Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Randgold Resources Ltd. (NASDAQ:GOLD)

Q1 2006 Earnings Conference Call

May 8, 2006 11:00 a.m. EST

Executives

Philippe Lietard - Chairman

Dr. Mark Bristow - CEO

Roger Williams - Finance Director

Analysts

Steve Sheppard - JP Morgan

Victor Flores - HSBC

Patrick Chidley - BJM

Howie Flinker - Flinker & Company

Presentation

Operator

Welcome to the Randgold Resources Limited conference. (Operator Instructions). At this time, I would like to turn the conference over to Dr. Mark Bristow and Philippe Lietard. Please go ahead.

Philippe Lietard

Hello, this is Philippe Lietard, and I’m sitting today in Washington DC. Good morning to our participants in North America and good afternoon to those in Europe and the U.K. and thank you again for joining us for this teleconference of the past quarter’s result.

I am glad to be with you all again this quarter, and hear your queries and comments, measure your interest in our Company, and to keep us abreast of what interests and concerns you. I’ll be handing over shortly to Mark Bristow, who will take you the results in detail, but I’d like to set the scene by saying it has been a really outstanding performance by the team in the face of very challenging circumstances.

If you look at quarter over the quarter, you will see that though we were rigorously tested, we still managed to tick all the right boxes. At Loulo, completion of the second phase of the plan progressed rapidly, and the mine produced a robust operational performance in its first quarter.

At the same time, plans for the underground operation at Yalea were finalized, and work for this development will start shortly. Morila was back on track as a prolific cash generator, and we moved back into the Cote D’Ivoire with a view of revitalizing our Tongon project.

Also, our operation teams are active across the broad spectrum of East and West Africa’s gold fields. Of course, the bottom line for the quarter is a healthy one, at a time when many gold companies are not making profit, despite the high gold price.

All in all, then, a very good showing by the team, who have again demonstrated their capacity for dealing successfully with the demands of a dynamic business in a very complex industry. With that, I’ll hand you over to Mark.

Dr. Mark Bristow

Thank you, Philippe, and again, good morning to both Americas and good afternoon to Europe and the U.K. We will be posting the script, the script that I presented to the market this morning on our website. We have a live webcast currently on the website. So anyone who wants to go to the detail, I’ll refer you to our website, and I will try and stick to the highlights of my presentation this afternoon.

For those of you who have access to a computer, we will be following the slides which are posted on the website. The first set of slides are on our highlights. The key is just to reinforce what Philippe said, and that is in many ways, we did much better than expected. The past quarter was a challenging quarter, but as the results have shown, the team did a great job all round.

Particularly at Loulo, we managed to ameliorate against the lower grades which we had indicated would have to be processed this quarter by getting the throughput up on the mines. We’ve made excellent progress with the work towards commissioning the crusher circuit and we have tidied up just about everything that was outstanding on Phase I. So we are really comfortable that Phase I now is substantially complete.

In addition to that, we made excellent progress with the underground work, and we expect to start excavating the portal during July. The target of reaching all in the underground development towards the end of the year still stands.

Morila is solidly back on track; for the first time it reached its designed throughput. We also, as Philippe said, went back into the Cote D’Ivoire. We have re-established our offices in the northern part of the country. We’ve always had offices in Abbiegen and of course, we didn’t take our eye off the exploration ball.

Specifically, if we look to Loulo, our first full quarter of production at this operation, very good throughput performance in the face of the obstacles the team had to overcome. The first phase of the plant, as I’ve said, is substantially complete now, and as far as the crushing circuit goes, we’ve made excellent progress with the civil work. We’re just about ready to put the final large primary crusher in place. The two secondary and two tertiary crushers have been installed, and have been commissioned. So we’re getting there and we’re on track for June commissioning for this circuit.

The strategically important tailings return water pipeline is now in place and has been commissioned, and although we see the next two months still as being a challenging operational environment, we’re more than comfortable that the team is capable of dealing effectively with the situation.

Moving on then to the Loulo Gold mine operational results, these are the results for the quarter. As we warned last quarter, we revised our feed strategy because of the enforced delay in the completion of the crushing circuit.

The lower head-rate of 2.9 grams per ton was the result of this, and although down from the previous quarter, it is in line with our provisions. Notwithstanding this, the Loulo management team produced just shy of 65,000 ounces and certainly, that’s well within our guidance for the market. As you will recall, our guidance for the year is 250,000 ounces, so we’re in line. We expect the back end of this year to be better than the first half.

Cash operating costs were impacted by the expense of the mobile crushing-associated rehandling costs, and then also the adjustments with our grad. Our unit costs were as planned. And if you go to the income statement, you will see that our aggregate costs were in line with last quarter, and that’s a very satisfying achievement.

We really got on top of the costs, both at Morila and we’ve been able to maintain unit costs or aggregate costs at Loulo. You must put that into perspective that we had an increased operational throughput, both at Morila and Loulo this quarter. So although the cash cost per ounce is up at Loulo, the unit costs are in line, and that’s merely a grade function.

