Randgold Q2 2006 Earnings Conference Call Transcript (GOLD)

Aug. 7.06 | About: Randgold Resources (GOLD)

Randgold Resources Limited (NASDAQ:GOLD)
Q2 2006 Earnings Conference Call
August 7, 2006, 11 am ET

Executives

Philippe Lietard - Chairman
Mark Bristow - CEO
Roger Williams - Finance Director

Analysts

Victor Flores - HSBC
Patrick Chidley - BJM
Heather Douglas - BMO Capital Markets

Presentation

Operator

Good afternoon and welcome to the Randgold Resources Conference. All participants will be in listen-only mode. There will be an opportunity for you to ask your questions at the end of today’s presentation. [Operator Instructions]

Please note that this conference is being recorded. At this time, I would like to turn the conference over to Philippe Lietard. Please go ahead, sir.

Philippe Lietard - Chairman

Hi, everyone in North America, in Europe and in South Africa. I am Philippe Lietard, Randgold Resources Chairman. And first of all, I want to thank you for joining us again today for our quarterly review. As you will have seen from the results, the half-year to June has been another very good period for Randgold Resources, with the Company reporting substantial advances and improvements on every front of the business.

What makes this performance particularly impressive is that it was achieved in the face of some very difficult circumstances. Chief among these was settling down the new mine at Loulo, while at the same time completing the plan that should have been finished by the contractor some seven months ago. And the way in which the Company took over this unexpected task and completed it successfully is typical of the way Mark and his team addresses new challenges.

Meeting and beating challenges such as these, and there have been many over the years at Randgold Resources, requires people with a high level of skills as well as the will to win. And it is because we understand the importance of people that we continually invest in our future growth. We invest not just only in expansion of our physical assets, but also in the enhancement of our intellectual base. And this is why we have recently appointed as independent Non-Executive Directors to our Board two very eminent international businessmen. Both have a long experience of Board membership and of company governance. In addition, each brings their own specific expertise in management, in finance, in strategic planning, in mining and in Africa.

Norb Cole spent more than 30 years on several continents with the Coca Cola Company and he is now on the Board of a number of US companies. Karl Voltaire spent more than 20 years at the World Bank and at the International Finance Corporation where he oversaw, among other things, the development of a number of major mining projects in Africa. Randgold Resources is indeed fortunate. And as its Chairman I surely feel very fortunate to have these two new independent directors to broaden our Board’s international perspective and to enhance our capacity to deal strategically with technical complex, legal and commercial issues in the countries and markets where we operate.

Having said that, I now would like to hand you over to Mark Bristow, who is standing by to take you through the results. Thank you. Mark?

Mark Bristow - Chief Executive Officer

Thanks, Philippe, and good afternoon and morning, ladies and gentlemen. As I’m sure you have all seen, and if you haven’t it is available on our website, our presentation we made to the analysts in London at midday. And I’m not intending to repeat the full presentation now, but try and take you through some highlights and then give you a chance to ask questions. As I say, the web cast is available on our website.

So, moving then -- and I assume you’ve all got a copy of the presentation. Our highlights, a very good first half-year considering the challenges that we’ve had to get through in Loulo. The team there did an excellent job in keeping production on track and settling the operation. Loulo, for all intents and purposes, is now substantially complete. And I’ll touch on some of the outstanding issues, but none that will affect the throughput in the short term, a good performance from Morila as well.

Exploration had its -- probably its busiest quarter. And looking generally at our operations, we were able to get Ivory Coast. All in all, I think that one would expect in a higher gold price scenario in the first half comparing it to the second half of last year, which is a good reference, our revenue up, profits up, gold production up, and by those sort of numbers that one would expect in a stronger gold market. And that really is the fundamental base on which we set out to build this Company and that is profitability.

If we move to the next slide, highlights for Loulo. As I’ve said, satisfactory quarter. As we commissioned the crusher we had a couple of difficulties in the June month and those rolled on to the July month, as we settled the operation down and dealt with the transitional. The delay in the commissioning of the hard rock crusher took us into the start of the rainy season. So, we had an additional operating environment that we had to deal with.

Having said that, and as I’ve said earlier, the team did extremely well in getting through that. It’s not an easy thing to commission. We originally were going to commission with a good stockpile of oxide high-grade ore to back us up early in the year, and certainly not in the rainy season. We -- as you’ll see in the next slide, we still kept throughput on average for the quarter above design, which I think is a particularly good achievement.

