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Randgold Resources Limited (NASDAQ:GOLD)

Q3 2012 Earnings Call

November 7, 2012 7:00 AM ET

Executives

Mark Bristow – CEO

Analysts

Cailey Barker – Numis

Bruce Alway – Société Générale

Jon Bergtheil – Citi

Mark Bristow

Good afternoon, ladies and gentlemen; again, very warm welcome here. Glad the politics are behind us for a moment and we can focus on our business.

Just kicking off, I think it’s worth today just reminding everyone that one of our core principles at Randgold Resources is that all stakeholders should benefit from our activities. And I believe that this applies to mining companies and – in general, and in particular to those who operate in the world’s emerging regions. And I think I’ll come back to this at the end of the presentation and just give some comments on the debate at the moment, with the changes, or muted changes in fiscal and legislative – a range of mining codes and that across the continent.

I think also just as an introduction to remind you that Randgold has always had its sights firmly focused on value creation, and I hope to reinforce that again today. Our aim is to build a sustainably profitable business. So, the quarter variations are, whilst they’re important, and I understand they’re very important to you, you can’t run a business on a quarterly basis.

And that I hope – and again, it’s been our commitment to the investment community to constantly work to ensure that our shareholders know our plans and then not to rely on whispers or nudges or messages to the market. So we’ve also undertaken this today to share with you an update of our guidance after 2016, because there is a lot of variability in the market. We’ve made some good progress in the last couple of quarters and we feel it’s – we’re right in the middle of budgeting at the moment and we’ll be sharing some of the detailed forecast project-by-project and also consolidated forecast just give you some comfort that we’re very much on track with our plans to achieve our 1.2 million ounce target in 2015.

While as you would have derived from the quarterly documentation that this quarter was something of the mixed bag, the positives again certainly outweigh the negatives, and we are very much building that foundation for our next big step in bringing Kibali on line by the end of next year. And our targets and business strategy is very much intact.

I’ll start, as usual, with our health and safety scorecard. Again, we’re very focused on safety and we believe both in safety and environmental issues, they are an integral of our business and not just box ticking exercise with corporate governance in mind. And whilst people might have different views on climate change and global warming, we believe the parameters of disciplined, responsible environmental management are important for our business. We want to measure carbon emissions, it has a direct relationship to our efficiency, for instance, in diesel consumption and so on, and so we will continue to report against those.

On a LTI basis, we had a disappointing number of LTIs this last quarter, particularly in Kibali and two in Loulo and Gounkoto, and none of them directly related to our operations, but is peripheral. The Kibali one really, we’re now employing about 4,500 people at Kibali and a lot of them are people who have never worked before and it’s a big focus in getting people to understand the importance of safely in a big industrial zone, in an area where no one has ever really worked. And – but at the same time, Morila and Tongon maintained their impeccable records of no lost time injuries and that’s now over three quarters in a row. And what it reinforces is our objective of having zero lost time injury target is very much achievable.

Loulo also gained its OHSAS 18001 safety certification and Tongon received its ISO 14001 environmental certification, part of our commitment to adhering to global best practices both within the environment and safety regimes. Morila was recertified with its ISO 14001 environmental certificate. And the other good news on this front was the significant reductions in the Group’s malaria incident rate, which is important for us as far as productivity of people and also the freshwater consumption at Loulo and Tongon, also an important part of managing these big industrial sites and ensuring responsible management of scarce resources like water.

I think the past quarter suffered a little from its comparison with the prior one when, you’d recall, we broke all records. So our profits and production were up on – or in line with the comparable quarter of 2011, they were down on the second quarter of the year. Cash and gold on the other hand were ahead of the previous quarters, despite our continued investments in capital projects.

And I’d point out when you – and I’ll do it in a little more detail in the next slide, but you all have noticed that we didn’t ship about $33 million of gold at the end of the quarter, primarily because the rand refinery was going through an audit process, and they delayed the shipment of gold out of the mine, and we change ownership when it leaves the mine. The impact of that is $12 million on our net earnings and you can add the $33 million on revenue. So – but I’ll touch it a little bit more when we show the numbers.

