Randgold Resources (NASDAQ:GOLD)
Q3 2007 Earnings Call
November 1, 20078:00 am ET
Mark Bristow - CEO
Charles Kernot – SeymourPierce
Good afternoon, ladies and gentlemen. Welcome to Randgold Resources quarterlypresentation. As you see from the goldprice today, it is a very pleasant experience to stand up and share our resultswith you; not only because the gold price is up; but it’s nice to be able tocome back to you after three months and take you through this, as what we hadpromised you last time has materialized this time.
Moving directly into the highlights for the quarter, we’vecertainly seen the team produce another solid performance, despite someoperational challenges at Loulo and I am happy to report after nine months into2007, we are still steadily on track to achieve our overall targets for theyear. Gold production for the quarter was up, group costs were contained andattributable profit rose by almost 70%.
Good news from Tongon where we completed the rescoping ofthe prefeasibility study and as expected, it supports a larger scale project onthe back of a significant increase in both resources and mineableresources. We are now going all out tocomplete the bankable study on Tongon and the target being towards the end ofnext year.
On the exploration front, our teams are moving back into thefield in West Africa after spending the wet season evaluating modeling andplanning, with a little bit of leave in between. As I’ll show you later, our explorationportfolio now contains some interesting brownfield opportunities, in additionto the greenfield prospects whichhave traditionally driven our organic growth.
As we have been saying for the past two quarters, Morilawould have a hockey stick production profile this year, with a sharp upturn inthe latter half of the year. This wasclearly demonstrated over the past quarter, when the mine’s gold outputincreased by 50% and operating costs per ounce reduced by one-third.
The expected increase in the production was attributable --as I pointed out last quarter -- to a better mining rate, which provided accessto the higher-grade phases. Had it not being for the lockup factor, which isthe down time linked to the significant increase in ore grade and some plantissues, the ramp in production would have been even higher. In any event, withanother good quarter in prospects, management has its sights now firmly set onachieving their revised forecast of 475,000 ounces for theyear.
These are the numbers which speak quite eloquently forthemselves. The big drivers of theperformance improvement were, as I pointed, operational stability and of coursethe higher grade.
Summing up Morila, despite the fact that it’s now nearing asunset phase, Morila remains a very substantial asset in the Randgold Resourcesportfolio, and as this comparison with some of the West African developmentprojects shows, it’s still a very significant reserve base. We are, along with our partners, perseveringwith our efforts to extend its life by finding more ounces on site, andcurrently we are dealing with the processing of the data from the $6 milliondrilling program that we recently completed, which took some 20 months. These will be analyzed and evaluated. We have certainly highlighted some gaps inthe data and once we complete that and have reached consensus on the next step,we will share that with you again.
Over at Loulo, the team delivered another sterlingperformance in the face of some tough operational items. It’s been a particularly -- as I’m sure you’ve seen in the news -- a wet season in West Africa and we’vecontinued to have our fair share of challenges with the mining contractorrelating to equipment availability and problems.
The combination of these two factors prevented us fromachieving our design mix of soft and hard ore; soft ore coming from Yalea andthe hard ore coming from Gara. The consequences of that is that we’ve seen alot more Gara ore through the rainy season because its harder and its easier totreat when there is a lot of water around.
It comes with it’s challenges because it’s a lot moreabrasive so we saw costs pick up on the back of the lieder and steel boreutilizations, but the benefit is that we got better recovery. If we had done the right mix our recoverieswould have been around 90% to up closer to 95%. So we achieved our planned gold output despite the lower throughput of 58,000 ounces.
In these difficult circumstances -- and I think that’s the significance ofoperating these mines in remote areas. We have a management team that’s stillable to change the way they do business and keep the targets that they set forus in sight and deliver against it.
You’ll see later on in the presentation as well we will takeyou through the underground development. Progress was slow there this quarterbecause we are still in that weather zone I talked about last quarter, and thishas forced us to put in significant additional supports through that weatherzone. It’s very important to us becausethis is the gateway to a 20-year life underground operation. I willtouch on that a little bit later.
Our review of the exploration data from Loulo region and theadjacent Bambadji JV over the off-season has certainly confirmed that this is avery exciting geological province. Certainly,we continue to believe in the potential for this region to add both to ourresource base and support in the future growth in production. We certainly have cornered the infrastructuralcompetitive advantage in that region at this stage.
