Randgold reported a 52% increase in profit for 1Q10 over the previous quarter and an increase of 92% on a year ago. Profit for 1H10 was up 88% on a year ago. Investors were unimpressed and the stock continued its downtrend.
Attributable gold production fell from 112,663 ounces in 1Q10 to 93,880 ounces in 2Q10. The fall in production at Loulo in Mali was largely responsible for pushing up the cash cost of production from US$553 per ounce in 1Q10 to US$604 per ounce in the second quarter. Total cash costs increased from US$617 to US$665 per ounce.
1Q10 was not a good period with gold production sharply down by 17%; a profit of US$36.4 million received a boost from a higher gold price and a gain of US$6.3 million on the sale of part of the company’s stake in Volta Resources. The company also recorded a write-back of US$13 million in respect of the company’s investments.
Investors are not impressed with extraordinary items; and instead focused on the operating profit from mining, which fell 24% to US$40.9 million from 1Q10. The company has lost investor confidence that might not return until results from 4Q10 become available. If there are more power outages in Mali investors will become increasingly disenchanted with the company.
SHARE PRICE CHARTS AND COMMENTS:
Looking at the weekly chart of Randgold we can see that the share price has pulled back to the confluence of support provided by the uptrend and the 39 week/200 day moving average. The weekly MACD has given a bearish signal and has also recorded a bearish divergence with the price action.
Taking a close look at the daily chart of Randgold we notice that share price managed to record a higher high of $99.67 on the 28th of June which broke the December 1st high of $90.3. However it has since ducked back below this level and has broken through the 50 day moving average. A retest of the uptrend and 200 day moving average support looks likely.
STATE OF PLAY
Positive news that the commissioning of the Tongon mine in Côte d’Ivoire was ahead of schedule was offset by a downward revision for production from the Loulo mine because of power outages. Loss of production from Loulo will be partially compensated by production from Tongon.
With commissioning of Tongon earlier than expected the company has increased its production target for 2010 by approximately 10%.
Power black-outs are a fact of life in many African countries and they play havoc with smelters, and with mines without backup facilities. Extensive power outages at Randgold’s flagship Loulo mine increased costs significantly upsetting the company’s cost profile for the period.
The company expects to get costs back on target by 4Q10. The company’s Chief executive Mark Bristow believes that despite lost production at Loulo, the group’s production for the year should be within 5% of budget. The original forecast for attributable production in 2010 was 477,000 ounces.
The feasibility study for the Gounkoto has progressed satisfactorily and consideration is being given to developing Gounkoto in conjunction with the nearby Loulo mine. This would create a very large high grade and low cost mining centre. However, the company would have to make sure that power is available without disruptions.
Gounkoto is only 25 kilometres from the Loulo processing facility. Putting the two projects together would result in two open pits and one underground mine. The feasibility study for Gounkoto is scheduled to be finished before the end of 4Q10. The deposit has simple metallurgy and is high grade. Indeed all of the company’s mines are above average grade which should ensure success.
The company believes that Mali has the potential for many more discoveries but that the risks are perhaps not to the liking of all gold miners. To help reduce the risk, Randgold will make Loulo a processing hub, much in the same way companies have in Russia and Kazakhstan.
Randgold has certainly been very successful in building a business in northern Africa and has taken additional risks to do so. Members might recall that in the Democratic Republic of the Congo the company has on of Africa’s largest undeveloped gold deposits.
So far, the company’s strategy of having partnerships with the governments of host countries seems to have worked but it clearly cannot guarantee power supply. One of the problems that the company sees that in some cases it might be difficult for governments to match the company’s level of investment and in the long term commit to developing a sustainable mining industry to prosper the local people.
We suspect that it is the power issue in Mali that is weighing on the company’s share price. Until investors believe that the issue of power has been dealt with, we would not expect the company’s share price to exhibit a marked recovery.
The feasibility study for the Massawa project has progressed but the ore treatment process will require a pre-oxidation step. The ore is refractory and most of the gold is either in solid solution with arsenic in the mineral stibnite or in pyrite. Pressure oxidation releases the gold from the sulphides but entails additional capital and operating costs. During the time taken to complete the metallurgical testwork, the company has time to consider the satellite deposits which have less complex metallurgy.
Operating cash flow for 1H10 was US$59.7 million but the company is still in a growth phase and spent US$165.8 million on new projects. After the payment of US$15.3 million in dividends and other items are taken to account, the company’s cash positioned was reduced from US$589.7 million to US$487.2 million.
Randgold is working through its poor hedge book which will be eliminated this year; there are 24,160 ounces at US$502 per ounce, all relating to Loulo. It will be a blessing for the company to see the end of these ounces.
Randgold is still trading at a considerable premium to the Large Cap gold sector. The consensus valuation metrics for the company show the company trading on a price earnings multiple of around 36X for 2010 and 22.7X for 2011. By contrast the respective multiples for the sector are 24X and 18X. The company is also trading on high cash flow multiples of around 30X for 2010 and 18X for 2011; against 16X and 12X for the sector.
Randgold has carried a premium because of the company’s growth profile and high grade projects. However, we see a huge risk that power outages in Mali will negate the company’s positives and the premium will be lost.
However, Randgold remains a solid play on the gold price and has good growth potential. The stock will therefore remain firmly held in the Fat Prophets portfolio.
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