Operating highlights; was a strong performance at Loulo underground mines, particularly which are now rising rapidly towards our expectations and as you know, that’s been a management issue we’ve been wrestling with for some quarters now and really rewarding to see that team delivering on its plan. And, of course, the steady progress at the Kibali project and I would reaffirm that all bets are still very firmly on the table for first gold at the end of next year and within budget as we stand today. And I think that reinforces the reputation our capital projects team has in delivering these big projects on time and within budget. Gounkoto, which has really done very well, declared a second dividend this quarter and so did Morila declare a dividend. So again, that’s what business is all about; it is making money and getting the revenues back into the center.

Looking ahead, in some additional news, we’ve announced today that the preliminary review of the Gounkoto underground potential is certainly good. We’ve signed off on that; there’s no fatal flaws to develop an underground mine there; it’s about 1 million ounce target at plus 5 grams, and I’ll come back to that a little later.

And then, of course, when you look at our business, it’s all about discovery and development and our focus remains firmly in our exploration endeavors across our portfolio of mineral rights. The lowlight, of course, has been Tongon’s underperformance as we continued to address the power and availability issues which I discussed last quarter and I’ll update you under those respective points in the presentation.

These are the numbers which as I’ve indicated are generally flat, but still more or less in line with our guidance. I think the key factor in the results is the rise in total cash cost per ounce, largely attributable to the lower grade process from Gounkoto and I’ll come back to that. It’s a much bigger capacity, we’ve really got that plant up and running and we added some of the medium grade or from the stockpile to fill the plant and that has an impact on overall processed grade and, of course, cash cost per ounce. And then Tongon’s underperformance also contributed to that higher cost.

The drop in earnings per share reflected an increase in both in tax paid and depreciation. And I’ll just stop there for a moment and point out, if you take the $33 million gold on hand at the end of the period, you’ll see that we generally have about $8 million of gold that hasn’t been sold at the end of the quarter. So if we took that full $33 million and put it into the earnings line, it would represent about $12 million, but if you adjust it for leaving $8 behind, it’s about $8 million.

So you add $8 million back on the earnings, you add about $28 million on to the gold sales line. At the same time, if you look at our income statement, we had an extra $10 million of depreciation this quarter and we did guide you on that last quarter and there’s a detailed calculation because we did the pushback at Yalea South starting last quarter and again this quarter and we’re amortizing that pushback over last quarter, this quarter and into quarter one next year.

And then finally, also in the income statement, if you look there’s an increase in tax paid of $3 million, that’s a direct result of the good performance at Loulo, which is in tax, so it pays more tax on better performance and we are busy balancing, as again we’ve guided towards, we are managing the benefits of a tax holiday in Gounkoto, at the same time we got to make sure that Loulo starts delivering because that’s where the capital sits and we’re busy paying back that capital. A small contribution in the cost was also from the pushbacks, I mean, the extra higher strip ratios both at Gounkoto and at Tongon as we still are catching up in the mining that we got behind at the beginning of the year.

Turning then to operations, we’ll start with an overview of the Loulo/Gounkoto complex, which as I pointed out in the introduction produced a strong operational performance, with a further increase in plant throughput, and remember, when we first talked about the plant throughput, the plan was to get to 330,000 tonnes a month with the new mill and then tweak a bit and get it up to 350,000 and then get to 420,000. We’re already at 380,000 and we haven’t tweaked it. And that’s important, I mean, that’s the drive of demanding more feed which we took off the medium grade stockpile.

The debate now is that we’re not going to go ahead and spend a lot more capital to try and further increase it because it’s already two years ahead of the plan. And the key is to keep that rate. And so we will probably be spending a little bit of capital on residence time, a few more sea aisle tanks and making sure that we can deliver on that throughput, given that we’ve got the early benefit of it.

The reduction in grade, as I’ve touched on, was mainly due to the waste stripping at Gounkoto during the rainy season. We’ve just been through the rainy season and we – again in catching up the mining schedule, we were able to focus the mine on pushing back and you’ll see in underground Gounkoto extra mining tonnes, because we have a medium grade stockpile at about 2.8 grams, we’re able to fill the mill and still achieve our target of 130,000 ounces for the quarter. So that’s the way we managed it. And profit from mining under Loulo/Gounkoto complex was largely, as I explained, the gold – most of the gold we didn’t ship was from Loulo because it’s our biggest operation, $22 million worth.

