Randgold Resources 23 Jan 09

GOLD

  • USD $42.50
  • Investment Type: Outside the box
  • Risk: High
  • Action: Sell Half

Fat Prophets take some profits

 

Amidst the current gloom, gold remains a shining light. During the white knuckle ride of 2008, the yellow metal proved to be a flower in a bed of weeds. However, gold’s strength perversely has worked against it as desperate investors liquidated the only asset in their portfolios worth anything.

For producers in the mould of Randgold Resources (NASDAQ, GOLD) the outlook remains bright but given equity market volatility, a recent dramatic surge in share price brings with it the likelihood of a pullback. And it is with this in mind that we feel it prudent to take some funds of the table, especially given the 233 percent gain the partial sale crystallises.

With the 2008 chapter now closed, investors will be hoping that such a dismissive market will never be encountered again. Many a decent stock was thrown out with the bathwater, being forced to depressed levels. As many panicked those able to keep their heads saw buying opportunities surface in November. Indeed one such was Randgold Resources which we recommended Members buy on November 14th (FAT140) at $29.75.



Since then, we have seen a rally. The sensitive market conditions remain and a return to such low levels can not be ruled out. However, for Randgold the last 8 weeks has been nothing short of spectacular. Even in the peak of a bull market, a 43 percent gain in such a short space of time is something to behold. In today’s environment it is simply unheard off.

Of course, the price of gold has a lot say in the gold miner’s climb. Having come within a whisker of the US$900 mark (temporarily becoming more expensive than platinum) gold is fighting hard to set new highs and it is little wonder that Randgold’s share price has rocketed. In the same breath, as much as we remain long term gold bulls we are cautious at such a steep rise and the prospect of a near term drop in the miner’s share price is enough to force our hand.

A key ingredient of any successful portfolio is not to give in to greed. We have often reduced our exposure to a stock by half when profits have become significant after a major rally.

By retaining half of our holding we still have comfort on the upside and by moving into cash with the other half we are poised to capitalise on any retracements should they occur. We see this as smart portfolio management.

At the moment, it would seem that gold is currently taking a well earned breather before resuming its assault on the US$1000 mark. How long this process will take it difficult to say, however there are sure to be many attempts before the eventual successful breach.



Our long term outlook for both the gold price and Randgold Resources’ share price remain robust.

Rather than a commodity, the yellow metal is viewed as a traditional store of wealth and a hedge against financial and political chaos. Given the events in the Middle East as well as the uncertainty surrounding the security of various investment classes, gold’s appeal as an investment continues to gather momentum. .

Indeed the facts say it all. During the third quarter of last year, investment demand doubled to over $10 billion and we expect this positive trend to have continued during the fourth quarter of the year.

On the flip side, a higher gold price in conjunction with an economic slowdown in gold consuming hotspots such as India, is beginning to stunt jewellery demand. However, more than offsetting this is the clamour for gold as an investment vehicle particularly physical gold.

The climate may be a lot calmer than in October last year, but volatility in the world’s financial markets remains. And as such investors are still looking to minimise counterparty risk. Indeed, many mints including the Perth Mint have been forced to suspend physical sales for short periods such has been the rush to safety.

And whilst gold demand is on the up, an ever growing supply/demand chasm in the gold market dynamic is something which CEO Mark Bristow has been keen to point out. Indeed, the company expects global gold supply to drop 15 percent in the next five years because of a lack of mining investment.

Further underpinning the case for gold is a perilously positioned US dollar which is set to be dragged down by a struggling US economy and the series of expansionary fiscal stimulus packages.

As US interest rates fall, investors find the US$ to be a less attractive investment, whilst the reverse applies when US interest rates rise, with investors finding the US$ to be more attractive. So, with the US Federal Reserve likely to continue with its rate-cutting program in early 2009, the value of the US$ must logically struggle this year.

Importantly, up to now the Fed has not been cutting rates in isolation, so the impact on the price of the US$ and the price of gold has not been so pronounced. This will change during 2009 we believe, as the US continues with its program of rate cuts and making cheap money available. And this does not take into account the huge inflationary impact of the massive spending programs being implemented worldwide.

As the public’s trust in paper money slowly evaporates as supply becomes more and more prevalent, gold will continue to rise. As a result earnings at Randgold will be beneficiary.

From a charting perspective, the overall outlook for Randgold Resources is very positive. As evident on the daily chart, from a low of $22.28 in October, prices have rallied strongly to reach $46.49. Encouragingly, prices are currently consolidating just below the highs, above interim support at $36.24.

