The FTSE 100 mining sector has been one of the best performance YTD with returns of almost 30%. As impressive as this rally is, it remains debatable whether this meansa bottoming out in commodities witha recovery well underway. However, what cant be denied is the fact that both Randgold Resources and Fresnillo, have added over 50% to their valuations. The question on everyones lipsis whether the rally can it continue?
Randgold continues toshine
Randgold (LSE:RRS) has been riding on the coat-tails of a bullish gold story. Gold futures had their best quarterly performance since 1986, gaining more than 16% during the first quarter of 2016.
Usually, a strong performance in gold filters through to gold miners like Randgold as it improves margins.
The price of gold may be the most important factor as miners understandably generate larger revenues when commodity prices are higher. However, the efficiency of each mine plays an important role too. The lower the cash cost of operating each mine, the better the margins. This was evident during Rangolds most recent quarterly earnings report, released 4 May, as total cash costs dropped 8% from the previous quarter to $648/oz.
The standout performer was Randgolds flagship operation in Loulo-Gounkoto, Mali, which helped offset the technical and commission issues at its other operations, namely the Kibali mine, in the Democratic Republic of Congo and the Tongon Mine, in Cte dIvoire. Loulos outstanding quarter, which includes a 29% reduction in cash cost per ounce, compared to a year earlier, helped boost Randgolds earnings to $0.58.
Whether Randgold can deliver another period of double-digit capital gains will depend not only on the continued rally in gold prices but also the ability of the company to continue improving its cash costs at key operations.
Fortunately, investors have reason for optimism as Randgolds CEO, Mark Bristow, reiterated that the miner can continue delivering at current or even lower gold price levels. Randgold has declared a 10% increase in its annual dividend from $0.60 to $0.66 per share, this still represents a paltry yield of around 0.8%. Yet investor sentiment concerning gold remainssomewhat bullish for the short-to-medium term, making this a buy opportunity at a current multiple of 42 times earnings.
The one that got away
Investors, who took a risk on Fresnillo (LSE:FRES) at the start of the year are probably in full cheer as the worlds largest primary silver producer has added a stonking 52% to its valuation YTD. Fresnillo continues to bask in the glory of a rally in the price of silver as its soared almost 10% YTD.
It may come as surprise that the companys CEO, Alberto Bailleres, struck a cautious tone during the companys AGM on 3 May. Albertomentioned that Fresnillo will trim its exploration budget in order to maintain a strong balance sheet as hes concerned that the current volatility in precious metals looks set to continue.
While this isnt the sort of news needed to support another 50% rally in Fresnillos share price, the miner remains on target forits gold and silver production for 2018.Alas, the Fresnillo rally YTD may be a missed opportunity and the somewhat low yield of 0.5% is far from attractive. Fresnillo currently trades on a 160multiple of earnings and considering Alberto Bailleress cautious outlook, Fresnillo may not be a buy it now but rather a watch it now opportunity.
The 50% capital gain in Fresnillo, may be‘the one that got away’buthere’s another opportunity that delivered a fourfold gainduring the last four years.And fortunately there’s more room for growth.
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Yasin Ebrahim has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.