Undervalued gold miners could be the buying opportunity of the year

Gold bullion

With the uncertainty surrounding Brexit growing, it’s a difficult time for UK investors. The best way to protect against Brexit and other, as-yet-unknown, geopolitical issues is to buy gold, or better yet, gold miners. 

Unlike buying the yellow metal directly, miners offer income in the form of dividends as well as greater potential upside thanks to operating leverage. 

Perfect buying opportunity?

Shares in Acacia Mining (LSE: ACA) are sliding this morning after the company issued its interim results for the six months ended 30 June, which show a 22% fall in revenue for the period to $392m and a 13% decline in underlying EBITDA to $161m. This revenue decline is a result of a spat with the government of  Tanzania over gold and copper royalties. The government claims Acacia owes royalties on undeclared shipments and these issues have forced it to suspend its dividend. 

Still, as a long-term buy, it remains strong. Last years shares in the miner traded as high as 600p, and a return to full production could drive a rally back up to this level. Based on current City estimates the shares trade at a forward P/E of 10.5 falling to 7.4 for 2018. 

The market’s best miner? 

Randgold Resources (LSE: RRS) is without a doubt one of the world’s best gold miners. Over the past five years, as the company’s peers have struggled to survive while the price of gold has fallen, Randgold has prospered, and cash has continued to flow for the group. Even though pre-tax profit has stagnated, since 2012 the miner’s cash balance has risen to $516m (from a low of $40m) and shareholder equity has risen from $2.6bn to $3.5bn. Randgold has no debt. 

With this level of value creation, it’s no surprise that shares in the company have risen by around 500% over the past 10 years excluding dividends. 

In the years ahead, Randgold’s cash generation will only continue and certainly improve. Over the previous five years, management has cut the total cash cost of production by around $100 per ounce to a little over $600 and at the same time production has risen from 800,000 ounces per year to over 322,000 ounces per quarter. Capital spending peaked at $630m in 2013 and has since fallen to around $250m for 2016. These figures indicate that in the years ahead Randgold will become a cash machine as it mines and sells its gold and saves, rather than spends, the proceeds.

With this being the case, it looks as if the shares are almost as safe as gold itself, except gold does not pay a dividend. Randgold has never been a dividend champion as management has preferred to hold cash back and develop projects. But now capital spending has come to an end, City analysts expect it to increase the payout in the years ahead. 

Analysts have pencilled in a dividend of 150p per share for 2017 giving a dividend yield of 2.2%. Further growth of around 30% is expected for 2018 giving a yield of 2.8%.

Do you have gold in your portfolio? 

Gold is one of the most defensive assets in the world, and every investor should consider having some exposure to the yellow metal. Indeed, by devoting a portion of your portfolio to gold, you can improve your chances of financial independence thanks to its defensive nature. 

If financial independence is your goal, the Motley Fool is here to help. Our analysts have recently put together this brand new free report titled The Foolish Guide To Financial Independence. The report is entirely free and available for download today 

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Rupert Hargreaves has no position in any shares mentioned. 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.

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