The shares are up almost 27% year-to-date but that appreciation makes them look expensive on a forward price-to-earnings basis. Randgold is trading at almost 27X the current 2011 consensus earnings estimate vs. an industry average of 20X. Barrick Gold (ABX) is an example of a gold stock at the cheaper end of the spectrum. It trades at just 14X next year's earnings, one of the industry's lowest valuations on this basis.
Wall Street sentiment reflects Randgold's quandary. While analysts are generally bullish with five buy ratings vs. three holds; the average price target of $97.92 is a discount of almost 7% to the stock's closing price of $104.85 on Wednesday.
In the second quarter, the company's profit soared 92%, but the West African miner had to contend with production issues and higher cash costs. I sat down with CEO Mark Bristow recently at the Denver Gold Forum to see if Randgold's blow-out results can continue and get his thoughts on whether the stock is overvalued relative to its peers.TheStreet: Your second-quarter profit rose 92% year-over-year was that just because of a rising gold price? Bristow: There were definitely other factors. We had a couple of extraordinary items in the results: one, a write back from an asset-backed security ... that we [had written] down. We tackled the institution with which we invested and we recouped our investment and we were able to write it back, and [two,] a realization of some exploration success. We discovered a little project in Burkina Faso, Kiaka and we [spun] it into a small junior company. It's done very well ... and we crystallized some profits from that as well ... Operationally [however] we had a tough quarter. You had some operational issues at Loulo, are those solved now? I think there are two aspects to those challenges. The first one is a delay in the build-up of underground project debt at Yalea, underground project debt at Gara is going very well. [But] we've had some ramp up challenges with Yalea and .... that will take until the end of the year to sort out. [Number two] we tripped ourselves up on an expansion on a ramp up in the plant and we just didn't get the throughput in our plant. We had a lot of availability problems, some teething problems at the plant -- that, yes, we have fixed along with our revised guidance. Quarter four will have a full quarter of throughput but we're still building up in quarter three -- that's still going to be a tough quarter for Loulo. So it seems like by the fourth quarter all your growing pains will be worked out? I think you'll [see] the measurable benefits of intervention during Q4. I think the other thing is we were always guiding to a hockey stick top to the end of the year. We have better grades in Q4, which always helps out at Loulo and we'll have Tongon production contribution, a new mine, it's low cost and substantial ... we're expecting to see close to [a] doubling of attributable gold production from Q3 to Q4 just driven by new mines and better grades.
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