Theseare the operating results out of Loulo for the quarter, and you can see howlower throughput and slightly lower grades impacted on cash costs. Nevertheless, we achieved our targets, as I pointedout, because of the higher recovery from the Gara ore.
Going to the underground, I have already highlighted at theYalea underground development, we had to dig through some very difficultweather material and consequently advanced for the quarter only 60 meters. To put this inperspective, our normal target would vary between 120 and 160 meters a month. So, it has slowed down the process a bit, butas I pointed out the integrity of the main, active plays as well as the safetyof our worker is paramount. We’ve had toshotcrete it; we have put in concrete buttresses, we mined through them again.
In the earlier slide I showed you on the seam we have thesesolid, concrete tunnels. Once we are through that then we have got about 15 to 30 meters to go. Once we are through that in two-and-a-halfmonths time, we will begin to take our first ore. So we are not far behind our originalplan. It could well flow into next year,but we would only see that as investing on the Loulo’s production profile inany way. At worst, it will defer some ofthe costs that we are planning to spend this year into next year, because we won’tstart mining ore until earlier next year.
Also as pointed out on the slide we were able to convertanother 360,000 ouncesinto the mine plant. That’s significantand rapidly what’s becoming the challenge here is how do we access all theseounces a little faster than the current schedule? Because this new schedulejust adds more life. We are alwaysdriven by NPV and so it’s important to see if we can enhance the production outof these underground operations and therefore be able to increase thethroughput.
Just quickly catching up on Gara, which is our secondunderground mine slated to start development at the end of next year. We have been tidying up again the mine planthere. We’ve got three more holes todrill to be able to take that 400,000 ounce resource that we declared last year and put itinto the mine plant and we hope to finish those holes before we declare our newounces early next year.
I mentioned the Loulo upside and here is a closer look atit. The Bambadji joint venture in Senegalalready forms part of the Loulo region which borders neighboring Mali. As I said we’ve been paying particularattention to the Senegal Mali shear zone. That’s the same structure that hosts Sadiola, Yatela, Yalea andGara. The specific target that we’vefocused on now is a five-kilometer wide zone and some 25 kilometers long.
With this newly consolidated ground holding we’re planningon flying a very detailed airborne magnetic and electromagnetic survey over theentire area, some 1,200 square kilometers. We believe that will help us better understand the geological and structuralarchitecture of the region; prioritize it for follow up and generate new modelsfor drilling.
Specifically also within the Loulo area, Faraba as you knowwe’ve reported an indicated resource of some 500,000 ounces for just 350 meters of strike, and over theoff-season our geologists have reviewed the data and certainly come up with asignificantly different geological level model more akin to the Yalea model andthat calls for a number of en-echelon and lensoid payshoots plunging down asyou see on the right-hand side of the diagram.
That in itself, if you do a bit of math, is certainlyhighlighting a multi-million ounce project. At this stage the model steps upbecause its making a few boreholes and we plan to get that model again duringthis season which takes us out to June next year. Specifically we’ve got a program of 7,000holes to test that model.
Staying with Loulo still and looking at some of the other satellitetargets we’ve certainly dusted off Loulo 3. Again as we build our knowledge of the structural controls this is aninteresting target. Up until now it’sbeen a very small strike. We know thatsome of these ore bodies get wider and bigger at depth. What’s interesting is the continuously up gradeand relatively high grade. So, we putthat back on and we are going to be drilling that out again through the season.The same over at the 500,000 ounce geological estimate progress in the North. Again we’ve remodeled that. We’ve got a lot more information and we havethat back in the plan for this next field season.
Leaving Malinow for a moment, I’ll come back to exploration and moving down to Tongon inthe Ivory Coast. The highlights of the quarter has to be thecompletion of a rescoping study which has demonstrated a significant increasein both the resource base from 41% as well as the reserves and mineableresources that moved from 1.4 million ounces to 2.8 million ounces.
On the back of that, we are now able to come up with asignificantly enlarged operation that’s much bigger than we had originallyenvisaged in the first feasibility study or prefeasibility study. Right now, our focus is to complete thebankable; we’re on track, we’re well advanced with the social baseline studies,the environmental baseline study. We havethe finished draft of the convention to engage the government; everything isworking. We are starting deciding on thecontractor, we will be looking to finalize audits for the long lead assets andthat’s slated for early next year.
