Why I see 38% upside in this growth stock

Updated: 
Randgold Resources

Shares in gold mining giant Randgold Resources(LSE: RRS) topped the FTSE 100 leader board this morning, opening 2.6% higher at 7,035p, after reporting a year of record production and a 38% increase in profit.

The company said gold sales for the year ended 31 December of $1.55bn were up 11% from the previous year, principally as a result of an 8% increase in the average gold price received of $1,244/oz. Meanwhile, total cash cost reduced 6% to $639/oz. This confirms once again that Randgold is a highly productive and efficient operator.

Potential big return in short order

Gold is currently trading at around $1,224/oz, modestly lower than the average price received by Randgold last year and well down from last year's high of $1,367/oz.

Big gold miners are a geared play on the price of gold and their shares tend to move by a multiple of the movement in the price of the metal. Rangold's shares reached a high of 9,715p last year, giving 38% upside if they were to return to that peak from today's opening price.

Last year's high came in the wake of the Brexit referendum and I see plenty of potential for fear and uncertainty -- including elections in France, Germany and the Netherlands to drive the price of gold and Randgold's shares back up again this year.

Long-term investment

However, I'm bullish on Randgold not only for its short-term potential for capital gains, but also for its long-term prospects. As today's results show, the company generates abundant cash. It beat its net cash target of $500m for 2016, with $516m in the bank and no debt at the year end.

The board has hiked the annual dividend by 52% to $1.00 a share from $0.66, giving a yield of 1.1%, which is infinitely more than you get from owning a bar of gold. Furthermore, the company has a 10-year plan to sustain its profitability even at a gold price of as low as $1,000/oz.

Looking at both the short-term and the long-term, I rate Randgold's shares a 'buy'.

Hi-ho silver!

I'm bullish on FTSE 250 silver miner Hochschild(LSE: HOC) for much the same reasons as I'm keen on Randgold. The company has already reported record production for 2016 and I'm expecting strong financials when it announces its full results in a month's time. At a current share price of 247p, Hochschild's dividend should give a running yield matching Randgold's 1.1%.

If the City consensus is on the mark, earnings per share (EPS) should come in at around $0.11, giving a price-to-earnings ratio of 28, which compares with Randgold's 33. Precious metals miners tend to trade on more elevated P/Es than many sectors, so I'm not concerned by these multiples. And particularly because both firms are expected to be delivering significantly higher EPS than 2016 by 2018, bringing Randgold's P/E down to the low 20s and Hochschild's into the teens.

On this basis, I believe Hochschild's shares are also very buyable at their current level.

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G A Chester 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.