Just a footnote to the results -- and I’ll touch on them under Morila as well -- is that I must point out that in line with the new SEC accounting standards, we no longer defer stripping costs.

If we move on, then, to the Loulo Gold mine slide which shows the operational performance, that’s really to highlight that the team has excelled in getting the throughput up well ahead or above the nameplate design. In fact, we averaged 240,000 tons a month for the three months. It was because of the throughput, despite the low grade, that we were able to come in line with our budget, as far as gold production goes.

Reserves and resources, it’s worth probably reminding those about what’s certainly become Randgold Resources’ mantra; and that is that discovery creates value, and while of course ounces in the ground are important, it’s their conversion into reserves that is really critical.

These bar charts show how continued drilling has increased the Loulo resource base, and even more significantly, how the reserves there have increased more than threefold, year-on-year.

Moving to the next slide, just reminding you that this is not by any means the end of the story. This slide highlights the latest drilling results from around the two main deposits, Loulo 0 and Yalea, which continued to increase our confidence that they are material extensions to the known ore bodies at both deposits.

You can see that deep infill drilling at Yalea continued to produce economic intercept. Probably as exciting has been the recent drill results from Loulo 0, a long strike from the known ore body. We had a very good intersection some 250 meters north of the Loulo main deposit, a long strike on the same structure, and again, to the south some 600 meters.

We intersected 22.6 meters of 8.2 grams a ton. The ore-body that we intersected is very significant. It looks very much like the Loulo deposit, and we are now currently in-filling the Loulo ore-body as part of our finalizing the underground schedule for Loulo as we did for Yalea last year.

Next talking about the underground, as you can imagine Loulo has got a lot of our attention lately. We’ve been dealing with settling down the team there, and finishing the crushing circuit. We've continued to extend the resource base as far as exploration goes. At the same time, we’ve been progressing the underground development project.

As we indicated last time, we’ve decided to do this in two steps, developing Yalea first, and then immediately behind that, the Loulo 0. The detailed mine design and production scheduling for Yalea has now been completed, and we’re currently finalizing a box cut and portal design. The construction of the main portal for the decline development will start in two months time, and we expect to exit the first development of ore towards the end of next year.

The order for heavy vehicle fleet has already been placed, and the development contractor will be appointed soon. We’re currently going through that adjudication process and in the meantime we’re finalizing the Loulo 0 underground plane. Once that’s been done, we expect to revise our plans, which integrate the open cast and underground tonnages, which we shared with you last quarter, and more importantly, the power plant feed potential out of these deposits.

At this stage we expect to make an informed decision on the plant expansion plan. We have been looking at how we can do it. We certainly built it into our design, and the likelihood is that we will increase its capacity to the 300,000 tons per month level.

As an update, we’ve included the latest Yalea underground development plan in the next slide, and again as indicated last time, we have now decided on a twin-decline system, one equipped with a conveyor and the other for heavy vehicle access.

We are still considering the possibility of sinking the vertical shaft rather than raised boring it -- we have to do it, but early stage indications are that the decision to go with twin declines has taken away many of the benefits of an early shaft and certainly it saves money. With having the twin declines we now have access to good ventilation because you can use the one decline as an updraft ventilation shaft.

That’s the Loulo operation and development projects. We’ll come back quickly to the exploration a little later.

Moving now to Morila, as I’ve said in the intro, the expanded plant finally reached design capacity, and the increase in throughput partially compensated for expected decrease in grades. We had a very satisfying operational performance from the team at Morila. We also managed to replace most of the ounces that we mined last year and we are very committed now to the detailed and regional tactical exploration strategy that we spoke about when we last spoke to you in January.

The next slide is really the results, which as is customary, very much speak for themselves. We must however point you to the uptick in recoveries. It’s the result of that team really getting to grips with some of the challenges.

For the first time we’ve seen evidence of our encouragement to get into focusing on cost containment because costs have come down at Morila. Some because there were non-cash adjustments last quarter, but some because of good management practice, and we are maintaining a strong focus on this cost drive. We are now encouraging the other departments, like mining, finance and procurement to learn a little bit from them in that department.

The next one is the South West extension drilling. As you know, for some time now, I’ve been recognizing that the challenge in Morila is to find more ounces. We talked about our 40,000 meter drilling program which we’ve now started last quarter. This program was initially concentrating on the extension of the high grade axis, about one kilometer south west of the pit. That was the objective, is to try and build a broad low grade anomaly, or halo, that we see just as a footprint around the main ore body.

Mineralization, alteration and structural setting are identical to those of the main ore bodies and during the quarter, we received our first really positive result from the drilling, an intersection running 34.8 grams a ton, about 700 meters south of the pit limit and on line with a high grade [payload] trend.

