Randgold: Best Bet in a Troubled Market
08/06/2015 7:00 am EST
Gold recently notched its longest losing streak since 1996; the price is now down 40% from its 2011 peak, observes Tony Daltorio in Daily Profit.
As to why gold fell so much, the usual reasons were brought out. These included the strength of the US dollar and the fear that the Federal Reserve would raise interest rates later this year.
This latest drop in the price of gold is not good news for gold mining companies. For many miners, their break-even cost is around $1,100 an ounce. So any drop below that price will bring severe pain.
It's not just the falling gold price hitting the miners. Many are being dragged down by their heavy debt burdens.
Debt was used to expand gold volume outputs when gold was flying high. Now they're stuck with heavy debt and little ability to sell stock to raise capital to pay off debt.
Most gold mining companies have already done deep cost cutting. There is probably little more there left to squeeze out.
The next stage for many companies will be the selling of assets and the abandonment of much of their exploration activities.
This is what happened in the 1990s. It eventually led to much lower gold production and the bull market for gold, which lasted over a decade.
A replay is very much possible. That means long-term investors may want to position themselves for such an outcome.
To me, that means looking for a gold company with good growth prospects and little debt. Such a company exists. It is Randgold Resources Ltd. (GOLD).
This Africa-focused miner's market capitalization is $5.6 billion and the company has no debt.
Randgold is a growth company, too. It has been developing gold assets in western and central Africa, where it has been in operation for over 20 years.
Last year, Randgold raised its gold output by 26% to 1.1 million ounces. This year it has targeted production of 1.2 million ounces. Its total cash cost per ounce continues to drop and right now is around $700 an ounce.
And with no debt and cash on its books, Randgold may be able to pick up gold assets dirt-cheap from miners drowning in debt and forced to sell to stay alive.
Despite being taken down in price with the other gold stocks, Randgold looks to be a safer bet than the others. For investors looking to buy low on gold, gradually building a position in Randgold is the way to go.
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