• Randgold Resources Ltd. (NASDAQ: GOLD) has outperformed Kinross Gold Corporation (USA) (NYSE: KGC) this year by 26 percent.
• RBC Capital Markets' Stephen Walker and Jonathan Guy have changed ratings on the two companies, suggesting that Randgold's outperformance will continue. Guy upgraded Randgold Resources to Outperform, while Walker downgraded Kinross Gold to Underperform.
• RBC's thesis is the tale of two companies. At Kinross Gold, the production profile is declining and the company may need to make an acquisition to replace reserves. Meanwhile, Randgold may make an acquisition, but approach it from a point of strength with an "ungeared balance sheet and low costs."

RBC Capital Markets was complementary of Randgold Resources' management, noting that the strong Q2 performance were the result of the "strength" in Randgold's business plan. That business plan has the company producing gold at a cost that is in the lowest quartile for the industry, allowing the company to generate positive free cash flow as long as gold prices are above $800 per ounce.

At Kinross Gold, the production profile is declining, and the company will struggle should gold prices slip under $1,000 per ounce. It is at that level that Kinross will start to burn $100 million in annual cash. However, if prices stay above $1,100, the company will be able to fund $300 to $400 million in capital expenditures.

The other interesting dichotomy between the two companies, according to the two research notes, is their approach to acquisitions. Kinross would need to look for an acquisition to "replace reserves," potentially using that $300 to $400 million to fund that.

Conversely, if Randgold's history is any measure, the company will not overpay should it decide to use some capital expenditures on an acquisition. Guy pointed to Randgold's acquisition of AngloGold Ashanti as evidence of management's structured approach. In 2009, the company paid $610 million for AngloGold's Kibali project, while RBC estimates that the project has a net asset value of $2.65 billion at present.

Based on the price target of GBP 4,500, RBC estimated that Randgold could gain 7 percent. Under the downside scenario, the firm said that prices could decline as much as 29 percent. At Kinross, prices could gain 9 percent in the target scenario, while they could decline as much as 28 percent for a downside scenario.

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