Just for the geologists in the audience and more for you totake away is a lot of detail on the boreholes, it gives you comfort that boththese ore bodies up in the Northern Zone have a lot of continuity. We’ve got one gap to finish off in theNorthern Zone as far as tightening up the current mine plan, and then we’ve agot significant gap between the trenches and the first line of boreholes. That’s the way they have done it, and we willbe inputting that with our thesis, we expect that to enhance the grade, becauseyou have got a repeat every couple of meters at the top that’s influencing thegrade in the Northern Zone.
Likewise in the Southern Zone, which is a lot more complexthan the Northern Zone, we’ve got some 12,000 meters to drill out andinput; that’s why we’ve got a significant amount of ounces still in what wecall geological or mineable resource. 1.6 million of that 2.8 million ounces is in reserve, and we’ve got atidy up our concepts; we expect that to come with a slightly better selectivity.In other words, we expect it to lift the grade as we are able to select some ofthese ranges out of a bigger line of mineable units.
There are also some deeper drilled boreholes under both ore veinsand certainly they are continuing at depth. Both ore bodies are down and have struck in 2 kilometers and so we have onlydrilled 350 metersbelow surface. The old adage in West Africa is they can be as deep as they are long.
This is a graphical representation of the results as itstands at present, with as I pointed out, 2.31 million ounces in indicatedcategory and the another 2 million in the inferred. All the Northern Zoneindicated inferred comes into the Southern Zone because of the geologicalcontinuity that we saw turning up.
I think that the other thing to point out is that RandgoldResources has always been driven by economics. So when we declare our resources, they are economically dependable andjust in Tongon’s case the reserves or mineable resources are calculated asfalling within a $525 an ounce strip, and the resources are calculated asfalling in a $800 an ounce strip. Thecurrent movement in gold price is takingus very close to what we’ve defined as a resource.
These are the key parameters of the rescope prefeasibilitystudy. You’ll see a significant increasein that resource base particularly the mineable resource at $525. The strip ratio is very attractive. Again you’ll see that we are very realisticwith our costs. We are not coming to themarket with a dollar a ton mining cost. We do mine in West Africa. With all the data inplace now, our estimation for the total cash cost for the operation is $360 anounce.
You can see the production profile significantly higher thanthe original prefeasibility which we had at 200,000 tons a month and about 200,000 ounces where we startedoff with the production profile in the first year giving close to 300,000 ounces; and then wehave three years of about 250,000 ounces and then about 220,000. We have got some optimization still to go,particularly on the pit designs we have just used very conservative 45 degreeangles. But once we have got thetechnical sign off, we will be able to design those perhaps a little bit moreaggressively.
I think the significant thing in Tongon as you’ve seen inLoulo is Tongon has got length; there is lots of opportunity, prospectivity andthe extension of the current ore-body depth in the long strike and immediatelyadjacent to those in the form of these deposits. The most interesting one at the moment beingthe Loulo South deposit where we’ve got our first exploration results comingout ranging from mineralization of significance that is structurally controlledand that’s what really drives Birimian gold exploration and certainly the structure thathosts the main deposits.
Just to point you to what we are going to next and you willsee that the first four items in the slide really point to the infill drillingsome 12,000 metersto be done. We’d like to see thatfinished, if not this quarter early into next year and we see that improvingsignificantly both the definition and the selectivity so we will be able toconvert all the resources in the pits you reserve and we will certainly be ableto be a lot more comfortable in estimating the grade.
I think the point is when you go back to the summary thenow, I will just point you the second bullet where you will see that that SouthernZone has a lot more dilution in it. That’sa result of the fact we are just little cautious about the continuity of thesethings. But we are comfortable oncewe’ve got the majority of the evaluation computed, we would like to see geologicalcontrols driving our estimate.
The last two items still outstanding is we’ve had someencouragements with the metallurgical test work certainly the metallurgy islooking better than we originally planned. We are now playing with the idea of introducing a flash flotation phasein the flow sheet, and we are looking at how we can enhance that ADAagain for the 0.5% recovery on the South side. Then we will be able to reportback again when we meet next time. As I’ve touched on, the final geotest thatneeds to be completed before we set the final pit design.
As I’ve pointed out, if we move on to exploration, then ourWest African exploration teams have had a well-earned respite from thefieldwork during the last few months, that is the wet season. However, in Tanzania,we have continued to work because it is dry there. I will just also highlightthat this break, which is a traditional break for Randgold Resources doesn’tmean to say that they all go on holiday for three months. It has made us competitive in that we sitdown, we collect all this data over nine months, and we actually have aconcentrated three months where we review our budgets, we review our models,it’s time for the leaders, it gives the leaders time to actually interface withthe geologists, bring out experts that interface with the field geologists anddevelop the next round of planning. That’swhat we’ve been doing, and you have seen some of the results of that.