So a quick comparison between the tonnes and grades mined and the tonnes and grades milled, and I think what I referred to earlier last quarter is that, one of our focuses is to get management to process what they mine and steer them away of playing with the balance sheet on stockpiling lower grade and mining higher grade. We’re very focused on that, because we’ve never been a company that focuses on the cash costs, we’d rather look at bottom line net earnings and that’s key in that basis. That’s what happened this quarter and again I’ll touch on this in a little bit more detail, but you can see if you add up the blues and golds, we processed everything we mined at Loulo and Gounkoto over the year.

These are the detailed results for the combined operations or the complex as a whole. As I explained, the head grade was down because of the reduced contribution from Gounkoto, which also affected recoveries with the consequent impact on total cash costs. Profit from mining was up on the comparative quarter of last year, but lower on quarter two because of unsold gold, I’ve already referred to. I think the key that I’d point you to is the nine months on nine months comparison and you can see a very healthy improvement in all the numbers. And that really gives you a better feel of the trends and the fact that we’re on track with our plans to grow the production within that complex.

Moving now specifically to the two separate entities, Loulo first, the most pleasing aspect of the strong all round showing by Loulo was the robust performance of the underground mines, which upped their delivery by 30%, contributing the bulk Loulo’s production and boosting its output 78% quarter-on-quarter. After a lot of effort, Yalea and Gara are finally coming into their own and it’s very important for the long-term sustainability of that project. And it was actually this last quarter for the first time where both underground mines achieved their monthly development targets of 1,000 meters a month at Yalea and 800 meters a month at Gara.

This is a closer look at Yalea where the progress that’s been made has enabled us to settle the mine plan for the next 18 months, as shown here on the inset, and also the whole mining layout which we’ve described in the bottom left hand set of bullets. The improvement in the development grade was attributable to the introduction of independent blasting conditions. In other words, as the development got away from the mining, ore mining, or stoping, we were able to really separate those two activities. And also the improvement in being able to clean the headings and the reason for that was we eventually got all the ore passes and the waste passes up and running. Another point you’ll pick up in the detail is as the development has advanced, the cost per meter has come down and we’re pretty much on budget now with the cost per meter.

On the mine design, as I’ve described there, you’ll recall that we’ve committed to really boiler plating the period until we’ve got the backfill plant commissioned, which is scheduled for the end of next year. And so we’re going to be developing an ore and waste drive on every level, every 25 meters up until the end of next year, but once we got the placed backfill commissioned, we’ll be dropping the foot well development three out of four levels. And with the spacing of those spirals, basically, what happens is we develop our 200 meters and then retreat mine.

And so we can do that. It builds the flexibility. The net results is about $0.5 billion overall saving on capital development, of which $300 million will go back to the life of mine numbers, back into the OpEx, which will impact on the operating costs, but a net saving of about $200 million. And just another little addition is that, we’ve also introduced temporary CAF, Cement Aggregate Fill plan, where we’re going to be back filling some of the stopes. It’s a good practice and also it allows us to start accessing the higher grade purple patch a little earlier on in our mine plan and you’ll see when I give you the guidance that we’re going to benefit from that as far as our production profile goes.

And Gara, other underground mine, it’s again encouragingly coming out of the blocks. We’re still installing the conveyor belt system and we’ve also signed off on the new design for some of the flat stopes, we talked about that last quarter. So that’s done and so we will be – that will help us build up to the target of 80,000 tonnes a month by year end, which will bring us in line with our original target of 200,000 tonnes a month out of the underground operations at Loulo. Gara mine design will follow the same principles as I’ve just explained for Yalea.

The standalone results for Loulo show that, as planned, it has regained its position as the major contributor to the complex throughput and production and as opposed to the pleasing reduction in cash costs and improvement in profit from mining. And there is still some upside at Yalea, where updated modeling on the back of underground drilling has indicated that we will probably be able to add to the reserves particularly around the high-grade purple patch designated by that dotted purple line.

Furthermore, a deep hole drilled below the current limits of the block model intersected a high grade zone in the hanging wall structure. And structural modeling during the quarter identified potential at depth to the south of the deposit. This is a big system, and as you can see, the mineralization is quite clustery and the key is looking for those next big high grade blocks within the overall structural system. And we will be drilling additional holes to test this potential over the next year or so.

