The price of gold (the ultimate safe haven) is supposed to rise in times of turmoil. While there’s certainly economic and political uncertainty in the world, gold still sells considerably below the $1,800/ounce level of less than two years ago, although it has bounced up from a low of $1200/ounce. Miners are scrambling to adjust. We investigate Randgold Resources (RSS.L) to see if earnings are glittering – or resembling fool’s gold.
Randgold trades on the London Stock Exchange and as an ADR on the NYSE. It has several mines across North Africa with production issues and that will likely lead to lower-than-expected earnings. Based on a negative StarMine Predicted Surprise of 4.7%, it looks like Randgold might report an earnings miss when it reports fiscal second quarter results on August 7.
Sluggish gold price and earnings
The I/B/E/S consensus earnings estimate on Randgold has remained flat over the last 90 days at 88 cents per share, but the StarMine SmartEstimate has moved down considerably, and is now at 84 cents a share, below the consensus. Analysts cite lower production levels as one reason.
Source : Eikon/StarMine
Operating woes
In the last two years, as gold prices have fallen, so too has return on net operating assets for Randgold. Although gold prices have bottomed and possibly stabilized over the last year, RNOA has continued to fall. Possibly the production issues at some of its mines are taking a toll on operating efficiency. Randgold reported that it was having issues with the crusher in its Tangon mine, which will lower output for the near future while the issue is resolved. This mine accounts for a quarter of the company’s revenues. Another mine at Kibali also saw some issues during its commissioning and may be a headwind for earnings.
Source: Eikon/StarMine
Shiny valuation
Randgold is currently trading at a forward 12M P/E of 22.5, above its five year median of 18.8. If you compare the common valuation ratios of Randgold to its peers, you can see that on most of these metrics, Randgold trades at a premium to its peers. Based on the StarMine Intrinsic Valuation (IV) model, the growth rate 10 year growth rate required to justify the current stock price is 12.9%. That is a pretty lofty expectation for earnings growth.
Source Eikon/StarMine
Delayed payables
Another sign of deteriorating earnings quality is rising accounts receivable days. The A/R days have been increasing gradually, and are now at 79 days compared to 49 days just two years ago. That is a sign that the company may not be collecting payments from its customers as effectively. CFO Graham Shuttleworth explained that with “timing of the way the shipments worked, there were two gold shipments where we were still waiting for cash.” While that may be the case, one should continue to monitor accounts receivable to ensure that they come back down to historical levels. With a few operating concerns at their mines, it looks like an earnings miss is ahead for Randgold.
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