When that process is complete, they have got a one-weekworkshop next week or the week after. The geology team will try to put togethera design interact their thinking and compete for the leftover drillingbudget. The drilling budget is allocatedon merit.
As already indicated, and I will highlight again here, as wegrow up and we are able to talk more and more about brownfield exploration, wehave two very significant brownfield prospects in the form of the area aroundTongon and the area around Loulo. That issignificant that in a market like this, we have a rapidly rising gold price becausewhat it offers is the ability to add early stage ounces or early ounces into the plan.
Then of course we’ve got our investment which separates us,I have always said and firmly believe this, from the rest of the industry. That’s the greenfields which is our future. Thatrequires constant and regular review and commitments to be able to ensure thatinto the future we are investing, and that’s what really supports, it’s theseprojects that support the new mines that are going to come on stream in five toten years’ time.
Just goingthrough them, you will see that in this slide is our Senegalposition. Part of Senegalis now firmly in the Loulo infrastructure, and then we have still got asignificant portfolio sitting on Bambadji trend 60 kilometers to the west ofLoulo, and two significant targets at Massawa and Sofia. Sofiabeing a long continuous anomaly about 15 kilometers long, significantmineralization. We have now got drillingin sort of between 200 and 500 meters spacing. Weare holding that model.
Movingsouth into Mali,something we haven’t touched on in this area around Morila just to reinforcethat we haven’t given up in that area. It’s an area that’s delivered Syama, which is amulti-million ounce deposit and Morila. Webelieve in the prospectivity of this area, and you will see that we areconstantly moving our portfolio around hunting for new stuff.
We’verecently signed a joint venture with a junior company AGG, African Gold Groupand those are the two yellow dots just below the Morila mine, two yellow spacejust below the Morila mine label, and we constantly do our review. More and more, we are seeing opportunities inthe junior space as the market changes production and holds back on supportingexploration companies.
Burkina Faso,as we have indicated in our comments, wehave completed the first round of metallurgical testing on the Kiaka deposit.Most of the results came back in well above 90% despite the lower grade feed. We are intrigued by this project. We have 2 million ounces, in big wideconsistent mineralized units. We nowhave an idea that we would have certainly potential to continue this structureto the north as it comes up the other side. So, we haven’t put this one awayyet, we actually have re-looked at, and we are going to be doing some more workalong the strike.
At the same time, we’ve now generated the next generation oftargets coming out of the new portfolio of permits which are the permits thatyou see to the west. Already we haveanother big anomaly, broad and long that we’ve done the first trenches; about 80 meters. Again, we are in the mineralized zone. We are intrigued by the geology and it certainlyattract a substantial amount of our exploration dollars.
Moving back to the Ivory Coast, we think this country is the most prospectiverealization in West Africa at the moment. It boasts the highest surface area ofBirimian rocks out of all the countries in West Africa. It’s got all the geology that you need and hostsall the big deposits and it hasn’t been explored. We, as you know as I’ve touched on alreadyoriginally got the Nielle Permit and to the west of our Nielle Permit, that is a workupdrill pilot where we will certainly move straight into that drillingprogram. As soon as we are comfortableto move out of Nielle Permit or the Tongon region and that’s across theNorthern part of the country. We havestarted exploring, however, in the Southern province which you see marked inred.
In Ghana,as I’m sure you are aware, Ghanais a tough country to find new gold deposits. It’s a very thick weather zone. You get nice big surface enrichments,and then when you drill it up, you get disappointing indications. We have a significant anomaly and we’ve nowgot some trenches and it’s about 15 kilometers of anomalies there, and certainly the geologyis pretty altered. This is anotherproject, and we’ve had a couple of them in Ghanaand this is our strategy targets in Ghanaat this stage.
But again, next quarter I think you will see quite a bit ofactivity in Ghana,because there are quite a few junior companies that are putting up theirpermits for review for joint ventures. Oneof the big challenges we have, because we move through ground so quickly, isaccess to new real estate into our models.