The most significant of it was that it had a lot of visible gold, a lot of intense alterations, and that’s very encouraging considering that it’s so far away from the pit. We have some follow-up bores now being planned around this hole, and we have to get through the over-burden. We’ve got waste stockpiles between that bore hole and the pit, to be able to test it coming back towards the pit now. That will be something that we will work through over this quarter.

As part of this drilling program, we have been very successful in replacing the reserves we’ve mined year-on-year, and last year was no exception. I think it’s also important, this is the reserve statement in the bar graph, just to point out that the reserves that are presented here and in our annual report are based on a $400 gold price, and the resources are merely the ounces that fall within a $475 threshold.

So by using different gold prices we are currently looking at what else can be brought into the reserve category from this resource category, and at what cost. I’m pretty comfortable that if we use a higher gold price, we’ll be able to impact on the production profile at Morila.

Leaving Morila then, and moving to the Cote D’Ivoire, as we pointed out earlier we continue discussions with government representatives, the administration and the various political opposition parties, the new forces in the north. As a result of that, we made excellent progress in getting consensus that is so very important for this country to support the development of the Tongon project.

We have established a key mine site up in [Cote d'Ivoire] and they are currently preparing for a 10 bore-hole drilling program, which we hope to complete before the start of the rainy season in July.

The plan is this will test our ability to work in the area, as well as allow us to fill a few gaps which will assist us in designing the detailed feasibility drilling program, which could start towards the end of this year, subject, of course, to the successful outcome of the planned and announced selection.

Once this is all done, it should take us about 24 months to complete the final feasibility study and be ready to start construction there.

Moving then onto exploration, the next slide is a highlight of the key aspects of our exploration work over the quarter. The point here really is the scope of this exploration program is a reminder that for us at Randgold Resources, exploration is not the flavor of the month; it’s rather the backbone of our business and has been since we started.

At a time when everyone is rushing around trying to create an exploration portfolio, it’s worth remembering that we’ve been building ours for 10 years. Our starting point is that great ideas are not a substitute for a carefully considered and consistently applied strategy, and that in exploration you have to kiss an awful lot of frogs before one turns into a prince.

Our exploration program is not designed to excite investor interest but to build our business. It’s been very successful for us in the past, and given our strong presence in all the major gold regions of West and East Africa and the high level of our activity there, our next major discovery could literally come at any time.

We need to caution that we’re currently benefiting from this high gold price because we invested in exploration in the ‘90s. The exploration that we’re investing in today is bound to be our success in the future. So that is, I think, something that I’ve recently said a few times. The industry tends to miss it, and invest in the peaks and go bust in the troughs. We have over the short time we’ve been around, trying to do something different, and invest ahead of the gold curve.

Taking some specifics now quickly, working through Loulo looking more at the detail. At Loulo, it’s not just our newest mine. It’s of course our most prospective exploration place. In fact, the more we learn about it, the more convinced we are that this is one of the premier emerging goldfields on the African continent, with the potential to deliver additional multi-million discoveries. We at Randgold Resources control 45 kilometers of strike along this highly prospective region. We are currently evaluating 45 targets there, which include resource delineation on five deposits outside the known deposits.

There are now many satellite targets across the landsat. That’s the next slide and surrounding tenements. And both Faraba and P64 have only recently joined their ranks and could both be economically viable deposits, although it’s still early days.

At Faraba the first phase of reconnaissance drilling has been completed, and a follow up four-hole diamond drilling program is now underway. I think it’s actually nearly complete.

At P64 the first phase of drilling has also been completed, and diamond drilling will now progress there. Just to point out that this Senegal Mali share that controls the mineralization from [Sadiola] all the way south extends well south of Loulo. At Selou, that’s our other permit, the Randgold Resources permit to the south, the Boulandisso and Sinsinko targets have recently also returned positive trenching results. Reconnaissance drilling of these targets are also planned for the current quarter.

The same goes for Morila. As I pointed out, Morila’s very aggressive tactical drilling program we have been conducting within the leach area is now being dovetailed with a similar program on our own surrounding tenement. Diamond drilling is due to start within our own permits there very shortly. In fact, within the next few days, as I understand.

In Senegal, we are speeding up the evaluation of our more mature targets and drilling will start soon with our target being to initially drill another seven or eight of the current 34 targets we have on our register there. At the same time, we are also looking at our more recently acquired rights to bring them up to a point where they can deliver targets.

In Burkina Faso, we’re at the target generation and follow-up phase, and I’m very satisfied both with our rapid build-up in this country and with the quality of the information coming from it.

Again, I’d point out, most of our exploration programs -- those that I’ve already presented to you, and you can check them in the slides -- and the ones I’m going to present to you, are producing significant results, demonstrating mineralization and width, something that one needs to be able to prove viability. We’re certainly not short of that sort of information coming out of the early work in Burkina Faso. We’ve planned to start our next phase of drilling of Kiaka in Burkina Faso and initiate some early reconnaissance holes on other targets later this year.

In Ghana, we’re busy with early stage regional exploration and target generation on our newly acquired portfolio of permits, as elsewhere. In line with our strategic approach to exploration, we have a plan, we have the people on the ground, and we have a budget.