We were able to finish off on the tailings and water storage facilities, which was important, ahead of the rains. And I’m happy to say that we today also announced the appointment of Shaft Sinkers out of South Africa as the subcontractor to support us in our development of the underground mines, both at Yalea and again at Loulo 0. Deep drilling at Loulo 0 also certainly adds to the potential of the underground resources. And I’ll come back to that in a moment.

Just quickly, the operational results for Loulo, they pretty much speak for themselves. Grade slightly down, largely because of lack of choice. The high-grade ore wasn’t all capable of being processed. Towards the end of the quarter we did stockpile a considerable amount of it. We had to very -- try very hard to just stick to the hard rock to get the crushers commissioned. So, we were thus restricted on access of grade, although the grade was there.

Recovery is well maintained considering the stop/start nature of the last three months with the commissioning. Ounces down because of the lower throughput than last quarter, but certainly still above design to 10,000 tons a month average. The operating costs, well contained. This is after, I must point out, accounting adjustments for the stockpiling of some of the high grade ore or the full grade ore out of Loulo, because we just weren’t capable of processing it this quarter, but generally a satisfactory quarter.

Next slide really touches on the Phase 2 expansion, pointing out, and you can see the pictures in the slide if you have the slides, the substantial steelwork that had to be completed. The outstanding work to be done is the completion of the final A-frame around the discharge on the stockpile. This really allows the stockpile to assume a bread loaf shape. At the moment we’ll be building a cone shaped stockpile. But we in our design improved on the Morila design, which allows the stockpile to be built up laterally and gives it more of a large capacity. So, not impacting on throughput immediately, but certainly gives us that security of supply.

And then we’re busy with the CIL expansion, an extra four tanks. Again, not critical for the current process, but something that will help us improve and maintain the recoveries, and particularly when we get into the higher grade sections of the ore body later. Apart from that, it’s just a clean up dealing with the tidying up around and final buttoning and but lift, the trouble-shooting and making sure everything fits and works properly. And, of course, the big focus now shifts to -- shifted to trading.

I’ve spent quite a bit of time on the mine. I’m very, very happy to see how the mine management’s operating team has settled down. We have, over the last two weeks, divided the operating team from the capital team, which will focus on the underground project now, and really let the operating team focus on getting that operation settled down. On to the underground mine; all ready to start. We have the people moving in to site as we speak, with the settling of the shaft sinking. Contract now Kinnerstratum [ph] is on site. We’re busy with the clearing for the box cuts, the first box cuts. And that should happen this quarter with the intention to start sinking in the final quarter of this year.

We have now been able to schedule Yalea. And if you have the presentation, here you’ll see the very detailed scheduling that has taken place. We are very excited about the potential of this underground mine. It certainly contributes significantly to a natural growth in gold production for Loulo going all the way out to 2012.

The next slide takes you to Loulo 0, which is now the focus of our attention with the objective of signing off on this development program -- the underground development program, as we have done with Yalea, and then looking at ways to shorten the life and increase the productivity. Right now we’ve got a scheduled life that takes us out to 2024. We are using -- assuming 100,000 tons out of Yalea underground and 50,000 tons out of Loulo underground that add to the amount. We’ve certainly put in capacity to hoist more than that in Yalea and we intend now to try and reoptimize the Loulo 0 underground project.

The drilling to date, you’ll see, the deeper drilling has come up with some very encouraging results, particularly deeper down below some of the lower grade zones that we had in the shallow regions of the ore body. And it’s also interesting that we’re seeing a [indiscernible] change in part of the ore body as we go at depth, raising the question of what it’s going to look like as we continue. We’ve seen a shift in the structure away from the tourmaline zone and a lot more sulfide and a commensurate increase in grade. So, we have hit some very significant intersections across the whole body, ranging above 10 grams a ton. So, we’re pretty excited about that.

Just to finish off, and I don’t touch on it anywhere else, you know we had that high grade intersection in the south at 22-odd grams south of the pit in Loulo 0. We have drilled a number of holes going south. We certainly confirmed the presence of the mineralized structure but not been able to duplicate any high grade intersections. We’ve drilled the holes quite deep. We’ve still got to settle a bit on the shallower portion, but certainly it does reinforce that that target is certainly a target that we need to continue to look at depth as we drill out Loulo.

