Converting Resources
Randgold Resources (GOLD), the West African gold miner released another set of impressive quarterly results this week. Rising production and robust gold prices drove mining profits nearly 90 percent higher to $33.8 million. Busy exploration and capital investment programmes bode well for further earnings gains as the company converts more resources into reserves and ultimately production.
| "With an extensive portfolio of 159 targets covering nearly 13,500 square kilometres, we believe Randgold will successfully grow its resource and reserve base in the years ahead." |
On the charts, recent gains have seen an acceleration of the two year upward trend in Randgold. Prices have risen more than 70 percent since March, breaking through the upper end of a bullish price channel to hit a new all-time high of $26.56. The pace and extent of these gains reflect firmly positive investor sentiment toward the stock and underlying strength in the gold market.
Following such a rapid price appreciation it is not unusual to see a stock pause for consolidation and possible correction. However, we believe that downside risks for Randgold are limited with initial support at $24.22 then $22.29.
Total attributable production of 118,989 ounces of gold was 78 percent higher than last year due to the first full quarter of contribution from Loulo in Mali. Despite the improved production figures and higher gold prices, net profit rose a more modest 11 percent to $12.8 million. Cost inflation, (planned) lower grade ore and costs associated with Loulo operations contributed to the slower rate of earnings growth.
The 80 percent owned Loulo operation is making solid progress since becoming operational late last year. Throughput rose substantially to 722,000 tonnes in spite of difficulties related to Phase 2 of the mine's development. Phase 2 involves the completion of a hard rock crushing circuit. Without the circuit, Randgold's short-term feed strategy has resulted in processing lower grade ore and higher handling costs. Gold production declined 5 percent to 64,677 ounces from last quarter while cash costs rose substantially to $323 per ounce.
We are confident that performance at Loulo will improve markedly following completion of Phase 2 in the coming months. With declining cash costs, production boosted by higher grade ore and buoyant bullion markets, we believe mine profitability will increase significantly.
Underground mine development in the region to complement existing open pit operations continues to move ahead. The design of the Yalea mine is complete and a contractor will be awarded the development contract in June. A $20 million budget will fund the start of construction in the third quarter. Meanwhile, evaluation of plans for the Loulo 0 mine continues. Exploration drilling at both sites has focussed on extending known orebodies.
Further exploration activities in the Loulo region have generated positive results. Proven and probable reserves attributable to Randgold now stand at 4.5 million ounces, up from 1.5 million last year. Attributable resources have also increased from 6.4 to 7.9 million ounces. The primary driver of the reserve upgrade was the updated underground mining studies.
Randgold's second producing operation is the 40 percent owned Morila mine also in Mali. More mature than Loulo, Morila production is in decline. As expected, quarterly production was down over 20,000 ounces from last year to 135,779 ounces of gold. Plant throughput, up 11 percent to 349,000 tonnes and in line with capacity, was not enough to make up for a decrease in ore grade.
The decline in production and associated cost increases were somewhat offset by strong gold prices. As a result, mining profits were lower by 5 percent to $17.1 million.
With a view to extending mine life, a wide-ranging 40,000 metre drilling programme at Morila has begun. Upgrading resources to reserves and extending known orebodies will be the focus.
Last year drilling added 510,000 ounces of reserves which offset a large portion of the 715,000 ounces mined. A promising target scheduled for further drilling this year is borehole REG003. We are confident additional exploration success will result in the mine's life being extended past 2008.
Across the border in Senegal, Randgold is pursuing 34 targets. In the near-term, seven are to be the subject of a 6,000 metre drilling programme.
| "Proven and probable reserves attributable to Randgold now stand at 4.5 million ounces, up from 1.5 million last year." |
Elsewhere in West Africa, trenching studies have been completed in Burkina Faso over a one kilometre strike. Whilst in Ghana, newly acquired permits are in the early stages of exploration.
News that work in the Cote d'Ivoire is due to begin again shortly is very encouraging. The political situation in the country has improved with elections planned in October. This has enabled Randgold to send a team into the country tasked with completing a 10 drillhole programme before the rainy season in July.
The Tongon project, where the drilling will take place, has an estimated 3.1 million ounces of resources. A final feasibility study requiring 27,000 metres of drilling will follow a successful outcome to this year's elections. The two year programme has a $111 million capital budget. Clearly the conversion of Tongon's resources into higher quality reserves will be crucial to longer-term earnings growth.
Financially, Randgold is in a strong position. Cash flow from operations remains buoyant at $22.5 million. Combined with last year's $103 million fund raising, GOLD has $158 million in cash. We believe these funds will enable Randgold to finance the development projects required to add production and reserves in the years ahead.
Randgold has a relatively small hedging programme in place related to the project financing of Loulo. In total, 365,000 ounces have been sold forward at an average price of $435 per ounce or 37 percent of the mine's planned open pit production through 2009. Currently, Randgold is taking advantage of the strong gold price by rolling forward contacts when necessary. Due to our belief in the long-term nature of gold's bull market, we would rather see GOLD deliver into these contracts with the view of becoming completely unhedged.
With an extensive portfolio of 159 targets covering nearly 13,500 square kilometres, we believe Randgold will successfully grow its resource and reserve base in the years ahead. These developments will in turn underpin gains in production and earnings. This bodes particularly well now with gold trading above $700 and the 25 year high of $850 coming into view. We believe that gold will eventually break above here to achieve a new all-time high above $1,000 in the next 12-18 months.
With the long term upward trend firmly intact and the outlook for gold remaining firm, Randgold is well positioned to trade at levels above $26.56 in the near to medium term. As such, Randgold will remain held in the Fat Prophets Portfolio.
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As at the date at the top of this page, Directors and/or associates of the Fat Prophets Group of Companies currently hold positions in Avexa (AVX), Evolution (EVN), Cerro Resources (CJO), Energy Action (EAX), Mt Isa Metals (MET), Telstra (TLS), Woodside Petroleum (WPL), ANZ (ANZ), Austar (AUN), Carsales.com (CRZ), Gold Road (GOR), IOOF Holdings (IFL), Magellan Financial group (MFG), Paladin Energy (PDN), QBE Insurance (QBE), Platinum Australia (PLA), Datasquirt (DSQ), Hodges Resources (HDG), Newcrest Mining (NCM), Oil Search (OSH), Zambezi Resources (ZRL), Auroa Minerals (ARM), Billabong (BBG), Pioneer Resources (PIO), Runge (RUL), Westpac (WBC). These may change without notice and should not be taken as recommendations.