Again, I should highlight we are being guided by very specific geological models and strategy in this region which incorporates Burkina Faso. You’ll see we are pursuing the structures down from Burkina into Northern Cote D’Ivoire, and also into Northern Ghana; and also in Cote D’Ivoire where you see that we’ve picked up some ground in Ghana and we’re following that big structure that hosts the world class Ahafo deposit all the way into the Cote D’Ivoire as well.

Moving on then to the Cote D’Ivoire, we have recently been awarded two new permits. In the south of the country and early stage reconnaissance exploration has started there; this of course is in addition to our pre-feasibility project at Tongon and other mineral deposits to the north.

We like the Cote D’Ivoire. I believe it’s one of West Africa’s more prospective and most under-explored barsumian terrains, underlined by some of the geographical structures that have produced major gold deposits in Ghana, Guinea and Mali. It still has one of the better infrastructures in Africa, with good roads, power supply and plenty of water.

The country is being administered by an elected government. There is an issue politically, which is being addressed. You can meet with all the players, and the one thing that’s important is all the players believe that the mining industry, and particularly Tongon, is important for the future of the country. And then on top of that, you have much better infrastructure than some of the other emerging prospective areas in Africa like the DRC, the Central Africa Republic and others. And we are certainly looking at those countries, but on a relative basis we’re comfortable with the risks that we’re being presented in the Ivory Coast.

Moving across to the east of the continent now in Tanzania, we’ve completed a four hole reconnaissance program at Kiabakari which returned a best intercept of 12 meters at 3,2 grams a ton, and identified two new zones north of the known mineralization.

This is going to help us to build a model for the next round of drilling and as you know, we’ve got a huge portfolio in Tanzania, and we’ve really worked hard this quarter to get through them to sift out at the more prospective areas and get working on turning over some of the ground.

Moving now to the financials, just quickly, this is a summary. We’ve produced a summary in the slide show. The details are on the website and in our quarterly. You can go to them for anything you would like to follow up on.

As stated earlier, a very good set of results, and I won’t go into all the details. I think as already mentioned, from January 1 we have changed our policy on accounting for the first stripping. This was to bring our accounting into line with the latest SEC rules, and we believe the new treatment should provide clearer numbers going forward. So any costs of waste stripping are now passed through the ore stockpile in the period in which they are incurred.

What this change means is that comparisons to the previous quarter have to be made with caution. For example, the restated net profit for the December quarter of $17 million is after a credit of $4.1 million for deferred taxation, which relates to the deferred stripping restatement.

The more comparable number would be the $12.4 million as previously reported, and therefore we showed slight improvement to $12.7 million for this current quarter. Importantly, the current quarter’s result is after Morila’s first full quarter of tax, amounting to $5.6 million in our income statement.

You will also see that our profit from mining was up 10% compared to the previous quarter, as the higher gold price offset the lower production and higher cash cost.

For me, one of the most significant numbers is the $22.5 million cash generated from operations in the quarter. This figure is before tax but after all other costs have been paid for, including $7.5 million exploration and corporate expenditure. It shows our cash generating capacity and our ability to build our business going forward.

On that note, we have a very strong balance sheet, with $158 million in cash, and $60 million project finance debt for Loulo. We are currently looking at refinancing this to allow some of it to feed through to the government’s contributions to Loulo, which we are funding as well as making the facility a bit more commercial.

The other couple of points that I’d like to make on the balance sheet are that we continue to pursue MVN to recover the $12 million we have as a debt on our balance sheet, as well as further claims we have. Our next court date for this matter has been set for June 20.

We are also busy reviewing our hedge position. We have rolled out the contracts that were due for delivery in this quarter, so that all our ounces were delivered as spot. However, we took a $3.2 million non-cash charge to income statement due to that roll-out.

We are looking to structure this hedge both to allow us to deliver and secure around 30% of Loulo’s monthly production, which will result in us participating in approximately 85% of the spot gold price going forward. We will report back to you on this next quarter.

Finally, ladies and gentlemen, I have spent the last three slides putting some comparatives down. The first one is really looking at our relative premium to NAV based on a $500 gold price and 5% discount. The bars for the senior producer average and intermediate producer average are as per the HSBC, and our 1.5X is based on consensus. We did that because HSBC is actually one of our advisors.

It’s very important that despite our recent performance in our share price, we are still relatively undervalued on this basis. On the right-hand side is a very enlightening demonstration of reserve life of proven and probable reserves. You will see that the senior produced average is 12 years, and the intermediate produced average is 10. We’ve recently grown ours from 10 to 13, just over 13.

That really highlights and reinforces our strategy which we’ve consistently stated, and that is that through organic growth, you do eventually build a real profile for your business. Despite all the M&A activity, the big guys are not adding a lot to their businesses. And we certainly have, because we didn’t start with much 10 years ago.