Going across the east, a twin focus in Tanzania;one is that Miyabi joint venture that’s on a specific model. We’re looking at a model, this particularresource is located on the intersection of three big regional structures, allof which boast a gold deposit. Wherethese structures are in particular you have got Miyabi and there is significantalteration. They have certainly gone in a systematic way, about 500,000 ounces of low graderesource.
So we’ve done the first round of drillings just to get thereferences right and we’ll be drilling for more there. We’ve already got a generator team in thisregion and we’ve been picking on the proterozic rocks, which are younger thanthe Archean that traditionally host gold deposit both in Tanzania and the DRCand that's been our focus of our generative team and we’re pretty confidentthat we’ll be able to show you some ore mineralization in these rocks nextquarter.
As always, talk is cheap and numbers support all thosepromises. This is the summary of ourfinancials; consistently profitable is the best way to describe it. We told you that we had a pullback in thefirst half of the year and we’ve come out this half past. If you remember in January I said our costswere under pressure to increase by some 15%, and it was dependent on the oilcost and the euro/dollar exchange rates. We are well inline with that at 3.24 year-to-date. We don’t see next quarter being worse thanthis quarter. So that should hold uswithin our guidelines.
On the cash position we’ve got 130 million that is showingup. If you go through our cash flow, youwill see that there is a significant amount of dollars tied up in workingcapital this quarter and they were largely easy to explain about $20 million ofabnormal lockup. $10 million associatedwith just shipping of gold, so we haven’t received the money yet; and about $5million to $5.5 million from the lockups with the higher grade out of Morilaand that should come out this quarter. Then we paid all of our creditors earlythis quarter and normally you would pay them off at the end of this month, andwe paid them before. So, we arecomfortable. We are comfortably above the$100 million net cash position after providing for the debt.
It is always nice to show a share price performance likethis, although we don’t hang on laurels on the share price. We certainly are breaking out that it is away that the market measures us, and it is always gratifying to getrecognition.
At the same time, it gives us encouragement that ourstrategy of forming a profitable pure gold company is the correct one. But that, be that as it may, I can assure youthat we as a management team certainly don’t focus on the share price, butrather on the fundamentals of building and running a sustainable, successfulbusiness in an environment where more and more, new gold supply is decliningand the industry is constantly dealing with increasing cost.
We’ve been saying that more and more, we’ve been saying thatfor a long-time, and what separates us from many of our peers is that we arebringing production online at this time.
I hope just to finish off and conclude today’s presentationby sharing those fundamental principles that we value in our company and formcertainly the heart of the way we do business.
First of all, in an era of diversification we are and tendto remain a pure gold company. This offersinvestors undiluted leverage against the gold price. I think when you look at the move to ETS,what we say to people is buy ETS, to buy an ounce, it costs you today $796; ifyou take that $796 many more than an ounce with Randgold Resources.
The ounces you get are profitable, the reserve ounces, andthey’ve got a margin in to find some more. Then you’ve got the upside in the resources, as we pointed out, ourresources are economic to set a higher gold price. If you’re buying gold or ETS you must bedoing that because you think the gold price is going to go up. So you get a whole lot of traditionalleverage because we are a pure gold company and you don’t have to worry aboutthe zinc price, the copper price and the other base metals.
We believe and we certainly have built this business throughthe discovery and development of profitable mining opportunities and we willmaintain our emphasis on increasing production and creating value through realvalue, increasing growth.
We’re forecasting 50% growth in production over the nextfour years. That’s significant for us,with Loulo as we get into the underground higher grade areas and with Tongoncoming on. That is net of the declining production out of Morila.
We will nevertheless continue to pursue acquisitions andother corporate opportunities, but one of the big focuses we have is we always ratethem against our own organic growth prospects. We aspire to the higher standards of financial reporting. We are definitely the most highly regulatedgold company listed on the main board of London Stock Exchange and we’re fullymature filing in the USwith Sarbanes-Oxley compliance and all that stuff.
We are heavily invested in the development of our own peoplejust as we invest in exploration. Webelieve in investing in people, and for those of you who often used to thinkthat Randgold Resources was a one-man show, I think you can’t run these assets in the places that we run in withouta quality team that is able to make decisions on its own within the guidance ofan agreed-to strategy; that we certainly have.
On that I think if you look at the single scarcest assets inour industry right now its management and quality people. One of the things that we really put at thecenter of our next phase is continuing to invest in our management team andensuring that we have the best management team in the industry to take ourassets forward.