That’s really Loulo as far as the project goes. As I’ve said, the challenge now is to get the mine settled to deliver on our 250,000 ounces forecast. And that’s a tough call. But with a bit of planning I think we -- that’s still reachable. And then really get the optimization settled. I think we can get to 220,000 tons a month just on good efficiencies. The team seems to believe and has set itself a target over the next couple of years to lift the throughput to 250,000 tons a month with what we’ve got. We have an option to go to 300,000 tons a month with some extra crushing capacity. And the big question is the ore bodies and their ability to deliver enough to feed a plant like that. And that’s all the focus -- where the focus is going to be on our new business and capital projects team, while the mine operating team focuses on delivering on the budget.

Morila, moving to Morila, a solid operational performance, the same as last quarter, slightly better cost management. I think a very aggressive drilling period but so far no ore body. A lot of technical success and we’ve just suspended the drilling program for a while the geologists catch up with all the data that they’ve collected over the last couple of months.

I think the very encouraging thing out of Morila is to see the metallurgical team and how they’ve managed to really improve the recoveries despite the drop in grade. That’s over the page on results. And also, their cost control management has been impressive. We’ve got a long way to do the same in the mining department and that’s our next big focus, along with our partners AngloGold and Ashanti.

So, good set of results, nice and consistent, slightly better grades, slightly lower throughput, largely because of a big [indiscernible] line. Recovery is encouragingly well maintained, considering that we did come off on the grade from last year. Cash operating costs, total cash costs are in good shape.

And I think the point I would highlight here is that going forward we are stockpiling ore at Morila. We’ve got a large provision against stockpiles on the balance sheet. The intention is that we want to -- unless we find any more reserves that we can mine from open cast, we want to complete the mining by late 2008/early 2009. And so we are building stockpile and it’s critical that the mine manages that stockpile and we do have those grades and tonnages that we are putting on the stockpile available to us when we start processing those stockpiles in 2009.

Another project that we talked about last quarter and we’ve made good progress on is the Tongon project in the Cote d’Ivoire. We’re now back in the country and during the past quarter I visited our Tongon project with a high level delegation, which had the blessing of the President. And we were accompanied by the now Minister of State and the Head of the New Forces, along with representatives from the Ministry of Defense -- the Government Ministry of Defense, Ministry of Mines and the Governor of the North to the site. It was very encouraging for us to see the commitment on both sides towards the mining industry and particularly to our project. And we had a day of speeches and visitation. And the thing that impressed me most was that at no stage did any of either party exploit the event politically and it was very much a focus on this project.

Really we’ve always said that we don’t want to develop mines in -- where we have to have our own private armies. And I’m again happy to say that so far we haven’t had to do that and the boys are still working at Tongon trying to -- desperately to complete this 10-hole tactical drilling program, although the rains have started there. Whatever happens, we should finish that before the year end. And at this stage with -- providing that the political process continues as it is, we see ourselves starting up the detailed feasibility drilling in January; we are out to tender for that program. It’s a big program, 35,000 meters of drilling.

The next slide is just a summary explaining what we’re doing with this program. And really what we are doing is that we only drilled to 150 meters in Tongon South and a lot shallower at Tongon North. And we -- these 10 holes are designed on two of these -- on both projects to take us down to some depth, so that we have a coat hanger on which to design the detailed drilling program, and to date no surprises.

Moving now to -- leaving the projects and the mines, to our exploration review. Really our focus here, and I think it’s evident, and we’ve put in a couple of slides to demonstrate that our job is we are hunting down those projects that fit our criteria. We are committed to turning over ground that isn’t prospective and we have been able to do that quite successfully. And we’ve really -- probably had the busiest quarter, certainly the busiest six months that we’ve had in the history of our Company.

We’ve acquired -- and I’ll just -- if you just go through the slides, we’ve -- on a global basis we’ve acquired 10 new permits across our portfolio. We’ve dropped seven and we’ve got six new ones under application, and that keeps the flow of projects. We’ve, over the last six months, been drilling at six projects in four countries, and we now have 168 defined targets on 65 permits covering 20,000 square kilometers out of the six countries.

The West African field season is now in recess and -- because of the rains. But we are about to start with the -- our work in Tanzania as it dries up. And so the next three months will be spent evaluating all the data and preparing for the next round of exploration programs in the respective countries.

