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Randgold Resources Ltd. (ADR) (GOLD): Asian Gold Demand Could Trigger Strong Rebound

LONDON — Last week’s gold price slump convinced many investors to sell their shares in gold funds and miners.

However, the fall seems to have triggered a rebound in demand in Asia, where buyers have been stocking up on gold bars and coins. According to Aram Shishmanian, CEO of gold’s trade body the World Gold Council, demand has been strong since the gold price fell: “We are already seeing shortages for bars and coins in Dubai, while premiums in Mumbai are at $26/oz. and $6 in Shanghai, indicating that buyers are willing to pay more than current spot prices for the metal.”

Should you buy gold?
The two leading physical gold ETFs — Gold Bullion Securities Limited (LON:GBS) and SPDR Gold Trust (ETF) (NYSEARCA:GLD) — are both down by around 15% so far this year.

Like gold, they have rebounded by around 2.5% over the last week, but I’m not sure that investing directly in gold is the best way to profit from rising demand for gold. I reckon there are better opportunities in gold-mining shares.

A rare opportunity?
The share price of FTSE 100 gold miner Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) has fallen by nearly 20% so far this year. I’ve long admired Randgold’s progress but have never felt that the stock has been cheap enough to consider buying before.

Although Randgold’s forecast price-to-earnings (P/E) ratio of 14 still looks expensive compared to its peers, the firm has several key advantages.

Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) has $400 million in net cash, and its cash cost per ounce of $790 is lower than many of its peers. The firm’s Kibali gold mine is expected to start producing gold by the end of 2013, and should eventually produce 600,000 ounces of gold per year, providing a potential 75% increase on Randgold’s 2012 gold production.

Gold’s 6% yield
A smaller alternative to Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) is FTSE 250-listed African Barrick Gold PLC (LON:ABG). The firm’s share price has fallen by 58% so far this year, thanks to the failure of a potential sale to Chinese investors and the recent fall in the price of gold.

As a result, African Barrick — which is profitable and has net cash of $401 million — offers a forecast dividend yield of almost 6%. It’s a very tempting opportunity, but you should remember that if the price of gold falls further, African Barrick’s cash costs of $931 per ounce may leave very little room for profit.

The article Asian Gold Demand Could Trigger Strong Rebound for Randgold Resources originally appeared on Fool.com and is written by Roland Head.

Roland Head has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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