Really, that’s the story for this quarter. We’ve got the team or part of the team withus here. Graham is sitting in front, heis our new CFO; Dave Haddon, our Legal Counsel; Victor, Corporate Manager; andLois who runs the Communications; and we have Raul out of the technical IT sidewith us today; and of course, Lisa who runs the shop in London.
With that, we will be delighted to take questions.
Charles Kernot – Seymour Pierce
I just had a question on Tongon. You very kindly gave us the values around thereserves and resources. How much of theincrease has actually come about via value of assets?
You can work it out. Allthe Northern Zone ounces are used. It’sthe difference between the current resource, minus the Northern ounces, minusthat 1.44. It would be at 1.44.
Charles Kernot – Seymour Pierce
Why did you do it [that way]?
It is just the way it works in Mali. last quarter, you would see we paid in less. Itwas just the way the months worked out, with the weekends in there.
Charles Kernot – Seymour Pierce
As far as the capital, I have a feeling that as we willbeing some pretty remarkable gains. The difference though, is the costs[inaudible].
That, as you know, is efficiencies and a lot of otherthings. There are three things, fourthings that drive our cost right now;
(1) The fuel cost; that’s 25% of our cost.
(2) Euro/dollar, that’s % of our cost.
(3) In the rising gold price, theroyalty, that is $12 every $100, so right now you can knock off $40 plus out ofthe cash front. We can’t control that.
(4) Then the mining cost. In the short term, the mining cost had a bigimpact. They had an impact because we are going through that transition from opencost to underground and so as we bring the underground and start leeching, wedon’t capitalize that. That impact, theway we run our accounts, we take that on the nose.
We now talk about some of the cost going into next year, itis really that leeching and hedging and taking up the mining costs; obviouslythere will be some extra costs in there; they are not based on the long term. Once we’ve established the prices, we’ll beback to normal.
The significant thing on Loulo is that we see costs goingfrom the upper 200 to below the mid 300. So it’s 290 to 350 for quite a few years, just because of grade. That’s the trick in this guidance.
If you looked at quarter on quarter, an average cost of $38million; that’s after some adjustments last quarter against the cost in thisquarter -- in favor of the cost -- but that’s just the way we run ourstockpiles. We don’t diverge from it. Wesubscribe to the new SEC standards.
So if you look at our aggregate costs they were in fact, ifyou look at our unit costs they were also a little better because we producedmore. I think that’s what you are seeingwith Randgold Resources. The other thingthat’s impacting on our process at the moment is we are expensing these costs, andwe will continue to expense this until we take it. That’s again in our policy and we thinkthat’s a prudent way to run our business.
I must say more and more it’s easier to present our accountsto non-gold engagements because our income statement looks like it does.
[Microphone not available] Why are your prices up?
It’s a little bit of a paradigm shift for us. There is definitely 2 million plus ounces. If this was in Canadaor Mexicoeveryone would be all bubbly about it. The significance is there is no strip ratio. So if you look at the cost per ton, if youcompare the cost per ton at Loulo we are talking about $13 a ton mined. The cost of mining one of these you aretalking about probably $2.5 to $3 a ton mined.
So that is the trick in mining, is what is your total cost?If we could bring the processing cost down because currently Loulo’s processingcosts are $12 to $14, so if we could bring them down to $5 because we areprocessing 600,000 tons a month instead of 200,000 tons a month and it is simplemetallurgy and that’s the trick. Themetallurgy is simple. Then you could, soyou have $6 mining costs because of high volume, you’ve got $3 when the aggregate is $4, so that is $9. You have got a G&A because you are miningso much, it’s going to be down to $2. So, that’s $11, 2 gramsrevenue is right now at these gold prices, $23 and $24. So you’re selling at a 100% margin. That’s interesting.
Now, whether we mine it or somebody else mines it, there is definitelyappetite to buy gold reserves and they would be reserves because they areeconomic in this market. So as a gold company, what we offer our shareholdersand we have always been clear about it, we offer them profitable goldproduction and optionality. So, 2million ounces is an option. We willinvest in that option certainly over the next couple of quarters.
If we could get 6 million ounces, then we are inbusiness. Then, it will become somethingwe would want it to be. I’ll point out thatthis is a forward-looking statement.
Is this to say you will target most of the CapEx on Tongon?
$367 million is our current estimate. That includes $38 million for the miningfleet and $28 million of sustaining capital. So, if you take that all, it’s about $201 million capital cost, and youput that in perspective, what the overruns and extra paying Loulo costs are fora similar sort of plant are about $160 million. The Ivory Coastis definitely a cheaper place to work it than Loulo; in fact, you don’t have togo through a border pipe, there is all that extra.
