A Major Contrarian Play on Gold

 | Apr 16, 2013 | 10:00 AM EDT
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You've either got to have real courage or spectacularly bad timing to recommend a gold-mining stock while gold prices are plunging and gold-mining shares are collapsing. 

But that's exactly the recommendation that BMO Capital Markets made on Monday, upgrading shares of Randgold (GOLD) to Outperform from Market Perform.

The upgrade did come with a lower target price of $100 a share, down from $110. But $100 still comes with lots and lots of upside, since shares of Randgold closed Monday at $69.04. The 52-week high on the stock was $127 a share, and the stock traded at $86 as recently as March 27.

But you know what? I think the BMO Capital call is right. I agree that right now is the time to focus on gold-mining companies that own better-than-average-quality assets and that have best-in-the-sector opportunities for organic growth.

I'm not sure, however, that the market much cares right now about the logic of the BMO Capital argument. Buying a gold stock right now presents the classic danger of trying to catch a falling knife. But someday...

The case for Randgold is pretty simple. The company's West African mines are forecast by Standard & Poor's to show production growth to 893,588 ounces in 2013, from 794,884 ounces in 2012. Like all miners, Randgold is seeing costs climb, but at Randgold the rate is relatively slow -- a 6.8% increase in cost per ounce from 2011 to 2012 and a 1.5% drop in costs from 2010 to 2011. And unlike most miners, Randgold is seeing ore grades go up and not down. The overall reserve grade climbed to 3.84 grams of gold per ton in 2011, from 3.78 grams per ton in 2010.

The big story for 2013 is gold production from the company's Kibali project and the related increase in cash flow. Capital spending at Randgold looks to have peaked in 2012. That will free up enough cash so that the board of directors felt comfortable declaring a 25% dividend increase. Add in production from Kibali, and Randgold is projected to move to cash flow positive from negative in 2013.

And all this, as I said, doesn't matter much right now. Wall Street has decided that gold is trash, since there is no inflation to hedge against and because the global financial crisis isn't scary enough to drive folks to the yellow stuff. I'd start taking a serious look at Randgold if and when the price of gold falls to something like the $1,270 target price Goldman Sachs just placed on the metal. Goldman's target was for 2014, but since gold is down to $1,360 or so today, we might see it a bit sooner.

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