This FTSE 100 stock looks like a stunning dip buy to me
The gold price has made a strong start to 2018. It has risen by 3.1% and many commentators are predicting there will be further gains ahead. Of course, the precious metal enjoyed a strong 2017 despite a tightening of US monetary policy and improving confidence among investors.
Looking ahead, increased spending and reduced taxes in the US could cause higher inflation, which may be a key driver for gold in future years. With this in mind, buying gold miners could be a shrewd move. After a dip in its share price in recent months, now could be the perfect time to buy this FTSE 100 miner.
The company in question is Randgold Resources (LSE: RRS). Its share price has fallen by around 10% from its September 2017 high, and this could be an opportunity to buy when it includes a large margin of safety. The business seems to be making good progress with its strategy. Its large net cash position means that it has sufficient capital to focus on exploration and development, while also increasing production.
This rise in production is expected to contribute to an increase in its bottom line of 28% in the current year. Despite such a strong rate of growth, the stock currently trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that it could be worth a much higher share price in the long run. And with dividends forecast to grow by 64% over the next two years, the forward dividend stock yield is 3.2%. This could make it an enticing income option.
Of course, Randgold Resources also offers defensive characteristics. If the world economy’s outlook deteriorates, investors are likely to increase their exposure to gold due to its track record of being a store of wealth. This could push the price higher and lead to increased demand for gold miners, while also helping to boost profitability across the sector.
However, gold miners are clearly not without risk. Evidence of this can be seen in the performance of Acacia Mining (LSE: ACA), which has recorded a share price fall of 55% in the last year. This is due to an export ban on gold and copper in Tanzania. As a result, the company’s financial performance has suffered greatly and its cash flow has come under severe pressure.
In fact, in an update released on Monday, it reported that its cash balance had fallen by a further $15m during the final quarter of the year to stand at $81m. Production was also down 30% on its fourth quarter 2016 level, although it was ahead of expectations.
Although the company has been able to adapt some of its operations in light of the export ban, its bottom line is due to come under severe pressure. As such, with Randgold Resources offering growth at a reasonable price, it appears to be the stronger option at the present time.
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Peter Stephens owns shares in Randgold Resources. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.