If I try and step you through the key projects, Loulo remains our most prospective in our portfolio and the focus has really been, and will remain, on the immediate satellites around the Loulo 0 Yalea deposits. And then, of course, as we discussed last time, we’ve been focusing some of the bigger, more significant targets that we have, Baboto South being one of them, which is in the north of the lease area. We now have finished the surface work. We’ve trenched the structure over 1.3 kilometers that averages 24 meters in width and its grade is between 1 and 2 grams, averaging about 1.5. We’re now going to investigate the depth extent of the structure and having seen how Loulo and Yalea have thrown up numbers, we’re pretty excited about what that can produce.

Down in the south, continuing with Faraba and P64. You’ll see that we have managed to get a couple of holes into both those projects. We’re still -- we have right at the end finished some RC drilling at Faraba. And we haven’t quite been able to complete the infill drilling in the gap area between Faraba North and South. That will have to happen in the next season. It’s because of just availability of rigs and we moved the diamond rig into Loulo, particularly to chase that southern extension for a while. And some of the RC rigs arrived late, both in Loulo and in Senegal, so it delayed some of our program.

P64, however, did produce some good numbers. And P64 is quite a complex structure. We’re slowly unraveling that. We’ve drilled the first two holes. We’ve got a couple more to do to test the fold nature of this ore body and we’ve got to do it step by step.

On Faraba, as I say, it’s just a matter of drilling. We’ve done a lot of trenching. I think we’ve identified the targets and related the different stratigraphic positions across the gap. The gap is really an alluvial value that separates two continuously mineralized structures and we need to go under that and try and find it and see if it continues. By all accounts, it does look as though it does continue, but we’re waiting for that opportunity to drill it through.

Further to the south at Boulandissou and Sinsinko, again some encouraging results out of two reconnaissance holes. And particularly in Sinsinko we had holes below a very interesting structure with not a lot of grade, but came back with some very significant intersections.

So, again, I think reinforcing the mineralization, the opportunity in the region and we’re not short of targets. In fact, the Board has approved an additional budget to be spent on the Loulo exploration program, it’s about $1.8 million, to allow us to continue both with the development drilling, or the extension drilling at Loulo 0, and pursuing some of these targets I’ve just talked about now.

If I then move on to the Morila region, really Morila we’ve completed the program we set out to do for this half of the year. We’re now going to wait and target that to the results of the brainstorming session out of Morila, which is it got a very aggressive and much deeper drilling program. And then we will reassess it and go back and see what the next step is that we’re going to effect on this package.

The challenge here is really looking for that hidden ore body. And it’s not an easy task but we are -- we believe that, given the cash that Morila’s thrown off, the fact that it’s such a big project and, more importantly, that we are seeing a low grade halo extend far away from the main ore body that we think it’s definitely worth a continuation of this program in some form or another. And that’s what we’re really debating in our minds, exactly what form will the next phase take.

Senegal, more of the same. We are two down on the seven that we set ourselves to drill out -- as targets to drill out this year. We have four already defined and three more to come.

Mansa we’ve now rejected. We did a couple of follow-up drillings, couldn’t confirm the mineralization at depth and we have now rejected that target.

Delya is a new target, a very interesting target, high grade. We’ve now defined the trenching over a kilometer -- just over a kilometer, in fact. And it looks interesting. It averages about 10 meters, 10 grams, thereabouts, eight to 10 meters, eight to 10 grams. And we’ve done a couple of holes now, two results back. One average and the other one confirming that high grade over a reasonable -- so -- but that’s early days and we’ve got quite a bit still to do as far as drilling goes. Then the next two drill targets that are already on the second phase drilling of Sofia and Bambaraya. And that will happen as soon as we get back in the field. And then we will be progressing some of the other targets to a drill target phase as we go. We’ve also got a big RAB drilling program planned to choose some of these targets that go undercover of the [indiscernible]. Again, that drill rig arrived late and that’s been postponed until after the rains.

Burkina Faso, we completed everything we set out to do. We’ve now finished the first phase exploration on all the permits. That’s the soil geochem surveys, along with ground mapping and geophysical interpretations. And we’ve started the drilling program, started with the RAB program and the Kiaka permit, which has extended the original Kiaka target by a couple of hundred meters. And we’ve just finished an RC drilling program where we drilled under those trenches. They are trenches running at about 100 meters with just over 1 gram of mineralization consistently. So, above target and again early days, but at least we’ve got the drill rigs exploring beneath the surface target.