On the Greater Loulo permit area, in addition to the known deposits that we’re busy evaluating, like Loulo 3 that we’ve talked about in the past, a number of targets have been identified and notably, Baboto South we’ve just signed off on about 150,000 ounces of resource – indicated resource in the $1,000 per ounce pit shell at about 3.4 grams a tonne and there is also plenty of opportunity along strike, particularly around that Baboto target and we will be – you can look forward to further updates on that through the next couple of quarters. We have just gone back into exploration mode following the rainy season, we spend a lot of time reevaluating and reprioritizing our exploration strategies.

Moving south, Gounkoto also had a solid quarter. As I explained earlier, the flexibility of a multi-mine operation allowed us to reduce the tonnes mined and supplement this with stockpile material, which obviously impacted on production grade and costs. But when you look at it as a whole, we’re well in line with our budget. Having paid a maiden dividend in July, Gounkoto has declared a second dividend of $69 million this month, effectively paying out all the profits from last year, that’s why we did it, and which is good for us as well as the government of Mali, a 20% shareholder in the mine, which as you know has been going through a tough time of late.

Gounkoto standalone results bears out what I’ve been saying and clearly shows the effect of blending 180,000 tonnes of stockpile material at 2.8 grams a tonne into the plant feed. And incidentally by the end of next year, we plan to, as I pointed out last quarter, the plan is to move, Gounkoto is still in a tax holiday, so we’re balancing the benefits of that holiday as well as managing the repayment or recoupment of our capital in Loulo, but our target is to get to a split that’s in line with the reserve ratio of the two mines by the end of next year and that ratio is around 60-40.

I think something that I’m mindful of when we talk about 3.5 grams in – being processed out of Gounkoto is everyone just immediately goes to the ore body, as you know in Randgold Resources’ ore bodies are very important for us in getting our geology right and we have a policy in Randgold that every three years we do have full independent review of our reserves and resources and calculate cut off grades, the modeling that goes with the mine planning. And we’ve just completed that at Loulo and Gounkoto.

And this is an analysis of the tonnes grade and then of course ounces, looking back to the original resource model, then the grade control model, that’s the mining model as we convert that into reserves and then ultimately, what went into the plant – project to date. And you’ll see a very good correlation, I mean reconciliations like this are absolutely perfect and that’s the key in mining, is if you get the grade right, half your challenge is over. So we’re very pleased with that and it’s something that we always pride at ourselves and then that’s been able to predict and manage our ore bodies optimally.

In the meantime, we’ve also been making good progress with our investigation into the potential of the underground mine below the pit at Gounkoto and our preliminary views, as I’ve referred to earlier, found no fatal flaws in the ground conditions and point to an ore body, as I said last year between, five and 10 grams, that’s on a resource base, we’re still going to put in all the mining dilution, and losses, and everything else. So that’s why we’re happy it will be plus 5 grams.

Its 1 million ounces, it’s very much – you’ll see that little arrow high grade underground zone, like a little purple patch sitting under the Gounkoto pit. And the next step is now to drill that out to reserves, along with completion of the prefeasibility study, which is due early next year and then progress to a final feasibility study by the end of next year and we intend to start with the development of that decline starting 2014, bringing to account another 1 million ounces of reserves.

Around the Gounkoto permit, there are approximately 400,000 ounces of inferred material in satellite pits and 10 identified targets at various levels in the resource triangle. In quarter four, we embarked on a ground RP survey, which will be mapping in the bedrock geology under the extensive transported gravel. There’s a big structure that comes through that hosts all the deposits on the Loulo and Gounkoto permits.

And this major structural discontinuity has already produced substantial discoveries and we’re really – we’re excited about the work that the geologists have done and not only are we looking to replicate the models that have led to the discovery of Gounkoto and Yalea, but also we’re able to see finer flitches in the structure there and particularly the Jog Zone area in Gounkoto offers some interesting opportunities to model new targets in that region.

As I alluded to earlier, we’re working on our budget for 2013 and, as usual, we’ll be publishing an update of annual five-year guidance early in 2013, but we decided as a part of our commitment to making sure that the market is properly briefed by management rather than having to second-guess messages that we’ll just give you heads-up of our plans as they stand at the moment. And this is the production profile for the Loulo/Gounkoto complex which shows a much steadier growth and a slightly more ounces over the next period out to 2016.

