Resuming the upward trend

Rising production and robust gold prices are driving mining profits at Randgold Resources (GOLD), to record levels. Intensive exploration efforts and investment programmes should meanwhile translate into further profitability gains down the track. Put this in the context of a long term bull market in gold, and the prospect for earnings upgrades at the West African gold producer is excellent.

---

"Financially, Randgold is in a strong position to pursue further reserve base additions, with $158 million in cash."

---

From a charting perspective Randgold has weathered the broad-based market correction of May and June relatively well. We believe this is symptomatic of Randgold's gaining appeal as a pure gold play. Over the past three weeks, the firm rebound from the long term trend-line, as shown on the daily chart, reflects enduring investor support for the stock.

Following gains of 37 percent in just three weeks, it would not be surprising to see Randgold pause temporarily for consolidation. However we believe support at $18.75 will serve to limit initial downside risks with an additional buttress at $16.30.

Operationally, we remain heartened by the improving outlook at the 80 percent owned, 9 million ounce, Loulo deposit. Completion of Phase 2 of the mine's development will see quarterly production climb towards 70,000 ounces. An improvement in ore grades should also drive cash costs ($323 per ounce last quarter) down significantly.

Underground mine development in the region is moving ahead. Randgold expects this will cost a further $100 million over the next five years. The construction of the Yalea mine is due to begin in the third quarter. Management are also evaluating plans for the nearby Loulo mine.

We believe the potential of Loulo should not be under-estimated. The district is widely recognised as one of the premier emerging goldfields on the African continent. Indeed, management are convinced that the area will produce 'additional multimillion ounce mines'.

Randgold's mainstay operation is the 40 percent owned Morila mine, also in Mali. Current quarterly production is around 135,000 ounces of gold but is in decline. A wide-ranging 40,000 meter drilling programme should however see mine life extended beyond 2008.

Over the border in Senegal, Randgold is pursuing 34 more targets. Elsewhere in West Africa, Randgold is assessing preliminary drilling results in Burkina Faso. Newly acquired permits in Ghana meanwhile are in the early stages of exploration.

We are greatly encouraged by an improving political picture in the Cote d'Ivoire. Elections are planned for October. A satisfactory outcome could see Randgold convert a major part of Tongon's three million ounce resource to reserves.

Total proven and probable reserves attributable to Randgold now stand at 5.4 million ounces.
Given our bullish view on gold prices we are encouraged that the hedge book remains relatively limited. In total, 365,000 ounces have been sold forward which equates to just 7 percent of reserves.

Financially, Randgold is in a strong position to pursue further reserve base additions, with $158 million in cash. Randgold's extensive portfolio of 159 targets covering nearly 13,500 square kilometers, will clearly facilitate this outcome.

The stock's readmission to the FTSE Gold Index last month will boost investor sentiment towards Randgold. An absentee since 2003, inclusion on the index will raise the company's profile as far as UK index tracker funds are concerned. This week Randgold was also included in the newly launched 'Nasdaq Global Select Market'.

With gold now holding back above $600 we believe it is only a matter of time before the precious metal stages a retest of the May high of $730.40. Eventually we expect to see prices break above here with levels beyond $1,000 achievable in time. With a rising production profile and growing reserve base Randgold offers excellent leverage to such a bull market in our opinion.

Additional gains above $22.36 will, in our opinion, see Randgold's high of $26.56 come into focus. A combination of a strong long term upward trend and a positive outlook for gold bolsters our belief that Randgold will extend to new highs in the months ahead. As such, Randgold will remain held in the Fat Prophets Portfolio. For Members without exposure we recommend buying Randgold up to $21.80.