Market Analysis: GOLD 7/15/2014

Gold Cheat Sheet: One Stock to Buy and One to Avoid

Gold mining shares have performed terribly over the past couple of years. Since peaking in 2011, the Market Vectors Gold Miner ETF (GDX) has lost more than half of its value. Nevertheless, I think this is an excellent reason to consider investing in gold miners along with the fact that the fundamentals are very strong in the gold market. However, I don’t think it is a good idea to simply go out and buy the Market Vectors Gold Miner ETF. Investors need to realize that gold mining is an extremely difficult business. As a result, there is a bifurcation in the industry: some companies perform well while others do not. Investors should therefore single out those companies that have performed well and purchase them as opposed to a basket, which contains the bad with the good.

In what follows, I highlight one excellent gold miner – Randgold Resources (NASDAQ:GOLD) and juxtapose it with a poorly run company – Barrick Gold (NYSE:ABX). It will become clear why the former has succeeded while the latter has not, and it should become clear that investors would be wise to take the time to research individual companies in order to select the winners.

Rangold Resources

Randgold Resources has been one of the best performing gold mining companies in the 21st century. The company has an extremely simple yet disciplined strategy that goes beyond meaningless platitudes such as “growth” and “low cost production.” The first is that the company is focused on western Africa. While investors are often hesitant to invest in Africa, West Africa has been a relatively stable mining jurisdiction. Furthermore, it has a lot of unexplored land containing high grade gold deposits.

The second is that the company focuses on highly profitable assets. Randgold’s management is not interested in a project unless it believes that it can produce gold at a very low cost. This has probably reduced its growth rate on a per-ounce basis. But at the same time, the company didn’t have to write down any reserves in 2013 unlike its peers because it made extremely conservative price projections despite management’s long-term bullishness.

Finally, the company has had a very disciplined fiscal strategy. It has no debt and it has been very prudent in its acquisitions. These simple guiding principles have sent shares soaring a whopping 850 percent over the past 10 years. While the stock isn’t cheap, it isn’t incredibly expensive either, and it is positioned to continue to grow while offering leverage to the gold price.

Article Written By: BEN KRAMER-MILLER