Randgold is a major in the making

Brendan Ryan | Tue, 10 Nov 2009 16:12
[miningmx.com] -- SEPTEMBER quarter results at Randgold Resources (Randgold) have come in below market expectations because of operating issues at the Loulo mine, but the outlook remains good.

Randgold CEO Mark Bristow said the problems at Loulo were “short-term” and would be resolved as production was ramped up from the high-grade underground mine.

Randgold owns one of the most attractive growth pipelines in the gold sector. Following the $341m equity-raising during the quarter and the receipt of another $171m from AngloGold Ashanti on October 15, it now has all the financial resources required to deliver it.

According to a research note published on Tuesday by UK fund Liberum Capital, “Randgold has a bulletproof balance sheet from which it should be able to fund its entire high-quality internal growth pipeline”.

Randgold CEO Mark Bristow agreed with that assessment. Speaking to Miningmx on Tuesday, he said: “At a gold price of $800 per ounce we are fully funded to build all our projects, including Kibali.”

Kibali is the new name for the Moto project in the Democratic Republic of Congo (DRC), which Randgold acquired in a joint venture with AngloGold Ashanti through the takeover of Moto Goldmines.

The $171m payment from AngloGold Ashanti results from the fact that most of the minorities in Moto Goldmines opted to take Randgold equity rather than the cash option offered by AngloGold Ashanti.

Randgold had net cash of $519m at end-September, which the AngloGold Ashanti payment has increased to $690m.

Randgold and AngloGold Ashanti subsequently increased their stake in Kibali to 90%. They did this through an agreement to buy an additional 20% from DRC parastatal company Okimo at a cost of $114m, of which Randgold will have to fund $57m.

According to JP Morgan analysts Steve Shepherd and Allan Cooke, “Randgold is a major gold producer in the making. Aside from being about half-way through building its Tongon mine in Ivory Coast, it has three significant projects lined up behind that.

“All appear to have considerable ‘blue sky’ potential, in our view, and all appear to host multi-million ounce ore bodies that enjoy good to high grades. This means that mines built on them would likely be low-cost producers. “

The analysts said: “It is tempting to suggest that management could become overstretched; that the performance at Loulo hints of operational difficulties. There’s no doubt that the schedule is a punishing one and that Bristow is asking a great deal of his people.

“In our view, though, there are few teams as talented and well led as the one entrenched at Randgold. We believe this is a company with a sound business strategy and a solid track record. We expect Bristow and his team to deliver.”

That’s not the way UK broking firm Numis Securities views Randgold.

Numis analysts Andy Davidson and Mike Stuart commented in a report: “We believe that Randgold is currently overvalued in relation to its operational risks and established production levels, and we maintain our target price of 3500p .

“Recent share price strength on the back of the gold price has resulted in a downgrade of our recommendation to sell.”

The Randgold share price came off 239p to 4540p on Tuesday morning on release of the latest results; even Cooke and Shepherd reckon the price is high.

They said: “By using conventional DCF-based and most other valuation measures the shares cannot be described as cheap, because it is always hard to value ‘what you can’t see’.

“For us, Randgold epitomises a golden ‘iceberg’; the biggest part of it remains yet to be discovered below the surface. Good things are rarely cheap. We stay steadfastly overweight.” Liberum’s assessment is that “investors are willing to pay this significant premium relative to its gold peers due to Randgold management’s to date impeccable project delivery record.”

However, Liberum cautioned that Randgold management would need to fast-track the Massawa, Gounkoto and Moto projects “without hitches” to justify the premium equity rating.