Head to Head: Fresnillo vs. Randgold Resources

LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, they duke it out on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.

Stepping into the ring today are Mexico-based Fresnillo (LSE: FRES.L  ) , the world's largest primary silver producer, and African gold giant Randgold Resources (LSE: RRS.L  ) .

The FTSE 100 index is up 4% over the past three months, but gold and silver prices have been even stronger -- into double digits -- driven by the announcement of the European Central Bank's "unlimited" purchase of government bonds in the eurozone and the U.S. Federal Reserve's further round of quantitative easing. Miners tend to be a leveraged play on metal prices. Thus, Fresnillo's shares are up 34% over the period, and Randgold Resouces' shares are up 33%.

Let's take our seats at ringside.

Round 1: Earnings

 

Fresnillo

Randgold Resources

Recent Share Price (pence)

1,918

7,570

Last-Year P/E

27

28.3

Current-Year Forecast P/E

30

22.2

Three-Year EPS CAGR

81%

97%

Current-Year Forecast EPS Growth

(10%)

27%

Forecast Operating Margin

53%

48%

Sources: Digital Look, Morningstar, company reports. CAGR = compound annual growth rate. Winning metrics in bold.

Randgold Resources edges the first round with strong historic and forecast earnings growth and a lower forecast P/E. It's worth mentioning that precious-metals miners tend to have higher P/Es than most other industries and that Fresnillo's and Randgold's ratings are not unusual in the sector.

Round 2: Dividends

 

Fresnillo

Randgold Resources

Last-Year Dividend Yield

3.5%

0.3%

Current-Year Forecast Dividend Yield

1.7%

0.4%

Three-Year Dividend CAGR

96%

45%

Current-Year Forecast Dividend Growth

(50%)

27%

Forecast Dividend Cover

1.9

10.3

Source: Digital Look, Morningstar, company reports. Winning metrics in bold.

Dividends are rarely the first priority for precious-metals miners. Nevertheless, even the small dividends of Fresnillo and Randgold offer investors an infinitely better income than physical silver and gold, which, of course, have a zero yield.

Fresnillo's yield was relatively high last year because it paid a second interim dividend in addition to the usual interim and final. Even excluding the second interim, though, the yield -- 2.1% -- is still superior to Randgold's, as is the historic CAGR, which falls to 65%. On the same basis, Fresnillo's forecast dividend growth improves from -50% to -16% but remains inferior to Randgold's.

In summary, with or without Fresnillo's second interim, the tally in the dividend round comes out the same and gives Fresnillo a narrow win.

Round 3: Balance sheet

 

Fresnillo

Randgold Resources

Price-to-Book ratio

10.3

4.9

Net Gearing

(37%)

(22%)

Sources: Digital Look, Morningstar, company reports. Winning metrics in bold.

It's all square in the final round. Randgold takes the point for P/B, while Fresnillo scores on gearing. The negative gearing number for both companies indicates they have net cash on their balance sheets.

At the end of the contest, each company has won a round outright, and one round has resulted in a draw. The overall points tally is six apiece.

Post-match assessment
This was as tight a head-to-head contest as we've seen in the series. If the companies are hard to separate on the numbers in the tables above, what else could investors consider?

First, there's the gold-to-silver price ratio. The current ratio is more than 50, but the long-run ratio is about half that, suggesting that silver -- and silver miners -- may be the better value.

Second, from time to time the valuations of gold and silver miners disconnect from the prices of the metals. Thus, buying miners when they're at a discount to the historical norm offers something of a margin of safety. There has been such a disconnect in the past couple of years, but the recent bull run in the miners' shares has seen a reversion toward the historical mean. On this basis, a good opportunity to buy miners may already have passed.

Third, the 64,000 pound question: Are gold and silver prices going to rise or fall on your investing horizon? I can't tell you the answer to that one! Search the Web, and you'll find myriad opinions on the direction of precious-metal prices and on their medium- and long-term prospects.

Finally, if you do want exposure to gold or silver -- and you want it through miners -- then is investing in an individual company such as Fresnillo or Randgold the best way to go about it? You could consider spreading your risk across many companies by investing in an exchange-traded fund, such as iShares S&P Commodity Producers Gold, or in an open-ended investment company, such as BlackRock Gold & General or CF Ruffer Baker Steel Gold.

One thing's for sure: Investing is by no means easy in today's uncertain world, which is why The Motley Fool has published the special free report "Top Sectors for 2012." Our top analysts not only identify three favorable industries for 2012 and beyond, but also pinpoint one great company in each sector. If you would like "Top Sectors for 2012" dispatched immediately to your inbox, simply click here.

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Further investment opportunities:

G A Chester does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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