2007, we are seeing reduced production but increased revenue,plus the gold price. If gold continues torise, as many think perhaps to $1,500 an ounce, how will that change your cost to mine, the kind of mining you will carry outover the next few years?
The one thing I think that the market is rationalizing withus, is that when the gold price started moving, everyone got on the bandwagonand promised all of this production. Themarket is working out with the best ones in the world take five to ten years tobuild a gold mine; but first we have to find it. Having an anomaly and then chasing a coupleof bore holes is not a discovery.
So right now, our big focus is what can we do differently inthe short term to maximize our shareholders revenue stream? The first thing that is the initial follow up,the second thing is how do we expand Loulo. So those extra ounces that you seecoming into the mining schedule, at this stage we are testing both underground deposits on asequential basis.
What we are now going to be looking at is, is there anywaywe can attack it from two different points? Now that we are gettingcomfortable, the heat comes down and we will be training people and we see thatpeople can work underground, and we are more comfortable with working; by earlynext year we will have our first forecast and certainly we’ve set ourselvesnext year as the target.
We can easily expand the profit, for those who follow up, wehave always had a little extra in the plan. The Loulo plan for $15 million to$20 million we can up it from 220,000 to 300,000 tons. The big challenge is ourfill-in process, however, that is where our focus is.
So getting back to your question, you can do what everyoneelse does. You can go and pay a premiumfor more production and brag that you are making more money or you can expandyour gold production and bring new production in. What we are doing is, as yousaw in that graph, the industry is going like that. Our production although it looks ratherpedestrian, compared to some of the promises in the market, again of growing about50% in the next four years.
Next year, 2008, is flat and we are looking at ways toenhance that; certainly the revenue will be up and if we keep the costs undercontrol we should make more profits. Wehave a significant step with the first high grades coming out of Loulo in followingyear. The following year, Tongon is in productionand that counter-balances a Morila decline. I hope that answers your question. There is no magic in gold mine.
[Microphone not available]
I think three key points here as we speak; for us it’s agood business. If you at the IamGold JVthere is a lot of data, $16 million of data right in this part of where webelieve the base geology is. We did the pre-feasibility study with 51%, acontrolling interest. The more junior JV that we do, we take control of it, we keepthe rights, but IamGold they can stop us from diluting them at 51%. For the juniors, we force that through to 65%or 80% and we have the choice to take controlling interest or leave it. We benchat 31%. Pre-feasibility means that we make a decision.
On the corporate side, I have always said I looked at it tobe the pooper scooper in West Africa. I have no interest in finding at all; if youlook at our asset profile, Morila was 7 million ounces, Loulo is 6 million reserves, another 10 of resources; with due respectof all involved, that’s the game we play. So, we are after that. There are somebig assets that are undeveloped in Africa, those are whatattracts us.
We can compete against the new ones. We have bigger minesthan them and we deliver ahead of their promises in Africa,so we think we are at least equal competitors. And again, what we have found in Africa is if you have a $1 billionjunior, then doing a deal dilutes that $1 billion into $2.5 billion, soeveryone benefits; our shareholders, everyone.
The one thing in the market right now, is people are notthat interested in money; they are much more interested in equity. We see thatas an emerging opportunity for us. Thatis why it is so significant when I say managers are an important asset, becauseshareholders are going to be more and more likely to be looking for deliverywhen people are not a problem.
With a higher gold price and mining lesser grades, wouldn’tthat be a tactic in your mine, or even strategy, to leave the higher grades forhigher returns, perhaps, on these assets? And go back? Or would you just flat out produce as muchgold as possible at today’s rate to get the maximum revenue right now?
You will see that we have considered the gold price when wedesign our prospective; not just here in [inaudible] from any of the othermines. In Loulo, for instance, we changed the mix quality, but have taken it allout from underground, it is a natural swap over.
Randgold Resources is a profit-building company. So we could choose profit overproduction. We always have. NPV is theway to go. That’s the best way. So ifyou looked even at Tongon, you’ll see all the ounces are coming out in thefirst four years. We can maximize that andwe will think the money right now, thank you.
Well if you have anymore we will move across, there are somesnacks and glasses of wine next door, as per usual. We will be happy to continue thediscussion.
Thank you again for coming.
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