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Golden opportunity at Randgold?January 19 2013, 7:00am
It has been a lacklustre week for equities as faltering risk appetite and low trading volumes weigh on the New Year euphoria. Analysts highlighted growing concerns over the European economy, US earnings and the potential for another stand-off in Washington, surrounding the bulk of the delayed fiscal cliff.
There are fears that the debate will descend into the sort of squabbling that marked the last effort to raise the debt ceiling in the summer of 2011, with credit ratings agencies warning of possible downgrades. Last year, Standard & Poor’s stripped the US of its prized triple-A rating for the first time in the country’s history, but others could follow suit failing a swift agreement.
A mixed start to the US earnings season also cast a shadow over Wall Street, following tech giant Apple’s weaker than expected demand for its latest iPhone. Thus far, the number of companies to have exceeded analysts’ forecasts is 10% lower than in the third quarter of 2012, indicating investors’ expectations are too optimistic, although robust results from J.P.Morgan bode well for the banking sector.
The Euro came under renewed pressure following weak German GDP figures and comments from the chairman of the Eurozone finance ministers group, warning that the single currency was “dangerously high”. Europe’s powerhouse economy shrank at the fastest pace in almost three years in the final quarter of 2012, highlighting concerns that the recession in the Eurozone is likely to be deeper than previously expected.
The World Bank cut its global growth forecast for this year as austerity measures, high unemployment and low confidence weigh. Uncertainty surrounding a US political agreement before March, Japan’s political tensions, Italian elections and renewed concerns in Europe threaten to derail investor’s bullish expectations in 2013.
Technical analysis highlights the importance of historical resistance at 6100, with the FTSE 100 struggling to push higher. The acutely overbought oscillators appear to be rolling over, with the MACD histogram stepping towards negative territory, indicating momentum is falling. Support is seen at 5955, 5930 and 5795 with a fresh closing high above 6140 needed to reinvigorate the bulls.
In conclusion, the recent caution is hardly surprising given the strong start to 2013, with risk appetite appearing over-extended on a number of metrics. Headwinds are starting to blow against the markets New Year enthusiasm, with the technical outlook pointing towards a period of profit taking ahead.
Gold has risen this week, despite languishing over recent months, as concerns grew about the possibility of a confrontation in Washington over the debt ceiling. Last year central banks added the most gold to reserves since 1964 and will likely remain an important force in gold markets during 2013. Many analysts forecast the price will climb to fresh highs this year, with the likes of BNP Paribas, Bank of America, Saxo and Merrill Lynch all forecasting the yellow metal to climb above $2000 an ounce.
A related company I have been monitoring is Randgold Resources (LON:RRS), the largest listed pure gold miner on the UK market, with a market capitalisation of £5.4 billion. Whilst the price of gold has fallen over 7% since October, shares in Randgold have lost over 25% during the same period. This is partially due to the high beta of the shares, but also because of the unrest in Mali, which accounts for roughly two-thirds of its production.
Despite investors concerns, Randgold has been keen to report that their mines are operating normally in Mali despite the political unrest. Randgold’s operations are in safe areas, some 700 kilometres away from the conflict zones, and have not been affected by any of the issues afflicted in the area over the last 10 months.
Quarterly results on 7th November 2012 revealed substantial progress at the Kibali gold mine in the Democratic Republic of Congo, where production is expected in the final quarter of 2013, although output faltered due to power supply problems at its Tongan mine in Côte d’lvoire.
Production totalled 204,475 ounces of gold, down from 210,534 ounces in the second half of 2012, but remained higher than the 182,362 ounces produced in the same period last year. Meanwhile, management have been reducing costs, which were reported to have fallen significantly.
Given the recent weakness, Randgold trades on a historically cheap 13.5x this year’s earnings, which given the consensus earnings growth of 36%, puts them on an attractive PEG of 0.375.
The above chart of Randgold Resources illustrates the slide in the share price since last October, but shows signs of bottoming out over the past few weeks. The oscillators are starting to rise out of oversold territory, suggesting buying momentum is improving and given the close proximity of historical support at 5665p, I believe a long trade offers an attractive risk/reward.
The weakness in Randgold appears overdone, given the strong fundamental and technical outlook, whilst a highly anticipated recovery in the price of gold could facilitate a sharp move higher.
At the time of writing the share price is 5840p, with near term targets seen at 6073p, 6295p and 6716p and a stop loss below support at 5635p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Randgold Resources, but client accounts may. The material in this report has come from Simply Charts and Randgold Resources’ corporate website.