After a decade or more of gold miners damaging shareholder value by issuing excessive equity, the industry is turning a new page, and Randgold Resources Ltd. (NASDAQ: GOLD) is a prime example of the new trend, says Greg Orrell.
“One of our larger holdings, Randgold Resources, has shown the ability to hold equity dear,” says Mr. Orrell, President of Orrell Capital Management, Inc. and the Portfolio Manager, OCM Gold Fund (OCMGX). “It has had very strong management through Mark Bristow since its inception. It’s allocated its capital prudently by building a couple of new mines over the last couple of years that will work at lower gold prices, so it will be more in a harvesting mode than needing to spend capital.”
“When we look at Randgold over the next couple of years, we think it’s going to be in a position to have increased dividend payouts, and also take advantage of the depressed market in exploration assets — it will pick up some of those,” Mr. Orrell cointues. “So we like Randgold, though it does come with some geopolitical risk because of the operating jurisdictions it operates in West Africa and the DRC.”
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“The gold mining industry really lost its way in a lot of ways, especially over the past decade,” Mr. Orrell explains. “Historically, the argument for owning gold mining shares was that they offered gold price leverage through operating earnings, increased value in reserves, especially as the gold prices rose but also through exploration success, and then the prospect for participation in cash flow through dividends. That was all the way through the 1970s and up to 1980, and then it became a growth story, and companies were punished for not having any growth.”
“Especially over the last decade, management destroyed shareholder value by issuing equity for unprofitable production or projects time and again, it appears all in an effort to institutionalize the company. We say that we are a value-oriented investment firm, and that’s been tough the last few years, as the mining companies have been more adept at value destruction rather than value creation. Fortunately, we see that theme changing,” Mr. Orrell concludes.
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