Exactly one month ago, Africa-focused gold miner Randgold Resources produced a third-quarter trading update which indicated that it had dealt successfully with weather-related problems at its flagship Loulo/Gounkoto mining complex in Mali. Meanwhile, the residual effects of last year's post-election turmoil in Côte d'Ivoire appeared to have had only a limited impact on production. The fact that Randgold had apparently dodged a bullet (or two) added ballast to its share price, which had previously been held aloft by the buoyant price of gold. But now there are good reasons to suggest that Randgold's shares are overvalued in the light of faltering production and concerns for the gold price.
- Gounkoto problems rectified
- Kiballi project on track
- Production shortfall
- Increased cash costs
- Labour disputes
- Gold price under pressure
Randgold's third-quarter update, although broadly positive, did leave some doubt over the underground ramp-up at the Loulo mine, while the company - in common with other African gold miners - is struggling to keep a lid on its production costs. Still, management stuck to its guidance that full-year production would be maintained at 0.74m to 0.76m ounces. However, that would have meant Randgold needed to produce at least 0.23m ounces of gold in the final quarter, equating to a 38 per cent rise on the average monthly rate so far in 2011.
This was a tall order, but Randgold's bosses were confident that the full-year guidance was achievable as operations in Mali moved into the 'dry' season. Even so, it would still probably have required output at Loulo to return to the rate achieved during the first quarter, before heavy rains inundated parts of the Loulo/Gounkoto complex (although at that point production had already tailed off from the fourth quarter of 2010).
However, the best laid schemes of mines and men often go astray. It now transpires that Randgold has suffered continued disruptions at Loulo since the third quarter, plus labour disputes and technical problems at its Tongon mine in Côte d'Ivoire. These have combined to completely scupper Randgold's expectations for 2011. Accordingly, the miner has downgraded its guidance for this year's production to just 0.69m-0.7m ounces.
| RANDGOLD RESOURCES (RRS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 6,480p | MARKET VALUE: | £5.94bn | |
| TOUCH: | 6,480-6,490p | 12M HIGH / LOW: | 7,565p | 4,320p |
| DIVIDEND YIELD: | 0.3% | PE RATIO: | 16 | |
| NET ASSET VALUE: | 1,441p | NET CASH: | $430m | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2008 | 0.34 | 72.0 | 54 | 13 |
| 2009 | 0.43 | 106 | 86 | 17 |
| 2010 | 0.48 | 145 | 114 | 20 |
| 2011* | 1.22 | 580 | 472 | 23 |
| 2012* | 1.46 | 850 | 622 | 26 |
| % change | +19 | +47 | +32 | +13 |
Normal market size: 700 Matched bargain trading Beta: 0.5 *Investec Securities' forecasts £1 = $1.56 | ||||
True, the situation at Gounkoto provides some grounds for optimism, particularly as haulage problems to and from the site have been resolved. However, cash operating costs at Gounkoto are likely to remain on the high side, given the number of ancillary projects under way.
Randgold's management had cited "wet and poor underfoot conditions" as being partly responsible for an 11 per cent fall in third-quarter output at Tongon, but it's unclear whether all the factors behind the underlying reduction in mill throughput have been successfully addressed. The mine also suffered a surge in cash costs over the second quarter. On a per ounce basis, this is partially explicable in terms of the lost production, but Randgold also blamed the "poor performance" of a mining contractor. On the plus side for Tongon - or for Côte d'Ivoire as a whole - the political situation has 'normalised', if that's the right word, after last year's post-electoral dispute which saw the country slide towards civil war. For now, the centre holds.
Worryingly for Randgold, overall cash costs increased by 16 per cent on the June quarter to $747 per ounce (£480), which was well in excess of what City analysts expected. The company will struggle to meet its earlier guidance that its full-year costs would be around $600 per ounce.
Elsewhere, Randgold confirmed that its Kiballi project in the Democratic Republic of Congo remains on track to begin production at the tail-end of 2013. But the City will have to wait until 2011's results are reported for material updates about its exploration programme. By that time, the company might already have had to trim its revenue forecasts if the gold price is stymied by continued demand for the US dollar as a result of worries about the future of the euro.
