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Is Regis Resources Limited cheap or trouble?

What:

Shareholders in gold miner Regis Resources Limited  (ASX: RRL) would have been dismayed to watch the company’s shares fall 25% to an intra-day low of $1.70 last Friday. The stock has now declined 70% from a mid-2012 high of $5.75.

So What:

The company revealed a 10% loss of production due to teething problems and lower-than-expected grades at the Rosemont operations. The same problems have plagued the Garden Well mine and investor confidence will inevitably take time to restore. In addition, brokers are now raising estimates for costs (some up to 19%) and an equity raising has been mooted.

Prior to these revelations, the majority of market commentators were recommending the stock, and the consensus target price was around $2.70. The positive outlook was based on a very strong balance sheet supported by strong cash flows from the Australian-based low-cost operations.

Now What:

It is always dangerous trying to catch a falling knife until market confidence is restored. In the meantime, other quality gold producers such as Newcrest Mining Limited  (ASX: NCM),  St Barbara Ltd (ASX: SBM) and the new go-to Australian gold producer (having transformed from a nickel exposure) Independence Group (ASX: IGO) should be considered. To maintain set allocations to gold exposure, fund managers tend to switch funds into more stable stocks.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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