Randgold Resources 18 Sep 03

Increasing Profile

Randgold Resources (RRS) is an African gold mining and exploration business, and the largest gold producer with a primary listing in London. The company recently surprised many market commentators by making an indicative merger proposal to Ghana-based Ashanti (ASN). Irrespective of the outcome of these merger talks, we believe Randgold has excellent prospects. We are encouraged by the company's impressive half year result, RRS' promotion to the FTSE 250 index, and the company's exposure to a rising gold price.

"...we believe that the market's appetite for Randgold will further increase following the company's inclusion in the FTSE 250 Index. "

Randgold listed in London in 1997, and raised £83m to fund its acquisition of BHP Billiton's Syama mine in Mali, West Africa. Unfortunately, the rapid decline in the price of the precious metal from $380 an ounce to just $250 forced the closure of the mine in 2001. Randgold subsequently moved onto a different Mali project in Morila and has not looked back. To date 7 million ounces have been discovered at Morila, which is now one of the highest margin gold mines in the world.

RRS has a 40 percent share in Morila alongside Anglogold with 40 percent, the balance being held by the government of Mali. The mine is among the lowest cost operations in the world, and in the top 10 by size with a production of more than one million ounces to date. The mine benefits from a high gold grade, a shallow ore body and simple processing.

In addition to Morila, Randgold has a 1.5 million ounce deposit at Yaela in Mali, and a 3 million ounce Tongan deposit in Cote d'Ivoire. The company has a portfolio of prospective exploration projects in Mali around Morila and Loulo, as well as new opportunities in Senegal and Tanzania. Its reserves and resources currently total some 14.7 million ounces of which 3 million are inferred.

The miner recently revealed impressive half year results with a threefold increase in interim profits and a ramp up of exploration activities. Net profit for the half-year to 30 June rose US$25 million on last year to US$33.6 million. Earnings growth has further strengthened Randgold's balance sheet, and it now has cash reserves of around US$100 million. Increased cash flow has allowed RRS to increase exploration expenditure with encouraging results from major programmes.

Morila continues to produce solid results, and remains one of the lowest cost operations in the world. Production volumes for the quarter totalled 236,449 ounces, and low cash costs have been maintained at US$93 per ounce. A capital expansion programme is progressing and on track to increase production to 350,000 tonnes per month by year-end.

Care and maintenance activities have continued as normal at the suspended Syama gold mine. Randgold had written off most of this investment so we are encouraged that some value may be recovered. In April, Australian-based Resolute Mining Limited signed an option agreement whereby Resolute will pay Randgold a US$75,000 monthly option fee for a period of 12 months. If exercised, RRS will receive US$6 million in cash and offload up to US$7 million in liabilities. Randgold also receives a royalty of US$10 per ounce for the first million ounces produced, and US$5 per ounce for further production up to four million ounces, subject to the gold price staying above US$350 per ounce.

Progress has continued at the 80 percent owned Loulo project in Mali, which is now awaiting a final development decision. Production is scheduled to start in 2005, and the minimum mine life expected is 10 years. In the meantime, Randgold is moving ahead in negotiations with the government regarding permitting of a potential mine and regional infrastructure issues. Further drilling at depths below the open pittable reserve have produced good results, and signals the likelihood of upgrades to Loulo's reserve and resource base of 4 million ounces.
Encouraging trench results have been obtained from the Baboto prospect in Mali, and from the holdings in Senegal, which have confirmed the continuity of mineralisation. In Tanzania, Randgold has formed a collaborative venture with the government and has secured six exploration licences within the Victoria Lake goldfields. The Tongan targets are on hold, due to hostilities in Cote D'Ivoire, but there does appear to be evidence that the political situation there is stabilising.

Following on from a solid half year result, we believe that the market's appetite for Randgold will further increase following the company's inclusion in the FTSE 250 Index from September 22. Until May this year RRS had been quoted on the LSE in US dollars, and the redenomination of the shares to sterling has facilitated the company's move to the index. RRS' inclusion will significantly increase liquidity of the shares as it will become eligible for investment by tracker funds and may attract the interest of funds benchmarked to the index. RRS also now becomes the only pure gold play in the top 350 companies.

Randgold's profile has been further increased by the surprise bid for Ashanti in August. Under the offer terms Ashanti shareholders will receive one Randgold share for every two Ashanti, and Randgold believes this is an attractive alternative to the $1.1 billion rival bid from AngloGold. Following a merger, Ashanti shareholders would hold approximately 70 percent of the enlarged company, with existing Randgold Resources shareholders retaining 30 percent.

Randgold's offer stems from management's vision of creating a major independent pan-African gold business, focused on creating value and with ready access to the world's leading capital markets (UK and US listings). The Ashanti name would be retained for the merged business and would be relaunched on the London Stock Exchange with full UK index membership. We believe that the merged business would benefit from substantial cash resources, enhanced balance sheet liquidity, as well as operational synergies. The parties are currently in due diligence but in any case, the Ghanian Government owns 16.9 percent of Ashanti and having a "golden share" is expected to decide on a preferred bid by the end of September 2003.

Whilst the benefits and synergies accruing from a merger would be substantial, it is our opinion that RRS's valuation stacks up on a stand-alone basis. Regardless of the Ghanian's government's decision and whether the merger goes ahead, RRS will remain in excellent financial shape. Randgold's balance sheet has strengthened significantly in the last year with gearing falling massively from 248 percent to just 27 percent. The company's balance sheet flexibility and strong uncommitted cash flow from Morila will allow management to continue to pursue earnings growth and additional upgrades to the reserve base.

Along with many stocks within the gold sector, RRS has experienced a solid rally over the past year. Despite the extent of the latest rally we believe that further upside is likely over the next twelve months. Fat Prophets have held a bullish view on gold since 2001 (see gold story in FAT1) and we believe that prices are in the early stage of a major upward trend. In our opinion gold prices should rise substantially over the next few years and gold stocks should benefit accordingly.

Given our bullish view of the precious metal, we are comfortable that Randgold has sufficient exposure to a rising gold price. Although RRS has hedged around 20 percent of forward production for the next 18 months, this falls to 13 percent if the gold price is above $US360 an ounce. After 2004 all sales will be fully exposed to the gold price, and in the meantime we expect RRS' leverage to the gold price to be increased further by reserve upgrades at Morila and Loulo.

We are confident that Randgold can continue to generate cash margins of around 70 percent. This will translate into earnings growth as production increases at Morila, and once Loulo comes on line in 2005. External earnings growth may also be obtained through acquisition, given management's desire to participate in the current rationalisation of the global gold mining industry.

RRS is currently on a prospective price earnings multiple of 13 and we believe this is inexpensive when compared to the FTSE gold mines index average of 29. The company does not pay a dividend but we believe that shareholders are better served by the company retaining cash to fund exploration activities which should drive reserve upgrades and inevitably drive earnings.

With Randgold's share price already in an upward trend, we believe that best strategy is to buy at current levels. While some consolidation is possible in the short term, our objective is to establish a position for the longer term. We do caution Members that RRS is a speculative recommendation, but appropriate for those Members with a penchant for risk, and a wish to have a quality exposure to gold. Accordingly, Fat Prophets recommend Randgold as a buy up to 1560p.



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