"..for Randgold the last 8 weeks has been nothing short of spectacular. Even in the peak of a bull market, a 43 percent gain in such a short space of time is something to behold. In today’s environment it is simply unheard off."


From the October low, prices have rallied over 100 percent, before correcting to close at 2623p on Wednesday. Any stock would struggle to sustain such a rapid pace of gains and Randgold is no exception. While the broader outlook remains buoyant, we believe now is an opportune time to lock in some profits on this investment.

This prospective short term weakness and the profit we have made have both determined our latest move.

As much as gold produced the goods in 2008, its status as one of few investments which delivered positive returns counted against it. Indeed, a great amount of gold was sold as investors chose to cash in their physical, paper gold and equities as they struggled with the de-leveraging process. Given such selling pressure, the 6 percent calendar year gain could have been a lot more.

Indeed, the recent pullback in the price of gold could be attributed to similar factors. However, the devaluation of paper or fiat currencies which is actively being pursued by policy makers will dampen the impact that forced selling will have in the time ahead.

Randgold will continue its progress in the same way which got the company to its current position, through diligent organic growth. However the deflationary force which has reduced asset prices in the mining sector coupled with the company’s impressive cash position may see a change of strategy. Indeed, the company’s austere approach has resulted in it being free of debt with more than $250 million of cash on its balance sheet… plenty then to go shopping for assets with.

With gold trading above $800 an ounce, Randgold’s two mines in Mali are making good profits. Morila, which made the company’s name, is in decline and is due to close in 2012/13, but the flagship mine Loulo, which is larger, is being expanded.

Looking ahead, Randgold’s estimates on production are much like its approach to business model – careful and conservative - and we believe that much upside potential remains. CEO Mark Bristow has recently stated that higher output from Loulo means Randgold’s annual gold production will rise from 400,000 ounces in 2008 to more than 600,000 in 2011. However this could be accelerated as acquisitions of gold prospects in central and eastern Africa begin to catch the eye of the well heeled producer.

All factors considered Randgold remains poised to capitalise on the long term gold bull market ahead. However given it stellar share price performance of late as well the abundance of profit takers in the market, a pullback is likely.

As such we feel it prudent to reduce our exposure, and recommend Members lock in some profits, selling half their holdings around $42.50. We maintain a core holding for longer term out-performance.

DISCLAIMER

Fat Prophets has made every effort to ensure the reliability of the views and recommendations expressed in the reports published on its websites. Fat Prophets research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication. However, like the markets, we are not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Fat Prophets and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Fat Prophets hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply. As at the date at the top of this page, Directors and/or associates of the Fat Prophets Group of Companies currently hold positions in ABB Grain (ABB), Aurora Minerals (ARM), Austal (ASB), Australian Wealth Management (AUW), Avoca Resources (AVO), Avexa (AVX), Argo Exploration (AXT), BHP Billiton (BHP), Babcock & Brown Japan Property Trust (BJT), Boart Longyear (BLY), Biota Holdings (BTA), Catalpa Resources (CAH), Catalpa Resource Options (CAHO), Coeur D'Alene Mines (CXC), Fat Prophets (FAT), Fat Prophets Options (FATO), Fosters Group (FGL), Global Mining Investments (GMI), Lihir Gold (LGL), Lion Selection (LST), Macarthur Coal (MCC), Maryborough Sugar Factory (MSF), Mundo Minerals (MUN), Mineral Securities (MXX), Mineral Securities Options (MXXO), Newmont Mining (NEM), Oil Search (OSH), Oz Minerals (OZL), Progen Options (PGLO), Platinum Australia (PLA), QBE Insurance (QBE), Rio Tinto (RIO), Roc Oil (ROC), St Barbara (SBM), Sirtex Medical (SRX), Territory Iron Ord (TFE), Telstra Corporation (TLS), Tox Free Solutions (TOX), View Resources (VRE), View Resources Options (VREO), Walter Diversified (WDS), Woodside Petroleum (WPL), Merrill Lynch Gold Fund, Platinum Japan Fund, Gold Bullion. These may change without notice and should not be taken as recommendations. The above disclaimer does not apply to investments held by the Fat Prophets Australia Fund Limited ACN 111 772 359 (FPAFL).

Snapshot GOLD

Randgold Resources
Market Capitalisation $3.3b