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Are Gold Fields And AgloGold Ashanti Fully Valued? - Seeking Alpha

Wednesday, 9 March 2016

Summary

  • On Tuesday RBC Capital Markets’ Richard Hatch wrote that it’s not time to jump into Gold Fields and AngloGold Ashanti.
  • I have assessed these two gold stocks and compared the value with the market prices and analysts’ opinions.
  • I would hold NYSE:GFI and buy NYSE:AU.

On Tuesday RBC Capital Markets' Richard Hatch had a look at South African gold miners and wrote that it's not time to jump into Gold Fields and AngloGold Ashanti.

I have assessed these two gold stocks and compared the value with their market prices and analysts' opinion.

Fully Valued Stocks

"high gold prices and a weak rand could continue to help the nation's gold miners, but warns that the stocks look fully valued.

Gold Fields Ltd. (NYSE:GFI)-NYSE:

The approach to assess this stock is based on the free cash flow generated by the company in 2015 and assuming that will generate the same FCF in 2016.

I am conservative on estimating 2016 FCF because of the following reasons:

  • I don't believe that gold will trade at its abnormal high level again anytime soon. This implies that the company will operate at higher grade mines to push all-in costs down and therefore reduce the production and sales.
  • The company has operations in South Africa and Australia, so it is exposed to currency risks.
  • The company's target is to further improve the net debt to EBITDA ratio by continuing to reduce the net debt and therefore guaranteeing a comfortable balance sheet with flexibility.
  • The development of ore bodies and the valuation of value-accretive opportunities are critical to the company. All these activities together with the previous two factors will absorb cash generated from operating activities.

2015 FCF = Cash from operating activities - Capex = US$771m - US$634 = US$137m.

The company has 782.67M shares outstanding. The FCF per share is US$0.18.

DCF = CF / (1 + r)^1.

What I need is the discount rate.

As cost of capital I will use 8.40% that is an average of the entire industry. I will calculate the growth rate, g, as Return on Equity - 5 Yr. Avg. of the industry X Retaining ratio (RR) of the industry: 6.46% x (1 - Payout Ratio) = 6.46% x 91.33% = 5.90.



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