The next slide is another comparison, a very simple comparison, market cap per reserve ounce. It’s interesting to see how some of our peer groups trade significantly high. We are relatively modest, and certainly in line with the sort of production costs that we have, just about $360 an ounce market cap per ounce, and again, it highlights the relative lower market cap per reserve ounce compared to the rest.

I think just to finish off I’d like to just take you back a little bit. When Randgold Resources was listed on NASDAQ in 2002, its share price stood at $3.25, or then $6.50; we subsequently split. Today, less than four years later it’s trading considerably above $25, and the Company has a market cap in excess of $1.7 billion.

Between 2000 and 2005, we made profits of more than $200 million, much of which has been reinvested in growth opportunities , and our latest balance sheet shows total assets of $470 million, representing the capital that we have invested in the development of Morila and Loulo.

The Loulo underground project will cost a further $100 million over the next few years, and the Tongon project, which is in line to become our third mine, has an estimated capital cost of $111 million. And since our establishment, we’ve spent $140 million on exploration over a period when most of the industry abandoned or at least cut back on this function.

And we have contributed more than $1 billion to the economies of the countries in which we operate, and this is important in forging productive partnerships with their governments and the people, and helping to ensure the long-term sustainability of our business.

As this graph shows, we have managed to outperform many of those great gold companies in our industry. We at Randgold Resources, and I’d like to reinforce this, remain committed to maintaining our focus on value creation for our shareholders through the discovery, development and the production of profitable gold ounces.

I trust I have again, through the course of this presentation, been able to demonstrate we certainly have the strategy, the will, and most importantly, the team to deliver on these ambitions. Thank you very much for your attention. We’d be delighted to take any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Steve Sheppard of JP Morgan.

Steve Sheppard - JP Morgan

Thank you, good afternoon Mark, gentlemen. I’m always reminded that it was barely two years ago you hosted a visit to the Loulo site which was nothing more than an exploration camp. I think you have done rather well.

Having said that, could I ask you, Mark, please, if you could just refresh some guidance for us? Could you just remind us what you expect Loulo’s cash costs to level out at once you’ve reached steady state?

Maybe talk to us a little bit about the production guidance as far as the next couple of quarters is concerned, and perhaps update us on your CapEx expectations for the Group.

Finally, would you like to just look into the crystal ball and tell us where you’d like to see your production three years down the track?

Dr. Mark Bristow

Sure, no problem. Just to remind you of our guidance. Our guidance at the beginning of the year was 400,000 attributable ounces at $270 an ounce. That meant 250,000 ounces from Loulo, and 540,000 or thereabouts; 500,000 ounces from Morila. We’re ahead of that guidance already. We’re on line at Loulo, that’s 65,000 ounces for the first quarter, and we have as our target to get to 125,000 at mid-year. We should do between 60,000 and 65,000 this next quarter.

That really will be dependent on how quickly we can get the crusher, the main crusher working, but that’s all holding up. We’re forced to feed slowly lower ore grade because we have to stick to the softer ore.

We expect that the second half of the year will be better than the first half, and so we have no reason to change our guidance to the market for the year’s production there. In fact, if everything goes according to the plan, and we can deliver on the higher throughputs that the management has achieved this first quarter, we run the risk of being a little better.

Morila again the recoveries are encouraging. We gave the guidance of at least 500,000 ounces. We’re certainly doing that at this stage. We’ll have an average quarter this quarter. We’re going to have slightly better quarters later on in the year. At this stage it looks as though we could go a little bit more, not as much as 10% but maybe 5%, above the 500,000 and we’re happy with the cost. The cost has come down nicely.

So on balance, we’re still comfortable that we’ll get, on a consolidated basis within our guidance, and if we carry on and get through this quarter, this is the challenging quarter, we run the risk of beating it, Steve.

Steve Sheppard - JP Morgan

Thank you. And the CapEx, Mark?

Dr. Mark Bristow

The capital, we have spent some money. We’re still chalking up all the expenditure on Loulo, completing the MDM work. But the underground capital at the moment, the authorized capital is $20 million for the year, and we’re on track with that.

The variability in that is a couple of million either way is for any additional reserve drilling that we might want to do, and we’re pretty excited about some of the work that’s coming out at Loulo. So that might increase the expenditure. We’ve gone about $10 million Roger, do you just want to catch up with the Loulo work?

Roger Williams

Yes, we estimate we’ve got about $10 million left to spend on getting the rest of the plant, and that includes the Phase II crushing circuit at Loulo.

Dr. Mark Bristow

And that would include the extra tankage as well? There’s some expansion coming through.

Roger Williams

The extra tankage, and that also includes the change we’re doing to the tailings.

Steve Sheppard - JP Morgan

And that last question you have, what would you like to be producing in three years time?

Dr. Mark Bristow

Yes, we know exactly what we’d like to be doing. In our current plan, strategic plan, we get up towards the 500,000, 480,000 ounces. Steve, the exciting thing is that our work on Yalea, we’ve upgraded the throughput out of Yalea, and that’s why we gave a profile of ounces last quarter which shows that target.