Ivory Coast, our fieldwork hasn’t only been confined to the Tongon project. We have two new projects going to start, Appouasso, which is on the southern extension of the Sefwi Belt in Ghana. And on the -- that’s the same belt as the Newmont Ahafo project, which we’ve started. And we’ve got another one, Dignago on -- in the west -- south west of the project. And both those permits we are currently busy with, or have just completed, soil surveys across them. And again, we hope that we’ll be able to develop targets from that work for the next field season.

Ghana, again, it’s the earliest phase of our resource triangle. Our focus is to produce not only by new targets for the base of our resource triangle. Again, we’re just about complete on the first phase exploration coverage of this ground. And, in fact, in the JV with Central Goldfields we’re a little bit more advanced than that. We’ve already generated some follow-up targets.

And then finally, Tanzania, the -- our two main focuses in Tanzania are the area between the old -- two old colonial mines. Kiabakari Buhemba is a focus of ours, and particularly the Kiabakari project. We’ve recently acquired it. It’s an old colonial mine that produced some high grade gold from a deep structure on the edge of a granite. We’ve subsequently done some stratigraphic style drilling well into the foot wall and we’ve certainly intersected gold mineralization in other structures sub parallel to the main structure that was mined.

And we have -- we’re really excited about this target. It’s certainly opened up the target as far as a bigger prospect. And we’re now moving a full camp on to this site and we’ll be developing some surface ground treating first and then get back into a second phase of drilling as soon as we can. The second area that we’re focused on is the extensions of the two main regional structures east of the North Mara mine, where both structures host economic deposits being mined by the North Mara mine. And we have a joint venture with Barrick on some of the ground to the east and we have our own permits as well. And we are pursuing both the structures that we’ve identified on surface, as well as targets developed from geophysical investigations.

Again, that’s going to probably be pushed back a little while because I believe that we should be focusing on Kiabakari. And we've got a couple of other interesting prospects that we're pursuing in Tanzania and not least of which is a new bit of ground in this shaft, which is the newly identified Singida Dodoma greenstone belt, and we've got four permits there under a joint venture with Barrick as well.

Then finally just finishing off with the numbers and, as normal, a few slides just to create some debate. Numbers I guess are most encouraging and nice to be able to present these numbers, as they certainly tell a pretty compelling story. Again, as I started out on this talk, revenue up, profit up from mining, profit from operations up and so on. And we were able to keep quarter on quarter fairly steady. And I think the other thing is we see the impact of us having more than one operation. On the bottom line we're still in line with our heads-up to the market on costs. We're still intact as far as our 400,000 ounces production goes for the year. And that's largely because we've -- although we've slipped a bit on Loulo, we've been able to catch up on Marila.

So we're well set to get to the end of the year in line with our target. In fact, with a little bit of luck, we should be able to beat our 400,000 ounces, heads-up. I think the other thing is -- a very important thing is the profitability of our business. Last year at this time we had a cash of US$56 million. We've raised US$10 million and since then we still have US$151m, despite the capital spending of project finance repayments at Loulo. That's because of the strong cash flow generated by our operations and so that's encouraging to see the business performing as a business.

Finally then, ladies and gentlemen, a couple of slides. The first one is, as I've often said before and as our record shows, we at Randgold Resources are really committed to being a return-driven business and to the creation of value. And we have an interesting way of measuring value and its returns. It shows the market capitalization against earnings per share, per share price of the respective peer group companies, or ones that we identify as peers, and compares us with them. And what is clear is that Randgold Resources still sets itself apart from its peers as having more upside value when considering its profitability versus market cap. And that's something we as a team continue to strive to communicate to the market and reinforce that gap and promote it.

The next slide, again what our record also shows is we've grown up and, again, we see that now in being able to manage a difficult situation. It's not the first, and I'm sure it won't be the last, difficult situation we face as a management team. But we are a fully integrated business, which allows us to be able to deal with these issues. We've been able to invest not only in our future but people who can properly manage these challenges. And we believe we're capable of sustaining profit generation at the upper end of our peer group and certainly now we can plan for the next 10 years and beyond. And, as the previous slide indicates, that is really not yet, we believe, fully reflected in our market rating. And this is borne out again by analysts’ indicated target share price, which is shown on this graph, even though our share price has enjoyed a steady improvement over a considerable period now.

And finally, something that is -- I put into the slide presentation not only to inform the market but also to remind my management team that costs is something that we all need to focus on. It's something that often gets lost when the gold price is high and we've always consistently said we want to be profitable and that means we have to protect our margins. And the industry at large, and certainly companies like us who are located in remote places, are under cost pressure and it requires constant attention from management. And we can assure you that that's right in the front of our minds everyday when we wake up.