We’re expecting the cost to be a little higher in 2013 for this complex, driven by, one, the allocation of more operating capital into and we’ve never been one that tries to lighten the cash costs. We’re very focused on putting everything that goes to deliver a bar of gold into the cash costs. And again, another contribution to the cost next year is the delay on the heavy fuel power project. Again, we guided that last quarter that we’ll be bringing that conversion of medium-speed engines into the back-end of next year. So there is a little longer period we run at diesel before the conversion starts paying or delivering the benefits.

Over then into Morila, which just keeps going, beating this quarter its plan again by significant margin. I think I referred earlier to the importance of mining the whole ore body, this is a classic. We’re actually benefiting from the inefficiencies of the early part of the mine’s life where we try to high-grade the ore body and put the lower grade ore body on stockpile. And in fact now, this last quarter, we moved into mining mineralized waste, it’s not even in our balance sheet, and we’re still delivering healthy profits from that asset.

We’re also continuing with our plans for a pushback of the pit. There is about 100,000 ounces in the bottom of the pit. We’re engaged with the Mali government to find a win-win situation in being able to participate in the revenues of doing that pushback. It’s a big capital cost to push the pit back. So its back end loaded as far as revenues go. And under the current tax regimes, the government gets 60% and we get 40% and we’ve suggested that maybe we should structure so that we get 50-50, because we carrying the risk. And we certainly have traction with the government and we’ll – the intention is to try and settle this plan before year end, so that when we come back to you in January, we’ll able to confirm the detailed guidance.

These are the Morila operating results for the quarter, which largely speak for themselves. You can see we’ve done very well on the total cash costs, despite the drop in grade and the reason for that is that we’re no longer adding a deferred stockpile cost to the cost, because we’re mining mineralized waste which has no value in our balance sheet.

And this is the Morila five-year forecast and the dark blue bars are, if we do the pit for pushback, that’s the contribution, it effectively gives us another year of production before we start processing the tailings dam and the tailings dam as you see drops down to the sort of 45,000 ounces a year and it’s full breakeven cost about $1,300.

And what it does is it’s not going to make much difference to our business, but it pays for the closure of the mine. It allows us to really settle down our agri business strategy to ensure that – and what our plan here is to be able prove to our partners in government that we can leave sustainable businesses and employment behind after mining. That’s an important project for us and also it takes away a big liability, in that we put the tailings dam back into the pit, and take away all the potential risks of leaving the tailings dam often in semiarid environment and having to manage its rehabilitation.

Moving to Côte d’Ivoire, it’s not all bad news at Tongon. We continue to improve plant availability. We have moved the availability up from 80% to 85% and consequently, our throughputs lifted which is encouraging. I think the more encouraging part of that is that we’re already over our design at Loulo and if we can take that last 5% out of availability, we have got another improvement still ahead of us as far as throughput goes.

This certainly helped us, this quarter, to maintain production at the quarter two rate, despite the continued disruption caused by frequent power outages in the grid. We did, again, refer to that last quarter; you’ll remember I pointed out that we had ordered an additional five generators to augment a backup power plant because we’ve been using it more as a full generating facility, power generating facility. Those gensets are now on site and we’re busy with the commissioning of them.

And what that will allow us to do us to stabilize the process, whilst we deal with Ivorian government on some very critical things as far as distribution of power in Ivory Coast. It’s all about infrastructure. The Ivory Coast really had no maintenance spent on it for the last five, six years and we’ve run into number of challenges within the main grid, bigger transformers that are not working optimally. And we have two issues with the grid power. The first one is constant blackouts, and some of them are only one second, but when you have a blackout, you catch the whole plant.

And the second one is fluctuations in the voltage. The extra five gensets will allow us to take oscillate the gold production of the plant on power, on diesel power (inaudible) impact of the general steady processing, which is important for particularly the float circuit part of our process. And then as we pointed out, the power fluctuations can be managed through extra capacitor capacity and we’ve ordered those. They are due on site this quarter, and we should have them up and running by the end of the quarter.