The indications are that Yalea can sustain at much higher feed than we originally planned. We want to now finish the work on Loulo underground, and on that basis, if we can jack up -- because all our plans have been worked on 200,000 tons a month. If we can lift Loulo up to 300,000 tons a month, it has a material impact on ounces produced, and it would certainly ameliorate the drop-off currently planned for Morila. There’s upside in that, as I indicated, if we decide to push back a little bit and take a slightly bigger cut in the Morila mine. Then if we’re able to keep the Tongon on track, that has a positive impact as well.

So clearly it would be really nice for us to beat $500 an ounce. The very exciting position we have at the moment is changing the gold price in planning in Morila changes the reserve ounces. Changing the gold price planning in Loulo currently, because we have underground extension, doesn’t change the reserves because our underground actually, it gets rapidly to the point where the underground is cheaper or lower cost than the open pit, but it makes more money. We've always focused on profitability and that's our intention, is to keep that focus and to deliver the profitability that we've been talking about for 10 years.

Steve Sheppard - JP Morgan

Thank you very much.

Operator

Thank you Sir. Our next question comes from Victor Flores of the HSBC. Please go ahead.

Victor Flores - HSBC

Yes thank you. Hi Mark. Could you give us sense of whether you'll continued to produce at this higher level at Loulo during quarter and whether you actually have enough soft ore to make it? What kind of a cushion do you have on the soft ores perhaps is the better question?

Dr. Mark Bristow

Vic we've got now two mobile crushers crushing the transition ore. Today a third one should arrive because you've seen that we've beaten our throughput designs and so. That's the big thing, is we've taken probably 25% of hard ore over the last two months in the feed and we've maintained very high throughput.

Going forward the real issue, as you've rightly picked up, is the ability to feed material. What we're doing at the moment is with the third crusher we can be sure about the size. We're looking at bypassing the oxide roll crusher because we've already crushed it to the right size, and feeding it straight on to the belts in to the mill which will allow us to stay at a fairly high speed rate and stop the stoppages that we get which is impacting on our throughput.

Going forward after that we're starting to believe that we might be able to plan on a 220,000 tons a month throughput; even after the hard rock circuit is commissioned because they are things that really work very well. That's why we've said we'll have a wait and see. We've made some changes to some of these processes. We've had to pick up on some bad design points that we've had to fix. We've been busy fixing those.

Once we've seen the performance we will then make a decision on expansion; taking it above that. The cost of doing that is somewhere between $10 million and $20 million That's something that certainly pays handsomely if you do it. You've just got to be comfortable you've got long-term feed.

Victor Flores - HSBC

Okay thanks. So essentially what you're saying is that with the supplemental crushing you have already plus what's coming on the site, you should be able to carry on without interruption?

Dr. Mark Bristow

Yes, we're shooting for 60,000 ounces, which will take us to 125. With a bit of luck we'll duplicate this quarter, and it's really throughput.

Victor Flores - HSBC

Second question goes to this supplemental crushing that you have on site. How much is that adding to your profits and costs on a per ton basis?

Dr. Mark Bristow

We've been working on that Vic. It's between $3 and $4 a ton. Over the last two quarters we haven't used -- and we're going to have about a 100,000 tons a month crushed, so the rest we can see. So, you're looking on that basis it's $5 for that 100,000 and you work it out. So, it's a bit variable at this stage. We've got one crusher we own. We are paying $5 a ton for another crusher. We've got some rehandle costs.

Victor Flores - HSBC

Okay and then just finally, if a decision is made to expand the plant when do you think that decision will be made and how long would that take to bring on line?

Dr. Mark Bristow

It will definitely be this quarter. We've already committed to expanding the tankage. We talked about that awhile ago, just that MDM doesn't get around to effecting it and we're busy with that now. The capacity of the plant milling, tankage, all that sort of stuff can handle the 300,000 tons.

It's really managing the front end of the plant which is always the bottleneck. That's the way we design our plants. And it needs to be tied in with our decisions on how we're going to crush the underground ore. As soon as we are comfortable that the underground design will allow that feed to be long term or at least medium term, we'll make the decision, because certainly the open pits can handle it.

We just don't want to run out of ore too quickly and have a big gap. So we'll make it this year. Whether it's next quarter or the following quarter is something that we'll tell you next quarter. I guess we’ll tell you next time we meet.

We've already done the numbers, Vic and the options are we put in more crushers at Yalea and so that Loulo feed can go to the crusher on the site. We are going to be putting in an overland conveyer from Yalea so that's the one option.

The other option is that we put an extra crusher, secondary and tertiary crusher in the current circuit.

The third option is that we introduce a fourth phase of crushing in the current circuit and that is I think the preferred route at the moment. It's easier, it's a little more expensive but it's really reliable. The others, it's all a bit of test work we have to do. I don't know if that's making sense but it's very dynamic.

