthy "usiness.
<o, if you see a signicant discount on current share
price, then avoid the stoc'.
8ebt: ; company raising loans at high interest rates
than their rivals show that nancial institutions don’t
have condence in seeing their money "ac', therefore
imposing a high interest as a guarantee of seeing some
of the money.
For shareholders, that means the company is
essentially wor'ing for its creditors.
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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0
10
%0
30
40
0
50
&0
60
70
100
0.0
1000.0
%000.0
3000.0
4000.0
000.0
5000.0
&000.0
'hecking 4 li7uidity issues
Io. of shares /L2<
De"t /Km, L2<
>ar'et +ap. /Km*5m, *5m,
-ource: Randgold annual reports.
; loo' at Randgold Resources, you see de"t is near
!ero, and the num"er of shares dilution was at aminimum. ;lso, compare it to Randgold’s mar'et
capitalisation going up in value and you have a recipe
for success.
3. 9ble to produce surplus pro:ts ; current
production levels
Mne yardstic' that would "ring you success when it
comes to mining is how much *surplus cash would it
ma'e while maintaining current levels of productionJ
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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For prudent and accuracy, you should wor' out the
incremental increase in the company’s accumulated
depreciation.
- view *accumulated depreciation as a "etter measure
than depreciation charges "ecause it accounts for the
disposal of tangi"le assets Below, you can see the
incremental accumulated depreciation as a 9 of sales
is "elow that of Randgold’s net and cash margins,
therefore the gold miner produces *surplus
prots?cash.
-ource: Randgold annual reports.
<o, what is the surplus prots?cash generated "y
RandgoldJ
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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A0
0
0
100
10
%00
%0
300
30
Randgold<s has ability to acuire or pay a dividend
<urplus prots /Km
<urplus cash /Km
-ource: Randgold annual reports.
@hat is how much it can ma'e while maintaining
production.
4. Randgold has a strong proven and probable
reserve
+urrently, Randgold produces 1.%m ounces of gold per
annum, and it has proved and pro"a"le reserves of gold
amounting to 1m ounces.
;t the current level of production, Randgold’s provengold reserves will last twelve years.
Randgold’s resource /that is measured and indicated is
estimated at %&.5m ounces. (e should ignore this
resource num"er "ecause the current gold price could
mean it isn’t economically via"le /will not generate
cash earnings.
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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A
,000.00
10,000.00
1,000.00
%0,000.00
%,000.00
30,000.00
0.0
1000.0
%000.0
3000.0
4000.0
000.0
5000.0
&000.0
6000.0
7000.0
10000.0
Randgold reserve value vs. 2arket value
@otal reserve value /G8G
/$m
>ar'et value /$m, R2<*/m,
-ource: Randgold annual reports.
@he correlation "etween Randgold reserves value islower than the stoc' value and could mean
overvaluation.
. 'hecking Randgold valuation via fundamental
analysis
;nother way to chec' on an overvaluation in a goldproducer is to consider:
1. >ar'et value per ounce priced "y investors />ar'et
valuation divided "y the company’s proven and
pro"a"le gold reserves
%. ;dd in the total cash cost per ounce.
3. @hen compare it with the current gold price.
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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0.0
%00.0
400.0
500.0
600.0
1000.0
1%00.0
1400.0
1500.0
1600.0
Randgold<s cash cost ( market value per ounce
+ash cost /$?o!.
>ar'et value /$?M!.
old price /$?o!.*/0o3.,
-ource: Randgold annual reports.
2ere you can see the correlation "etween the gold
price and the cash cost and the value mar'ets gave to
Randgold’s reserves. ;nd Randgold is trading inAline
with the movements of the gold price.
=)>: -f you see a gold miner’s cash cost and mar'et
value per ounce overshoots the gold price, then you are
loo'ing at an overvaluation of the "usiness.
@hat was ve ways of researching and 'nowing the
characteristics of a successful gold mining corporation.<o, now for the template, you have "een waiting.
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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=he Randgolds template to successful gold
mining
1. For an esta"lished gold producer, price to "oo'
should "e no more than ve times, unless you see a
huge increase in economies of scale meaning a
reduction of total cash costs. +urrently, Randgold is at
%.3.
%. Randgold’s cash costs per ounce stand at $50
which gives it room to e#pand operations. ;lso, note
that the mines average 3.3A3.6g?t this is a reasona"le
grade and the reason why cash cost is low.
3. @o invest in a successful miner, ma'e sure it can
internally fund its mining operations. For Randgold,
they are earning %19 on margins where to sustain
current levels of production they must earn 169 onmargins.
@A. ; miner ma'ing 9 or 109 on sales is no good if
net cape# accounts for 19 of sales
4. ;lways chec' for any changes in a gold producerNs
liOuidity position, instead of focusing on sales and
earnings growth. (e are loo'ing for sustaina"leoperations not a PoneAtimeP sellAoE of its nonAcore
operations
<ometimes, a miner would "orrow for acOuisitions and
for e#pansion purposes, which is another topic for
another day. But if there are no e#pansion plans, then
the increase in leverage and dilution to shareholder
should "e a maor concern.
8/19/2019 Why Randgold Should Be Your Template for Seeking Investment in Gold Stocks
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- will do another piece on the potential gold producers
matching Randgold’s fundamentals soon.
8isclosure: - have no positions in any stoc's
mentioned, and no plans to initiate any positions within
the ne#t &% hours. - wrote this article myself, and it
e#presses my opinions.