Ladies and gentlemen, that's pretty much the story. Again, we'd be delighted to take any questions, if you have any, so we'll pass you back to Dylan.

Question-and-Answer-Session

Operator

[Operator Instructions] Our first question comes from Victor Flores of HSBC. Please go ahead, sir.

Victor Flores - HSBC

Yes, good morning, Mark. Could you give us a bit more sense of what the variables are with respect to achieving the 250,000 ounces at Loulo for this year? You talked about it being tough but achievable. You also talked about getting the plant up to 220,000 tons a month. So it sounds like the variable missing there is to what extent you can show a bit of improvement in grade during the second half to get to that target. Is that roughly correct?

Mark Bristow

I think we're pretty comfortable that we can get the 3.2 grams, up at that level. It will be nice if we get a little bit more. And it's possible, Victor. It's really how quickly we settle and get our minds around the dilution in Loulo 0. I think all those parameters balance out. One thing is that we are seeing better throughputs in the operation. We certainly get more value than most at about 8,000 tons a day and of course you have your days when you don't get them. So the 220,000 tons, it's going to probably take a bit of a time before that's steadily achievable but it's certainly an achievable target. The grades, with that you put pressure on the mining, so we don't have much in the way of stockpiles apart from this last month. We built a bit of a stockpile but we're still going to be -- and we will continue to build the large stockpile in the operation. So we don't have a lot of flexibility to pick and choose and I think we've never been a company that tries to influence or selectively mine out of an ore body. It eventually comes back to bite you. I think really, when I say it's achievable, the mine is forecasting to get there. As I said, we saw a run over into July on production interruptions. It certainly came a lot better than June by the end of July and our July month as well. And so if they get back up to the 60-plus thousand ounces a quarter, we'll be in good shape.

Victor Flores - HSBC

Great, thanks. The second question goes to exploration expenditure for this year. What is the new revised total exploration budget for 2006?

Mark Bristow

Our total exploration budget, with corporate included, it was originally around 22 and it will probably be about 24.

Victor Flores - HSBC

Great, thanks. And then just one final quick question on Loulo 0 and the underground drilling that you've done and showed in the slide in the presentation. Is any of this in the resource base or is it…

Mark Bristow

No, Victor, no. It's -- you see what we're doing now is running the risk of repeating what we did at Yalea. If you look at the slide, there's a color, a shaded color pink, which is the resource base. So any drill holes outside of that pink shade will be outside the wire frame.

Victor Flores - HSBC

Okay, excellent. Thank you very much, Mark.

Mark Bristow

Thanks.

Operator: Thank you. Our next question comes from Patrick Chidley of BJM. Please go ahead, sir.

Patrick Chidley - BJM

Hello, Mark. Congratulations on a great quarter again. Nice steady numbers there. I'd like to ask a question about costs at -- in Mali in terms of how is the increased price of fuel affecting the overall costs? And has there been some new route that you're using to alleviate those costs or has it gone the other way or -- and is there a temporary situation there?

Mark Bristow

Patrick, good day. The -- we have had an ongoing crisis in Senegal where we -- where Loulo gets its fuel from, with a stand-off between the major fuel companies or oil companies that run the refinery and the government. And we've, from time to time, been forced to truck fuel from Pogo and Benin, which is where we're getting it for Marila. And that's added some costs on, and particularly trucking costs, and that's the big challenge in West Africa. It's not only are we dealing with high fuel costs but we have this extra trucking cost. So that has impacted on this quarter's results and it will come off a little bit. But we -- I think the key thing is that we not only -- we burn fuel to get the fuel to site. We are managing it. We are looking at a lot of things, as we settle the operation down we move from capital phase to our operating phase, the whole control of fuel, the -- we now have some operating history on the generate -- power generating set-up there, so we're starting to work on that. Dispensing and managing, the fuel dispensing is critical. It's a hot commodity. It's the easiest commodity to steal in -- throughout the supply chain. So it's something that we believe we can improve on. We also are looking at heavy fuel alternatives, both at Marila and at Loulo. That comes as this other added environmental challenges and equipment challenges to be able to transport it but we are looking at it. On face value it always looks attractive; it’s making sure that we have security of supply. AngloGold is using heavy fuel in Guinea, so there are some examples, and they're also using heavy fuel in Gator. And so -- and we're now going to be expanding the power plant at Loulo with some medium speed engines to support the expansions in underground requirements. So we're managing it. I think our fuel cost share is 20% of costs. Rog, do you want to comment?