We all are quite comfortable about that decision. We really need to wait for the final detailed designs of the Loulo 0, which then we'll tick off our box as far as long term feed goes.

Victor Flores - HSBC

Okay, great. Thank you, Mark.

Operator

Our next question comes from Patrick Chidley of BJM. Please go ahead.

Patrick Chidley - BJM

Hi Mark. Just following up from Victor's question on the plant expansion. To go to 300,000 tons a month I just wanted to confirm that you're saying the open pits can handle that. Is that something that can be turned on pretty quickly? Could we see that rate next year if you decide to go ahead, if you decide that the underground will allow that to continue long term?

Dr. Mark Bristow

I think even if we could sign off on 200,000 tons consistently out of the underground and the schedules show the buildup would support that, we could at any time step on the gas from the open pit. But you don't want to step on the gas on the open pit and then run out of ore because you haven't got the buildup in the underground. So, the indications are Patrick that we should do 220 through the hard circuit which is 10% above our current plans, comfortably.

You know we might well get higher because just to explain to everyone, currently we're not running the twin stream. We're running one belt with the series and we're achieving 250. when we bring in the hand rock we commission both stages, both streams and we run the three stages of crushing and the mules in parallel.

So we're certainly expecting to do better than design and we need to see exactly how that settles down. That will also govern our decision. That we should see early in the next quarter.

Patrick Chidley - BJM

Right, but you wouldn't need to wait for the underground production to actually begin?

Dr. Mark Bristow

No, no, no, we've made that decision. At this stage we are very comfortable on the 200,000 ton a month profile. We've staggered the Loulo 0 yearly build up because Yalea is a lot bigger than our original feasibility. If we wanted to we could bring Loulo a little forward and increase the build up in the underground ore feed, because we're consuming the open pit.

Patrick Chidley - BJM

But you could actually put more trucks coming through out of the open pit?

Dr. Mark Bristow

Of course we made that decision. We'll start implementing it at the end of the year.

Patrick Chidley - BJM

Okay then, so that's potentially a big boost in earnings next year and onwards?

Dr. Mark Bristow

Yes.

Patrick Chidley - BJM

I just wanted to ask about the nature of this Loulo intersection you've got there, Loulo 0, 23 meters, 8lb per ton.

Dr. Mark Bristow

I'll tell you about it. If you've been to the site, Loulo's got a couple of flexures in it, in the main ore body that we've drilled out and you'll see there's folds of hard grade material. In fact we've drilled a deep hole that's aimed to test just one of those folds at depth. So we're busy with that now.

The big intersection is certainly a duplicated reef, it's the folded ore body of 22 meters of consistent mineralization. We've now got to understand exactly the structure around it. We'll drill it out.

So what's exciting for us is this is a potentially another one of these phases that we see regularly in the known area that we've drilled out. If you go to the northern one, the one that's 300 meters north, or 250 meters north, the interesting thing there is that the intersections nearer surface have been very poor in formalization. You can see the whole body, but it's not formalized and the grades are low. This intersection is much more tourmaline, very significant sulfides and it's high grade.

So again, as we saw in Yalea, there are phases and you can't write off an area because you get one low grade and I think that's the real attraction here. The thing about Loulo, awhile back I think it was two years I said, the thing about Loulo is its structure, you just get on the structure and you walk down and drill a couple of holes.

What we've learnt here is you have to drill these structures. As soon as you get a structure that's got gold mineralization, even if it's one or two grams, it's important to get some holes in and you can't just drill one hole. So we've got Loulo 1, Loulo 2, Loulo 3. We've got 40 odd targets and we've systematically been working through those. P64 is part of our ones that are really split up, but there are others that have very good intersections. Loulo 3, for instance, has got some very good intersections and we've drilled a couple of holes there, but we really haven't gone and exhausted it. So we're not short on targets.

Patrick Chidley - BJM

The last question relates to one of those targets, Faraba reports another pretty good bunch of holes that show wide width of mineralization. Are these in-fill holes or are these on the same lines that you had previously?

Dr. Mark Bristow

They were just deeper holes, Patrick, and we've got a big gap which we're busy doing a ramp program across. You can see it on the diagram. And then we've finished I think two of the four diamond holes. No, we finished three. The one hole has intersected a fault. The other two have intersected mineralization. We haven't got the results back from that.

As we said last time, we've got a frame now, a decent frame. We are busy now, we wanted to put the diamond holes in to understand because they're all RAB up to now. Understand what we're dealing with and then we will go in and really up the ante and do a bit more drilling.

We have the same with P64. It's producing some very interesting numbers. It's very complex structurally. We had a gap in the structure. We've drilled a bore hole. Certainly I think we believe that it's explaining the interpretation better.

We've got to finish off on that initial diamond hole and then we'll re-look at it and I'm sure we'll have some more information to share with you guys next time we talk.

Patrick Chidley - BJM

Do you think these two will potentially be in a resource category by the end of the year? Difficult to say?

