Randgold Disappoints In Q2 But Full Year Figures Still On Track

| About: Randgold Resources (GOLD)


Randgold Resources (GOLD) has reported disappointing Q2 results and its stock took a knee-jerk knock despite it remaining decently profitable.

The problems that caused the Q2 disappointment were technical in nature and have been, or are in the process of being, resolved.

Despite the poor Q2 figures GOLD has retained its annual guidance to produce 1.25-1.3 million ounces this year at Total Cash Costs of between $590-630 an ounce.

Perhaps we should have anticipated some kind of hiccup in its Q2 production, revenue and earnings figures from Randgold Resources (NASDAQ:GOLD), given that some of the technical difficulties it had been experiencing at two of its mines had been highlighted in the regular pre-quarterly results statements on individual operations from company CEO and founder, Mark Bristow, last month. But the impact of these problems was perhaps rather greater than expected. Indeed the stock dropped like a stone when the results were announced yesterday morning in London - down over 10% in something of a knee-jerk reaction, before recovering around half of that in trading through the day in London and New York.

But despite having the toughest quarter it had seen for some time, as CEO Mark Bristow put it, GOLD remains one of the most attractive gold mining stocks out there. Despite its 'tough' quarter, it remained decently profitable and the stock price reaction was largely a reaction to its track record which has been far better than that of its peers over the years. In short the results were poor for GOLD, but still pretty positive for the sector. Indeed year on year it made something of a profit improvement, but earnings were down quarter on quarter and, as we pointed out in an article published here a couple of days ago, in these times of rising gold prices it is perhaps the quarter on quarter figures which should be the best guide see: Gold And Silver Stock Ideas For The Remainder Of 2016.

The takeaway from the Q2 figures is that mining is a risky business with even the best run operations tending to suffer occasional technical hiccups. Given the extreme short term decisions so often taken by investors, such hiccups can often provide excellent buying opportunities providing belief in management is such that one is well assured that the problems can be overcome. And we feel yesterday's downturn, and partial recovery, made for a strong buying opportunity here when one looks at the gold miner's underlying profit performance longer term and its balance sheet, which puts that of most other top gold miners in the shade.

Thus, despite the technical problems, which are temporary in nature, GOLD is not changing its guidance for the full year of gold production of 1.25 - 1.3 million ounces at Total Cash Costs (Bristow doesn't believe AISC is an appropriate metric for a company like Randgold) of $590-630 an ounce and capital expenditures totaling $240 million, much of which will be on bringing Kibali underground towards full production. The full year production target is going to be difficult to achieve, but GOLD should get close barring any other major technical difficulties arising.

GOLD has always been insistent in not building a new mine unless it sees what it describes as a world class deposit in size terms which is capable of providing a decent rate of return at a $1,000 gold price. As a result it has built a balance sheet showing no debt and a surplus heading for $500 million by the end of this year if a $1,350 gold price continues to be achieved. Compare that with most of its huge debt-saddled peers among the plus 1 million ounce per year gold mining companies. Indeed, GOLD could even be heading for a $1 billion balance sheet surplus by the end of next year if the gold price holds up, and if it doesn't decide to do anything else with this surplus in the meantime - like increase dividends to shareholders. Bristow, yesterday, told a meeting of analysts and media in London in his regular quarterly results presentation, that a $500 million balance sheet surplus was his personal target for putting the company on what is perhaps the soundest footing of any major gold miner, and once that level has been exceeded then the company would review what to do with additional surpluses. He didn't like having a 'lazy balance sheet'. And he appeared, as a major shareholder himself, to be an advocate of further increasing dividends. (The company already has been maintaining a progressive dividend policy).

Anyway, coming back to the latest quarterly figures, gold production at the Tongon mine in Cote d'Ivoire was severely impacted by an extended 46 day partial concentrator shutdown due to a failure in one of the milling circuits the result of a 'comedy of errors' by repair technicians as Bristow put it at yesterday's meeting. Apparently the problem is now fixed and the affected milling circuit running smoothly.

Tongon seems to go from problem to problem, but nevertheless still produces a substantial amount of gold - some 50,391 ounces in Q2. It just never seems to quite reach its production targets. Even so it is still a decently profitable operation - just not as profitable as GOLD would like. It is a major gold mine in its own right anyway and, as Bristow pointed out it came into production during a civil war in Cote d'Ivoire when the gold price was in the $400s, but has since repaid all its capital costs despite its successive technical misfortunes. It has also seen mine life expanded by several years from its original projection and brownfields exploration is likely to see further life extensions. Its latest technical difficulties were finally fixed in July, so there will still be an impact on Q3 figures but overall GOLD anticipates full annual production there to reach 260,000 ounces. Its H1 gold output was 104,513 ounces so a considerable uptick is now anticipated over the remainder of the year (which could be tough to achieve.).

The other major adverse impact on Q2 earnings came from reduced recoveries at the 45% owned Kibali mine in the DRC (AngloGold Ashanti (NYSE:AU) also owns 45% and DRC parastatal SOKIMO the balance. Randgold is the mine operator) were primarily due to transition to milling a mixed ore feed as ore from the new underground section is brought into the milling process. Recoveries should improve over time as the sulfide ore element builds and operators get more familiar with the mixed ore feed process. Kibali is currently Africa's largest single gold mine in terms of production and is located in one of the most remote parts of the continent in the northeast of the DRC close to its border with South Sudan.

