Shares in temporary power specialist Aggreko (LSE: AGK) and gold miner Randgold Resources Limited (LSE: RRS) have fallen by around 50% since September 2012, when both reached all-time highs.
Is it time to buy back into these previous high flyers, or is there worse to come? I’ve been taking a look at the latest results from each firm to find out more.
Pure gold
Mark Bristow, Randgold’s chief executive, is highly respected in the mining industry. Today’s results show why.
Net profit for the first half of the year was $110.5m, down by 26% from $150m during the same period last year. However, the average gold price received during the first half was $91/oz. lower than last year, so this decline isn’t surprising.
To help combat the falling price of gold, Randgold is cranking up production, which hit a new record of 300,039 ounces during the second quarter. As a result, the group’s total cash cost per ounce fell to $684 during the second quarter, compared to $701 during the same period last year.
Net cash generated from operations was $71m, and the firm ended the first half with a net cash balance of $109m. That’s a big increase from just $26m at the end of June 2014, and shows that Randgold has been able to replenish the cash it has spent on developing its new Kibali mine, despite the weak gold price.
Randgold’s unique advantage over its peers is that it has no debt and all of its mines have been developed assuming a gold price of $1,000 per ounce. Gold has yet to fall below this level and Randgold’s results show that the firm can deliver on its promises.
The only question is whether gold has hit the bottom yet. Personally, I think there could be a little further to fall, so I won’t be rushing to buy Randgold shares just yet.
Generating a profit?
Unlike Randgold, Aggreko has not managed to hold onto its place in the FTSE 100. The firm was pushed down into the FTSE 250 earlier this year.
First-half revenue was 2% higher, at £781m, but trading profit fell by 18% to £114m. The underlying figures, which exclude the effect of exchange rates, were worse. Revenue fell by 2%, but trading profit fell by 22%.
These falling profits highlight Aggreko’s apparent loss of pricing power. This first became obvious in July, when the firm warned that a major contract in Bangladesh was likely to be renewed at much lower rates than previously.
The second headwind faced by the firm is the reduced level of activity in the US oil and gas market, where Aggreko often provides temporary power for drilling sites and the like. Much of this work has stopped, and where it is ongoing, Aggreko is likely to face considerable pressure to lower its prices as oil firms cut costs.
Aggreko confirmed its full-year pre-tax profit guidance of £250-£370m today, but said that margins were likely to remain lower in 2016. The shares currently trade on around 15 times 2015 forecast earnings.
I wouldn’t rush to buy at this price, as I think that Aggreko’s profit margins could fall further, and may remain low for several years.
Of course, I could be wrong about both firms — that’s what makes a market.