Randgold Resources (LSE: RRS) has released a strong third quarter update. It shows that the company has recorded excellent production growth, as well as improved financial performance. With uncertainty likely to rise in the coming weeks and months, it is my star buy.
Randgold Resources’ production in the third quarter was up 7% quarter-on-quarter and in-line with the previous year. Its total cash cost per ounce of gold produced was 9% lower quarter-on-quarter and 5% down on the prior year’s corresponding quarter. Together, the increase in production and reduced costs mean that Randgold’s profit increased by 32% versus the previous quarter and by 58% when compared to the same quarter of the prior year.
Rising long-term profitability
In terms of cash flow, Randgold’s net cash generated by operations increased by 18% quarter on quarter. This pushed its cash balance to $361.1m, and if the gold price stays above $1250 per ounce then the company should get close to a $500m net cash position by year end.
Looking ahead, Randgold’s prospects for its next mines are increasingly coming good. It expects its Loulo-Gounkoto and Kibali mines to produce in excess of 600,000 ounces of gold per year for the next decade, while its Tongon asset has a life of mine of at least another five years. With Randgold profitable at over $1000 per ounce of gold, it remains well-placed to deliver rising profitability over the long term.
Randgold is forecast to record a rise in profitability of 50% in the current year and a further 33% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.6, which indicates that it is an excellent buy. With uncertainty from the US election being high and the outlook for the global economy somewhat challenging, the prospects for the gold price are upbeat.
Diversification and growth
Of course, Randgold lacks diversity and is therefore highly dependent on the price of gold. For investors seeking a better-diversified and lower-risk resources stock, BHP Billiton (LSE: BLT) has considerable appeal. It mines a range of commodities such as iron ore and copper, while its oil and gas division offers diversification as well as long term growth potential.
In the current financial year, BHP Billiton is expected to increase its bottom line by 227%. This has the potential to rapidly improve investor sentiment in the stock, with BHP’s PEG ratio of 0.1 indicating that it offers upward re-rating potential. A low valuation also means that BHP has a wide margin of safety so that if commodity prices come under pressure, BHP’s share price performance could still be relatively strong.
BHP also has a sound financial standing, with its balance sheet able to accommodate more debt. This provides it with the potential to make acquisitions in order to boost its financial performance yet further.