One should probably not detract from the huge success of Kibali so far, which says a lot for GOLD's management expertise. The sheer logistics of building a mine of this size in such a remote location - almost as far from the sea as you can get in Africa which is significant given that all the equipment involved had to be shipped in and road hauled to the mine site through areas often devoid of modern infrastructure. Initial gold production was achieved ahead of schedule from its open pits, while a major underground section is now being developed too. But the underground and open pit ore types differ in composition and ore hardness, and the milling circuits have been switched to handling primarily sulfide ores, which will become the norm as underground production builds, but the process is less amenable to maximizing recoveries from the predominantly oxide ore feeds from the open pits. This is something that will improve over time says Bristow, but don't expect an immediate fix. Even so Kibali remains on track to produce 600,000 ounces of gold this year - 45% attributable to GOLD - helped by bringing forward some mill feed from a higher grade satellite pit.

The company's current flagship operation - the two-mine Loulo-Gounkoto complex in south western Mali, close to the Senegalese border - had a steady quarter with a slight increase in gold recovery and in gold price received. But these did not quite offset slightly lower grades and a sharp increase in cash costs due to higher underground mining costs (which will increase flexibility ahead), and an increased strip ratio in the Gounkoto pit in a pit wall push back exercise - again a temporary procedure. The combined operation produced just over 170,000 ounces of gold which is already ahead of the 2016 target. (Guidance for the full year is to produce 670,000 ounces).

There is also a small amount of gold production coming from its Morila operation, also in Mali. This is in its closure stages largely treating low grade waste dumps and moving to mine tailings. There is also a prospect for running feed from a small satellite pit through the mill. The mine has been in its closure phase for several years now, but is taking a long time to die! It remains profitable although a small gold producer nowadays - 14,432 ounces in Q2. Operations there are expected to continue until 2019.

Overall, because of the technical problems at Tongon and Kibali, group production was down 4% quarter on quarter at 281,494 ounces and profit down 8% at $58.7 million, even though a slightly higher gold price was received. Despite the apparently poorer figures, net cash generated rose by 6% quarter on quarter with total cash holdings up 7% to $272.7 million - hence the strong balance sheet, and getting stronger by the day with gold prices currently sitting over 7% higher than the Q2 average. As with most gold miners the leverage to increasing gold prices is particularly strong.

Bristow, as a geologist, has always been particularly keen on the company maintaining a high level of exploration activity - something most of the other top gold miners have been cutting back on as part of their costs savings plans - and this is aimed at both brownfield and greenfield potential. The former is primarily for increasing/enhancing mine life at its existing properties and the latter in the search for new deposits which meet GOLD's stringent investment parameters. In his quarterly presentation, he pointed to considerable potential in both elements of the exploration search. The gold belts in which the company operates are extensive.

While brownfield targets are probably the most advanced in terms of providing new gold production because, as likely extensions to existing profitable mines they don't require the new project parameters which are so essential to the Randgold ethos, they don't have a major impact on the overall project pipeline in terms of total production growth.

For greenfield exploration targets, with a substantial lead-time from discovery to development, even if a project meeting the GOLD requirements for development is found, it could be many years before it could impact on company total gold output. The lead possibility at the moment is Massawa and the nearby Sofia deposit in Senegal, just across the border from Loulo/Gounkoto, but at the moment it is likely borderline on meeting GOLD's investment criteria. Drilling is continuing. Bristow would dearly like to find something major in Cote d'Ivoire which he sees as having the most supportive government mining code and there are some early stage finds which are of interest, but any new mine there would still be some years away.

Perhaps the best expansion opportunities may come from an acquisition, but the gold price increase this year has probably put anything that might be of serious interest at too high a price. In Q&A at the London meeting Bristow was asked if there was any possible interest in Acacia, Barrick's African offshoot which is known to be on the sale block. His answer was a pretty scathing negative.

So what's the overall take-away from GOLD's disappointing Q2 figures. The stock took a ridiculously big knock because the company has been a victim of its own success and the market somehow expects it to move ever onwards and upwards, and when it doesn't it over-reacts. Occasional technical difficulties are a natural hallmark of investing in mining stocks, and they can be serious if they look to be ongoing, but in GOLD's case this is unlikely. Tongon should now be fully back on track to meet its undoubted production potential in the second half of the year and Kibali is going through an anticipated lower recovery phase which will gradually work its way out of the system. GOLD has an overall track record that should be the envy of its peers and if Bristow's implied comments pointing to possible good dividend increases ahead, should the gold price remain at or above current levels, bodes well for its future.

So what are the downsides? GOLD operates in countries which much of the world sees as potentially politically unstable, but it has a great track record in maintaining positive relationships with whatever government is in power in the countries in which it operates. There is thus an element of perceived political risk in its activities, but technologically, despite these latest hiccups, it is at the top of the tree and, should gold - the metal - continue to perform, GOLD the company, should continue to go from strength to strength. Take the recent setback as a buying opportunity. Q3 and Q4 should bring better things and the price will react accordingly - and with good margins at its existing mines is less vulnerable to a gold price downturn than most of its peers. It has been on a rising dividend path and this pattern seems likely to continue which is another bonus for shareholders who have been seeing dividend cuts at many of GOLD's peer companies.

Disclosure: I/we 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.