And then of course, the Ivory Coast government is also investing in its infrastructure, both in capacity and reticulation. And we expect that to be largely addressed, as far as we’re concerned, around the middle of the next year. So we’re seeing a slightly higher cost profile for Tongon going out to about the end of next year. Of course, we’re going to be working to get – bring that forward, but that’s our plan and our forecast are currently based on that strategy or that scenario.

These are the numbers for Tongon, which as I pointed out right in the beginning, certainly could have been better, but should be seen in the context of the specific issues I’ve just shared with you. The lower grades is part of the mining sequence. As you know, we stumbled in the mining and in the last rainy season we’ve been catching up and really it’s a product that we’ve haven’t got to the higher grade part of the ore body yet. And we’re just into that higher grade part now, these last couple of weeks, and that will come. I think the throughput certainly helped to alleviate that. But again, we also had higher power costs. Our average cost per kilowatt is about $0.17 and if we were delivering as per the plan of 98% from the grid, that was our original feasibility plan, it will be down at around $0.10, so that’s the impact.

We’ve also – as we did in Loulo, particularly on the underground, we were not only working to stabilize the power issues, but also we’ve made some fairly senior management changes at Tongon, bringing in some of our seasoned West African operators and we’ve also reinforced the up-skilling of our local operators. We’re very determined and committed to making sure that we end up operating our mines with national skills, and that’s an important part.

We’ve beefed that up, because what happened in Tongon with the constant power interruptions, we started getting behind on the plant maintenance and we got into a firefighting mode in Tongon and we’ve really had, as a management team, to stiffen and help out and get the mine management back into a position where it’s proactively managing its business rather than reactively managing its business. We’re guiding to achieve our budget this quarter, but the key thing you will see on our guidance that I’ll come back to it is that we can’t see ourselves catching up on the underperformance over the last three quarters. So that has impacted our guidance and I’ll touch on that a little later.

On the good news side, still at Tongon, infill drilling is progressing in the southern zone of the ore body to convert inferred resources to indicated below within the $1,000 pit shell. When we ran the pit shell last year, we had quite a bit still in inferred resources and we’ve got a drilling program that’s focused on converting that. So we’ve got upside in the reserves.

And also the latest round of drilling has also identified some possible extensions in the southeast of the ore body, where there is a big thrust zone in that red circle and we’ve got some brand new intersections in a completely new target within the pit shell and we have – it’s going to take a bit of time to really work out whether this thrust that we’ve picked up is continuous (inaudible) an ability to contribute to the reserves. Elsewhere on the Nielle permit we’ve been refining and validating field observations on the brownfields target as well as near-mine targets. And recently, we’ve staggered a couple of good intersections at the Coucal and Coucal South targets, which are very close to the mine infrastructure, as you can see on the slide.

As I pointed out, Tongon should be – do better in the fourth quarter, but we’re not going to catch up for the year and so looking further ahead, however, we’re very confident that as we bed down the operation, Tongon will get to its targeted to 280,000 to 300,000 ounces per year level. So we’re maintaining our five-year guidance on production with some anticipated increase in cost certainly in the short-term because of the decisions we made to stabilize the power supply.

Also, with Côte d’Ivoire returning to normality after last year’s post-election problems, our exploration teams have now finished the review of all our permits. We’re busy lifting the force majeure on them. And we see this next field season as being a full field season, having reviewed the prospects and completed the planning. So we’ll be able to start reporting on our work outside the Tongon exploitation permit going forward.

Moving into Kibali and the DRC housing update on the project, which continue to advance steadily towards first gold a year from now. All key contracts have now been awarded, which is important. The bulk earth works for the plant are in place and mass concreting has started. The concrete foundation for the first CIL tanks has been completed and the steel work has begun. So you’re starting see the shape of the mine now. And I’m sure you would have picked up that there are two 7 megawatt mills, each weighing about 170 tonnes and we’re transporting them in three sections each, are on their way across Africa from – they’ve arrived in Mombasa. And in fact, the first three segments are already 1200 kilometers on their way to the mine, they’ve got 500 kilometers to run.

We’ll have the – both mills on site by the end of this month, early in December, which significantly ahead of schedule. We expect those mills – the foundations to be complete early next year and once – in about six months, once we get the mills on the foundations you need to get all the popping and infrastructure. That’s a critical path that we’re very pleased with. The same with most of the other major equipment that’s been manufactured, most of it is compete, the crushes, the big motors and that, and they’re all on their way to the site, as we speak.

