Randgold Hunts Growth in Elephant Country
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Randgold Resources’ (NASDAQ: GOLD) Chairman Philippe Liétard concisely recapped 2012 in the company’s recent annual report. He wrote, “There’s an old safari saying that if you want to hunt elephants, you have to go to elephant country.” Certainly political and infrastructure challenges of operating in west and central Africa became a focus for company stakeholders over the past year. However, despite the challenges, Randgold continues to benefit from its large, high grade gold mines on the African continent.
2012 earnings were up 12% with gold production up 14% to 794,844 ounces. Cash and gold on hand at the end of the year totaled $403 million even though capital expenditures topped $560 million. One negative: cash costs per ounce were up 7% due primarily to low throughput and recovery rates at Tongon in Côte d’Ivoire. Debt remains relatively low at less than $40 million.
Source: Randgold Resources' Annual Report 2012 (top three headers are 2013 guidance)
The majority of Randgold’s production comes from its mines in southwestern Mali. Turmoil began in Mali last March when lower level military members overthrew the government. The coup has led to three governments and two prime ministers in a single year. Contributing to the chaos is the ongoing rebellion in the north of the county by Al Qaeda-aligned militia and the subsequent French military intervention.
The general turmoil in Mali has not substantially affected production or costs. In fact, Randgold’s flagship Loulo-Gounkoto mine complex produced a record 503,224 ounces in 2012. Cash costs per ounce also improved to $738, a 6% improvement year-over-year.
However, the state of Mali has asked Randgold for $82 million for various unanticipated taxes. Randgold is disputing these taxes and believe mining conventions guarantee a stable fiscal regime and govern the applicable taxes. Interestingly, Randgold’s other host countries, Côte d’Ivoire and the DRC also informed the company of plans to revise their mining codes and fiscal regimes.
Randgold’s latest big game hunt is the Kibali mine in the Democratic Republic of Congo. The company acquired a 45% stake in the approximately 11 million ounce project in 2009. The project is a joint venture between Randgold, AngloGold Ashanti (NYSE: AU) (45%), and a Congolese government enterprise (10%). Total production from Kibali for the first full year (2014) is expected to exceed 500,000 ounces. Approximately 92% of Randgold’s 2012 capital expense was in Kibali.
Currently open pit production has begun with 97,000 ore tonnes mined in 2012. Underground development is underway with the vertical shaft platform and associated earthworks completed. Two ball style mills were installed in January ahead of schedule. Safety has been an issue with an elevated lost-time injury frequency rate and a fatality. Village relocation efforts are back on track after being slowed due to weather the first half of 2012. The project as a whole appears to be predominantly on schedule.
While AngloGold Ashanti will be growing production with the Kibali project (and a project at Tropicana, in Australia), they are not as focused on production growth as Randgold. Their focus is on improving margins. This is evidenced by their recent guidance that spending on exploration and feasibility will decrease 18% in 2013.
Source: Randgold Resources' Annual Report 2012
Randgold’s Kibali project will increase consolidated group production by 20 to 25% in 2014. Despite fears, Randgold is not yet experiencing significant negative impacts from the inherent instability of their west and central African host countries. For those looking to add gold to their portfolio for diversification or hedging, because of the recent price pull back, or a belief that equities are topping, Randgold is an interesting option. Randgold has undiluted exposure to gold prices and a positive balance sheet but unlike the SPDR Gold Trust (ETF) (NYSEMKT: GLD) offers organic growth through its ongoing exploration and development.
For those considering gold exposure there are two additional reasons to consider adding a miner as opposed to the SPDR Gold Trust. First, there is increasing thought and discussion (CNBC's Rick Santelli comes to mind) that the SPDR Gold Trust is just "paper gold" that does not interest traditional gold bugs. Second, miners inherently leverage gold price increases; small increases in the price yield larger increases in earnings as a percentage. While as a whole the mining sector has not in fact benefited from gold’s run, Randgold’s price has more closely followed the price of gold and the SPDR Gold Trust. Over the past five years Randgold’s stock price has mimicked the movement of gold prices, albeit in the aforementioned leveraged fashion. For comparison, over the past five years the SPDR Gold Trust is up 69%, Randgold Resources is up 55%.
John Miller is long Randgold Resources. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!