Seeking Alpha
Value, growth, hedge fund analyst
Profile| Send Message|
( followers)  

Randgold Resources (GOLD) reported strong performance in the fourth quarter of 2013, beating the consensus estimate. The company reported an increase in production of 20% year over year. Randgold's ownership interest in the Kibali mine helped increase the production output. The company owns 45% stake in the Kibali mine located in Congo with the remaining stakes held by AngloGold Ashanti (AU) (45%) and Sokimo (10%). The mine, which was earlier expected to be ready by the end of 2013, was completed ahead of schedule, reporting its first production in the third quarter of 2013. As a result, Randgold's share of gold production from the mine was 39,690 ounces, beating the production target of 30,000 ounces comfortably. Apart from increasing Randgold's production, the Kibali mine will also help reduce the company's overall production cost.

Importantly, the mine reported a total cash cost of $464 per ounce, 26% lower than the company's overall cash cost of $628 per ounce. In 2013, the Kibali mine contributed only around 4% of Randgold's total production. The company expects the mine to produce 550,000 ounces of gold this year, which will increase the company's total production by 247,500 ounces (45% interest). Consequently, the Kibali mine's contribution to Randgold's total production will rise significantly, as seen below:

Company's total production 2013

910,373 ounces

Kibali mine's production

(45% interest)

39,690 ounces

Kibali mine's contribution to total production

4.36%

Company's 2014 production guidance (25%-30% growth)

1,137,966 ounces - 1,183,485 ounces

Kibali mine's expected production (45% interest)

247,500

Kibali mine's contribution to total production

Around 21%

As compared to the company's other mines, the Kibali mine operates at a very low cost structure and will play an important role in the company's future growth.

Mine

2013 cash cost per ounce

Kibali

$464

Loulo-Gounkoto

$704

Morila

$763

Tongon

$828

Considering the Kibali mine's lower production costs and higher contribution to total production in the near future, the mine will help reduce Randgold's overall cash costs, thus improving its profitability. Throughout 2013, the company displayed improving efficiency with a consistent decline in its total cash cost per ounce of gold.

Randgold

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Cash cost per ounce of gold

$841

$795

$662

$628

Further, I expect the company to maintain its operating efficiency over the coming quarters as the Kibali mine achieves full output. This mine will improve the company's cash flow position as output increases. This will allow the company to fund on-going development at the mine. Apart from producing gold from the open-pit mine, Randgold is also conducting underground exploration at Kibali and this could further increase the mine's gold reserves, which currently stand at 11 million ounces.

Why this company is in a better position?

Gold producers remained under pressure last year, as gold posted its first annual price decline in 12 years. The stock prices of all major gold miners declined as gold prices dropped almost 28% in 2013. Gold companies also recorded huge asset impairments as prices fell below long-term price assumptions used by these miners. Recently, Barrick Gold (ABX) changed its reserve price assumption from $1,500 per ounce to $1,100 per ounce, reducing its reserves from 140.2 million ounces at the end of 2012 to 104.1 million ounces at the end of 2013. As a result, the company recorded impairment charges of $12.7 billion in 2013, thereby posting an annual loss of $10.4 billion.

During times when gold prices were at their peak, Barrick increased capital expenditures on high-cost projects. However, some of the company's projects have become uneconomical to mine due to the unexpected fall in gold prices. Consequently, the company was forced to suspend work at its Pascua Lama project. Barrick has already incurred more than $5 billion on the project and is unlikely to resume developmental work until gold prices improve. Moreover, the company will be reducing its output as it shifts focus towards operating low-cost mines.

However, Randgold has followed a conservative policy when it comes to using gold price assumption. The company has been valuing its reserves using a gold price assumption of $1,000 per ounce for the past three years and therefore hasn't recorded any asset impairments. Moreover, it has allowed the company to invest in opportunities that are economical to operate at current price levels. Besides using a low price assumption, Randgold appears to be a better investment considering its debt position. For the year ended 2013, the company reported $2.93 million of debt, which gives it a high degree of financial flexibility. On the other hand, Barrick reported total debt of around $13 billion at the end of 2013. Earlier, Barrick's huge debt forced it to raise $3 billion through equity offering, which led to share dilution. The company operates at an extremely high debt-to-equity ratio of 1.1 compared to Randgold's 0.1.

Conclusion

Randgold's low debt level will allow it to fund exploration projects with better financial flexibility. Further, the company will be looking for acquisitions and joint ventures in the near future. I believe the company has an added advantage considering its debt position. Also, the Kibali mine will be contributing its first full-year production and will definitely help reduce the company's overall cost of production. I recommend a buy on this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Randgold: The Gold Miner To Watch In 2014