The relocation program is also making good progress. We’ve passed the 1,000 family mark, we’re competing about 45 houses a week at the moment and for all intents and purposes, the entire mine footprint that we need to build the mine is now clear. And what we’re dealing with is the other villages within the, what we call, the engineering footprint. And so we’ve got a fence around the footprint that we’re going to operate the mine in, and we’ve cleared it with an intention as we’ll have cleared that.

For those who are not familiar with this project, it’s going to end up moving 4,000 families, about 18,000 people, 14 churches, catholic cathedral, 17 schools and – into a model village, bricks and zinc houses with running water and electricity. So a big social project for us and which is making a significant contribution to the region. Capital expenditure for the project remains in line with previous guidance, and there is a difference in cash flow.

If you look at our capital, we’re probably going to be $100 million behind than the overall group capital this year, but it’s just cash flowing at this stage. And we’ve always said that the best will in the world, capital projects, you never pay the – and with CFOs like Graham, take a little longer to pay our bills. No, on a serious note, they never worked out exactly and we also guided that, although it was (inaudible) we were going to probably split it equally between the two years.

Just for those who are interested, a couple of pictures, the top left is the box cut for the decline. It’s just about – in fact it’s complete now and we’re busy preparing to start the sink of the declines, the burn cut out of Australia have got the contract to do the decline development and lateral development of the mine. Those are the mill foundations going up. Bottom right is the crusher and conveyor sections to feed the plant and on the left-hand side you can see the CIL tanks coming out the ground. So that’s it. We’ve got 4,500 people working on the site at the moment, but I think about 25 different contractors.

While our capital team is building the mine, one thing we’re very aware of is more ounces makes more returns on the same capital, and our geologists have been working alongside them to add ounces to the reserves of the known deposits. And two areas that have now got our focus are in the KCD deposit is the extension of the 5000 lode and there’s a gap in the 9000 lode where we haven’t drilled it out. That’s the middle of the cross section.

You can see Phase 1 gap and Phase 2 gap, and then, of course, the down dip extension, where we’ve got some boreholes down dip, and we know that they’re good. And the potential for that – conversion potential for those two projects is about 1 million ounces, so significant. And that’s the exciting thing about these big underground deposits. You move the deposits down a little bit, a few hundred meters, and you add lots of ounces.

Kibali is also making steady progress in reviewing their inventory we acquired from Moto with Kibali and we expect to complete this as planned at the end of the year. And at the same time, the work on our greenfield team is focusing on targets further afield, and particularly to the east of the target which is largely unexplored, really hasn’t had much work since the Belgium days. And that’s the place if we’re going to find a new big deposit in our mine, that’s where we’ve got to go to find it.

Most of the targets, those little stars you see there, they’ve potential for additional extensions or conversions, because Moto what it did do is it at least put a couple of holes into all anomalies. So we’ve got some basic geology and all those targets and that’s what we’re working on when I refer to the inventory, that’s our inventory. It’s about 8 million ounces that are not in the mineable reserve category that we’re busy evaluating.

Staying with the projects, but moving back across to West Africa, our Massawa project in Senegal remains one of the largest undeveloped ore bodies in Africa at 3 million ounces and as we mentioned to you last quarter, we’re attacking this project on three fronts. First, the best way to really bring it to account is to find more like anything. It’s a very complex ore body that needs pressure oxidation to deliver. So that’s the next challenge, is if we can access cheaper power, it will make a big difference to the economics.

We’re in negotiation and discussion with the Senegalese government and the Malian government on various permutations accessing hydro power and those countries have a big Millennium infrastructure strategy, like everyone short of capital. And we’ve shown that certainly hydro power is a very quick payback for us when you replace diesel power. The traction of this is if we get access to a significant source of cheap power, $0.10 power or even $0.14 power, the savings we’ll get at Loulo will largely pay for the Massawa development. So it has a big impact on our business, and so we’ll keep you posted with that project.

And then finally, the pressure oxidation, as you know, pressure oxidation has hurt a lot of people in commissioning and we’re mindful of it being a challenging technology, something we’ve never done before and we’ve really taken a good look at this, we’ve also noticed that the eastern European guys are – seem to be able to build it cheaper and the consumable costs are lower than the Canadians and Americans.

