Since we wrote this in the summer the gold price has fallen, with Randgold shares following. Investor nervousness has eased, Trump’s victory in the US elections has been greeted optimistically and interest rates are expected to rise by year end. High-quality defensive companies such as Randgold have underperformed in this environment. Although we share much of the market’s new found optimism, there are still many potential headwinds: Trump’s pro-growth promises will lead to a huge budget deficit, potentially undermining the US Dollar and benefiting gold prices; the new president’s world views risk escalating tensions in the Middle East; European elections throughout 2017 may generate further political uncertainty. High quality companies such as Randgold protect the portfolio at those inevitable times when investors’ nerves are frayed, potentially a regular occurrence given the uncertainty in the road ahead. – Geir Lode, Head of Global Equities
Geir Lode, Head of Global Equities at Hermes, believes that in the current environment of low rates and economic uncertainty, gold is set to shine – and UK-listed stock Randgold is his preferred way to access the opportunity.
Randgold Resources is a gold mining exploration company with a focus on Africa. The company produced 1.2 million ounces of gold in 2015, and we expect the production to increase to over 1.3 million ounces by 2018. The stock jumped on news of the EU referendum vote as it offered access to the safe haven of gold in the ensuing uncertainty, and despite a recent pull-back we believe Randgold has the potential to continue its strong performance.
Historically gold has been seen by investors as a safe haven protecting the downside in a portfolio. Over the next two to three years we believe an increased allocation to gold is likely due to macro-economic uncertainty, higher geopolitical risk, and low or even negative interest rates. The US 10 year bond is currently trading at a yield of approximately 1.5 percent and we expect gold to trade higher in an environment with prolonged low interest rates, an outlook supported by the Bank of England’s monetary policy decision last week. Even after a strong gold bull market so far in 2016 we think that gold is likely to move towards its all-time peak of over 1800 USD per ounce.
Randgold offers equity investors a liquid and low-cost way to access the gold markets, with a high correlation to the gold price. The company is one of the best-managed and highest quality in the sector. We believe that the stock’s premium pricing to the sector reflects the company’s low production costs, strong balance sheet, dividend potential and attractive production profile.
The management has a very strong capital allocation record and has stated that an expected return of 20 percent is required to participate in M&A deals or for new projects. While the company’s recently announced production figures failed to meet expectations, management has reiterated full year guidance and have a good track record of delivering when faced with operational challenges.
As a mining company operating in Africa the company is exposed to numerous potentially severe ESG risks. Three of the company’s mines operate in countries that are politically unstable and therefore there is significant risk of bribery and corruption issues. Sustainability, environmental and social considerations include energy sourcing, energy efficiency, impact on local communities and health and safety policies and performance. Randgold is widely regarded as a leader on these issues. There are currently no allegations facing the company, evidence of the high quality of the company’s operations, in line with industry best practice. On governance too the company is seen as an outperformer versus peers. We have had conversations with the company in the past around succession planning and remuneration, and are confident that our concerns are being addressed.
Randgold has not made any large greenfield discoveries over that last five years. From discovery to production it takes at least three to five years for a new mine to produce so we do not expect a dramatic change in the production profile short term.
While many traditional safe havens or high-quality investments are trading at stretched multiples, gold stocks currently look inexpensive compared to non-cyclical stocks. We see Randgold as a solid investment offering high quality, defensive positioning at a very attractive valuation.