Dr. Mark Bristow

I guess if we were listed in Toronto they might well be. But as you know we’re not too big on that sort of thing. We don't like to have to take things off the table. I think if they got their mind around the structure and we were happy with the framework, then we would start telling you that.

We've certainly given you an indication that -- the big thing that will make Foraba work is if we're constantly getting this higher grade zones in the big wide zones. It makes a big difference to the economics and we need quite a few more holes to give us that comfort.

On P64, it's a very different ore body. It's got very rich and it's got a big iron phase in it. It's very magnetic. We actually got to do an magnetic survey over it, just to try and understand it. But it's very magnetic and that hopefully will help us unravel the structure.

And we've got others. We announced a bore holes north east of Yalea last quarter, which is also on a sort of horse tail structure and we've been following that up with some trenching. I think if we wanted to come and give you lots examples of good intersections as you see in our exploration slides, there are lots of those.

The big challenge is you got to get it together and we pride ourselves in the fact that even when the market -- we come out and said look we've got a mine at Loulo, the best undeveloped project and we had a few eyebrows raised, we were able to deliver on it. We're pretty serious in keeping that.

Right now I think the question that Steve and Vic answered is key to us. That is, all the prospecting in the world is not going to develop extra profits from the current gold price. What we're investing in is our exploration programs the future. The benefits of the current gold price is to get the expansion decision made and get our operations running properly and keep our costs down; we have two different focuses.

Patrick Chidley - BJM

Great, okay, well thanks very much Mark.

Operator

Our next question comes from Howie Flinker of Flinker and Company.

Howie Flinker - Flinker & Company

Hi Mark.

Dr. Mark Bristow

Hi Howie.

Howie Flinker - Flinker & Company

First it should be said that Morila would not be operating at proper capacity without you guys. You've done it at the same time as you've tried to chase down a bankrupt supplier; two difficult jobs.

Dr. Mark Bristow

Thank you.

Howie Flinker - Flinker & Company

You're welcome. I have two questions. Receivables, are they essentially receivables from the Malian Government and the contractor who stiffed you?

Dr. Mark Bristow

Yes, you've hit it on the nail. $21 million from the Malian Government is VAT refund and fuel duties. We've been working with the Malian Government to have a repayment program and we've recently, because we have started to pay tax, we've actually been able to offset some of that. So we've brought it down this quarter.

The other, the $12 million which we've explained from MBM, and the remainder is really about three days of gold in process, or gold shipment, that we haven't been paid for. The fact that we've got two operations is a little more than when we had one.

Howie Flinker - Flinker & Company

As to the receivables from the Malian Government, can you continue to offset what they owe you against the taxes you owe them?

Roger Williams

Howie, we're working on a written formal agreement with them at the moment and that's exactly the principle we're working on and it looks like we should be able to get something settled this quarter.

Howie Flinker - Flinker & Company

Oh good. And second, I see your cash flow for the quarter approximated $21 million give or take if you add back the non-cash portion of the losses mark to market. Shouldn't that cover all that you need to spend at Loulo even if you expanded starting the end of this year?

Dr. Mark Bristow

Yes. As you see our cash flow improved.

Howie Flinker - Flinker & Company

It did, by about $5 million or so.

Dr. Mark Bristow

We spent $7.5 million on exploration and we spent some of the capital. So we covered our capital requirements plus the MDM stuff, plus we saw added to our kitty. So, we're in good shape, Howie. I think one thing we're very comfortable about is that we are certainly able to cover the underground capital costs and also Tongon. Even if we started Tongon at the end of the year, we are in good shape.

Howie Flinker - Flinker & Company

Well if you started Tongon at the end of the year, you'd probably have to dig in to some of your cash balance would you not?

Dr. Mark Bristow

Yes sure, but we wouldn't go to the market.

Howie Flinker - Flinker & Company

No of course not. That $17 million of additions to property, plant and equipment, does that include that $7 million of exploratory expense?

Dr. Mark Bristow

We expense that.

Howie Flinker - Flinker & Company

Oh yes, I forgot. That's it. Thanks.

Dr. Mark Bristow

Okay.

Operator

Gentlemen we have no further questions would you like to make some closing comments?

Dr. Mark Bristow

Well thank you very much ladies and gentlemen for making the time. As always, we're always at the end of a phone if you'd like to pick up on any specific questions. Rog, I'm sure you've got his details, same with me.

I will be going through Europe. I'm in France tomorrow and Switzerland the day after and then we'll be doing a meeting program in London; and then on to the New York Gold Conference over the week-end and we will be in New York Monday, Tuesday and Wednesday, we're having a lunch. If you want to attend and you're in New York you can give Kathy Duplessier a call or just drop an email to our website and we'll pick up on it. Thanks again for your attendance and speak to you next time.

Operator

Thank you very much Sir. On behalf of Randgold Resources Limited that concludes this afternoon’s conference. Thank you for joining us. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Randgold Resources Ltd. Q1 2006 Earnings Conference Call Transcript (GOLD)
This Transcript
All Transcripts