From its yearly low of $72.91 in May, Randgold Resources (GOLD) surged to a high of $127.27 in early October, up a staggering 75%. Having recently retreated to $117.61 Randgold is drifting back into the buy zone.
Randgold currently operates 4 mines, 3 in Mali and 1 in the Ivory Coast. A development in the Democratic Republic of Congo (DRC) is set to pour its first gold in 2013 and further exploration projects are underway in the DRC, Ivory Coast, Mali and Senegal.
A major concern for Randgold investors in the past year has been the Mali Military Coup, sparked in late March. The share price plummeted on this news and the declining gold price in the earlier part of 2012 but has since pushed forward.
The Mali situation proved to be less of an issue than first thought but is still not completely resolved. With Randgold’s production so focused in that one country it is important to assess the risk of political instability. Personally, we do not believe the situation there is of too much concern. The interim government has not been the cause of any direct instability to mining operations and understands the long term economic benefit to the local and surrounding economies. Having said that, problems in Africa can come from nowhere and escalate very quickly so future disruptions cannot be ruled out and with production so centralised Randgold is over exposed to the region.
Randgold was established in 1995 and listed publically in 1997 with a market value of £100 million. In 12 years its market cap has grown to almost £7 billion or $10.8 billion in USD.
At $117, Randgold certainly isn’t the bargain it was just a few months ago however a forward P/E of 16 is satisfactory.
Group production was up 58% in 2011 and is expected to rise 19% in 2012.
Randgold exhibits exemplary cost management. A profit margin of 35% is proof. Further, SocGen estimated that if gold fell from about $1,700 an ounce on Monday to $1,400, about a third of the projects being developed worldwide would be uneconomic. At $1,200 an ounce, half the projects would make a loss, it said. By contrast, two of Randgold’s five main mines would break even at prices below $1,000 an ounce and two more would be feasible at $1,300, according to SocGen.
Dividend yield is low at 0.3% but that is fairly typical of the industry. Miners generally prefer to reinvest earnings for exploration and development and Randgold is no exception. No doubt management is as optimistic on long term future gold prices as we are and hence wants to develop much greater capacity.
Debt to Equity is extremely low at 0.12 – something we love to see. Cash reserves are in excess of $450 million ensure solvency. The bigger players such as Newmont, Barrick and Goldcorp all service hundreds of millions if not billions of debt.
Randgold’s mean analyst price target is $138 which we’d agree with. Analyst consensus is currently a hold.
With gold drifting lower over the last couple weeks we’d look for a bottom to develop before picking up Randgold. The MACD indicates there is further to run in this correction.
Randgold’s management is a real highlight for us. Philippe Lietard joined the board in 1998 and became chairman in 2004. Mr. Lietard is formerly a corporate and project financier and spent much of his career with the World Bank and IFC, mainly in the minerals business in Africa. His experience in the region and in business is manifest in Randgold’s success up to this point.
A geologist by training and a former South African Army officer, Mark Bristow has been CEO of Randgold since its incorporation in 1995. The remainder of the board and management all have mining/geology or banking backgrounds and are evidently high performers.
What we like the most about Randgold’s management structure is the requirement for execs to hold company shares worth at least twice their base salary. Mr. Bristow significantly exceeds this with a holding valued at 56 million pounds. What better way to ensure management is working to help achieve your investment goals than to have them hold a greater interest in the company. This is something Buffet looks for when picking a stock and we couldn’t agree more.
We start this section with a negative. Reiterating the point we made earlier about political instability in Africa and more specifically Mali.
With the pessimism out of the way, development and exploration projects promise to return increases in production before long.
Consolidated production in 2012 is forecast at 825,000 - 865,000 ounces at a cost of $650/oz. Costs are being driven down by mining higher grade ores in Mali and the focus on profitability is certainly attractive.
As always, a mining company’s prospects are primarily determined by the price of gold. We are bullish on gold long term as FIAT currencies continue their race to the bottom. We’re in the midst of a short term gold down trend and perhaps waiting for a new area of support to be established is prudent before looking to pick up this stock. A stock price of $100 would certainly garner our attention.
Randgold lists on the London Stock Exchange as RRS.L and the NASDAQ as GOLD.
For disclosure purposes we do not have any interest in Randgold but have owned it in the past.
Have a good one.
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