Roger Williams

Yes, it's about 20% of costs. And, as Mark said, I think just to add to that you -- your underlying oil prices actually are a relatively small portion of your landed costs, if you like. So, for example, if it's $50 an ounce but it costs you -- only $20 of that really relates to fuel price and the rest is taxes, logistics and refining margins. Whilst we can't do a lot about refining margins, we can work on the other things and, in particular, how you manage the logistics and how you actually structure your power plant in the first place. And that the -- for example, the generators at Marila are already capable of taking heavy fuel oil, so it's an opportunity for us which we're looking at.

Patrick Chidley - BJM

And at Loulo, being as last quarter was affected by this extra transport cost for fuel, would you see, if that position was resolved -- situation was resolved, would there be a dollar per ounce figure that you could give that you're saving or….

Mark Bristow

Patrick, it's a little bit of a moving target because, as we get the crushers up full tilt, they are consuming power as well. So I think we'll certainly take some power away with the mobile crushing or some fuel consumption in the mobile crushing circuit once we decommission that, but I'm not sure that it's that visible. It might be $1 an ounce, $2 an ounce.

Patrick Chidley - BJM

Okay. And then a second question, just on geology at Loulo 0. I think you mentioned briefly that the nature of the ore body is changing at depth. This latest big drilling seems to be less of the brittle fracture tourmalinization ore body and more of the sulfuritic sort of stuff, which would look -- would it not look a bit more like Yalea or --?

Mark Bristow

Yes, that’s true. It's just -- we've just -- we’ve gone back to some of the -- on the one side of the ore body, on the southern side, there are a couple of the deeper, so 300 meter, holes that had this one meter massive sulfide zone in it. And now we've extended that as we've gone deeper and it's extended further to the north. So there’s definitely a facia change. We believe that the structure's also moved away from where it was higher up, shallow areas. It's a little early at this stage but we've certainly got a handful of bore holes with this very high grade -- if you see the one intersection that’s 9 meters, that's 4.5, but there's a 1.8 meter, 18 grams, that's a different unit which is very specific, a sulfide-rich unit that you can extract. And a couple of the other high grade holes, the LOCP 83 has also got that very high sulfide zone. So it's a bit early to tell but there's definitely something changing at depth and we -- and it does look a lot more like Yalea when you get that high grade.

Patrick Chidley - BJM

And what about the true thicknesses? Some of these thicknesses look pretty good but we know the ore body does tend to wander a little bit in terms of changes in depth and strike attitude.

Mark Bristow

Yes, these are true thicknesses that you see there, or just as close as we can get to true thicknesses because of the way we drill the holes. But the interesting thing is that there are -- these shallower -- these thinner intersections, Loulo's never been a thick ore body, we've always said it lends itself to underground mining. But with the slightly thinner, four, five meters, that high double-digit growth is very attractive for underground mining, so we're no longer looking for super-wide ore bodies at these depths.

Patrick Chidley - BJM

Okay, great. Thanks very much.

Operator

[Operator Instructions]

Our next question comes from Heather Douglas of BMO Capital Markets. Please go ahead.

Heather Douglas - BMO Capital Markets

Hi, good afternoon. I think you touched on this a bit at the beginning of the call, but can you give us more of an idea of what you're thinking about expanding the plant at Loulo to over 300,000 tons per month? So what’s the timing for any decision and what is the possible capital?

