Fresnillo plc and Randgold Resources are up 50% YTD, but will it last?

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 means a ‘bottoming out’ in commodities with a recovery well underway. However, what can’t be denied is the fact that both Randgold Resources and Fresnillo, have added over 50% to their valuations. The question on everyone’s lips is whether the rally can it continue?

Randgold continues to shine

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 Rangold’s 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 Randgold’s 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 Côte d’Ivoire. Loulo’s outstanding quarter, which includes a 29% reduction in cash cost per ounce, compared to a year earlier, helped boost Randgold’s 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 Randgold’s 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 remains somewhat 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 world’s 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 company’s CEO, Alberto Bailleres, struck a cautious tone during the company’s AGM on 3 May. Alberto mentioned that Fresnillo will trim its exploration budget in order to maintain a strong balance sheet as he’s concerned that the current volatility in precious metals looks set to continue.

While this isn’t the sort of news needed to support another 50% rally in Fresnillo’s share price, the miner remains on target for its 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 160 multiple of earnings and considering Alberto Bailleres’s 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’ but here’s another opportunity that delivered a fourfold gain during 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.