Mark Bristow

Heather, hi. I think just let me try and put it in perspective, because these things can run away with one. Currently, as we've got it, with 100,000 tons feed out of Yalea and 50,000 tons a month feed out of Loulo and the rest coming from open cast ore, we peak at 500,000 ounces a year at 2012, which is very significant for us. That on its own is important. What we want to do now is, first of all, we want to bed the plant down. We really believe that there is a more than even chance that we can get the plant up and running at the 250,000 ton a month rate just on efficiencies, just on bedding it down and getting everyone aligned operationally. The move to 300,000 tons a month is a simple exercise. Its capital cost is between $8 million and $15 million, depending on exactly what you do, whether you add a bank to the primary, second and tertiary crushers that we've got or whether you add a core tertiary crushing circuit. So those -- and we've already done the basic scoping studies on that. The big challenge is being able to feed that extra 50,000 tons a month. Now, that can come -- we have installed capacity, extraction capacity at Yalea of 200,000 tons a month, gulf capacity to get it out. The challenge is whether you can build and maintain the face length and the underground mine to support more than 100,000 tons a month. And we just feel that, at this stage, 100,000 tons is very good, and as we get down and we get the mining team together, we'll become more comfortable in pushing that. On Loulo, with these extra grades it's probably -- and we're busy with that work now. As soon as we've finished the drilling, we'll revisit the Loulo 0 underground schedule and see whether we can't lift that production, because we can afford to put a more advanced infrastructure in there with extra grade at depth. And that has another added opportunity. And then of course these exploration permits that we've got, if we could land 1m ounces anywhere in the permit within trucking distance, either by grade or by distance kilometers, it would change our thinking and we'll immediately launch that expansion. So that's the way we're running it at the moment. And the other side of that coin is to develop -- to try and shorten the life, so that's another story. And that is a balance of how much more infrastructure do we need to be able to mine Loulo and Yalea at a more rapid rate to bring a lot of those ounces forward because, again, it's all grade driven. And when we look out to 2012, by that stage with our schedule at Tongon coming in, we bring Tongon in at the back end of 2010, Marila's dropped off in our program and so that whole expansion or bringing the production forward at Yalea is attractive. But right now, as we speak, we grow ounces just in Loulo alone up to 500,000 ounces up to 2012 in nearly a straight line. And it's really just a measure of the -- as the underground starts dominating the ore feed in the plant.

Heather Douglas - BMO Capital Markets

Can I ask a follow-up?

Mark Bristow

Sure.

Heather Douglas - BMO Capital Markets

You mentioned about the Loulo exploration permits. Which of the products that you're now drilling are likely to make it into any resource by year-end?

Mark Bristow

Well, definitely the Loulo underground -- 0 underground. By the way, it's worth noting, if everyone's still on the line, that we're really looking at changing the Loulo 0 ore body name to stop the confusion between Loulo the mine and Loulo 0 and Yalea. We're running a bit of a competition and hopefully when we speak to you next we'll have a new name for this deposit. But that definitely will come into reserves because we'll update the feasibility study and be able to convert that. The next one, Yalea -- I mean Baboto, if it stacks up, can come into resources quite quickly because we have a very consistent surface continuity, albeit at lower grade but it has got width and it is not far from the plant. Faraba, if we can connect the two, again, as you see, we've got good intersections. We've just got to confirm the continuity across the river floor. P64 is a difficult one. The next three holes might unravel the structure and we'll be ready to roll. And we've got the others, the Loulo ones and twos and threes and we've got to string all those little stars there that we've still got to get round to, so -- but I think I'm pretty sure that we can see that as we deliver on the underground plan we will see more reserves coming out of that.

Heather Douglas - BMO Capital Markets

Okay, thank you.

Operator: Our final question comes from Howard Flinker of Flinker & Company. Please go ahead, sir.

Howard Flinker - Flinker & Company

Hello, Mark. I have two questions for you. One relates to the inventories, which seem to have risen immensely from last year. Are you stockpiling extra fuel or something like that?

Mark Bristow

Howard, let me pass you on to Rog Williams.

Roger Williams

The inventory value, the growth mainly relates to Marila, where we are stockpiling ore. We finished the mining -- to get the maximum efficiencies out of the mining equipment, we finish mining at the end of 2008, early 2009, and then after that we will process the stockpiles which are lower grade. So we’re busy building up inventories there. And of course you've got the addition of Loulo, if you're looking at year on year.

Howard Flinker - Flinker & Company

Great. And the second question is, is the functional currency in West Africa the French franc or some French West African franc tied to the French franc?

Mark Bristow

Yes, the French West African franc tied to the euro, or tied to the French franc, which is tied to the euro.

Roger Williams

It's 656 to the euro.

Howard Flinker - Flinker & Company

Oh, I see. Okay, thank you.

Operator: Gentlemen, we have no further questions. Would you like to make some closing comments?

Mark Bristow

Dylan, thank you very much, everyone. And, again, if there's anyone who would like to ask any questions, we'll be switching our phones on straight after this call. It's -- you've got my phones and our London office number is country code 44, 207 557 7730. I'll repeat that - country code 44, 207 557 7730. Otherwise we'll see you through the quarter. Cheers.

Operator

On behalf of Randgold Resources, that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.

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