And so we’ve embarked on a program to really familiarize ourselves with the full spectrum of available technology and we’ve also, in consultation with our various advisors, understood that we need to go and do some plant scale test work, pilot plant test work, and that’s planned for next year with the objective of getting the project up to bankable level by mid-2014, so six months after we tick the box in Kibali. And we’ve shared that strategy with the Senegalese government and what we’re very clear about is, everything we’re doing on this project, we’re adding value, whether we end up developing it ourselves or bringing it to account another way, we’re still adding value to this project.

Completing the operational overview then is the – this preliminary update of our five-year forecast. As I’ve already indicated, it’ll be further refined before we publish the official forecast in January, but we have done this to ensure we keep the market abreast of how we’re managing our business and how we’re looking at our future. As you can see, we expect to be at the low-end of our guidance for 2012, mainly because as I pointed out earlier, Tongon’s underperformance, but we’re looking to take a big step up in 2013 and especially in 2014 with Kibali coming online and we’re very comfortable with our target of breaking the 1.2 million ounce milestone in 2015.

The grade – another thing, as you know, one of the big stresses in the mining industry is the over-mining of the ore bodies, high grading of them and you’ll see that we’ve got a very healthy-looking grade which supports our growth. So not only are we increasing capacity, but we’re increasing the grade fed to the mills on a consolidated basis. The slight dip is the fact that we’ve also got the low grade tailing dam numbers in that from Morila, which don’t bring a lot of ounces, but they impact on the overall grade, because there’s a lot of tonnes.

I think the other point is that, 2013, we’re expecting a slightly higher cost, so costs are not coming down as quickly 2012 to 2013, but they’re on the right trend and we’re comfortable; we’ve always said that we want to get to 2015, 1.2 million plus ounces at around $550 total cash cost and that really has always separated us from the industry and that we don’t have to call on magical cost controls to get the relative cost down where we’re helped by the fact that we’re mining better quality ore going forward. And we base all our forecasts on spot input, current input looking out. So we don’t try and fiddle with inflation or anything else and this is what it looks like.

I think, having made that point, it’s interesting to compare our production profile with that of the gold industry, indicated with the gold bars, which, despite the 10-year bull run in the gold price, remains flat and, certainly on the back of the latest developments in South Africa, very little prospect of improvement. I think I’ve said for some time now, our industry is effectively ex-growth. And the other point is not only is it South Africa showing year-on-year declines, but in the last year, we’ve seen the United States, Peru, Argentina and Indonesia also show declines in gold production year-on-year.

I think it’s also worth pointing out that forecasts indicate now that the production out of Ghana, Côte d’Ivoire, Mali, Tanzania and DRC will significantly exceed South Africa’s output in a couple of years time. And that really reinforces the important aspect that we always share with our shareholders, we’re in these countries why, because they are prospective and they’re growing, and that’s what we’re interested in. They come with risk and we’ll spend a lot of energy managing that risk, but with it we certainly believe the risk adjusted cost of capital is worth it staying in those countries.

And again, a lot of people see the debate raging at the moment between governments and the industry as negative. One thing we’re sure of is that all the governments of the countries we work in are actively aware of the importance of job creation and attracting capital. The debate is, what is the reasonable take on tax? And taxes come in many form, whether it’s equity or royalties or real profits tax.

And our encouragement is we recognize the importance of royalties to governments, because there’s a guaranteed flow of revenue, but after that we really spend a lot of time explaining the importance of, it’s not about, if you want to get more tax revenues, but encouraging that investment, because it’s much easier to grow your tax base by having more mines, than trying to ring out the last bit of revenue from the first arrivers, who have taken that significant risk to come into your country early on in the evolution. And the other thing I often pointed out is that you can’t really harvest an industry that hasn’t been formed yet, like an the Ivory Coast. So let’s build the industry and then we can worry about how we’re going to tax it.

As usual, this is our share price comparison. And as you can see, our consistent operational delivery continues to be mirrored by equity performance. We have days like today that are little down; we have days like yesterday that we’re a lot up. And my personal view as I’ve been there for a long time and at the end of the day if you don’t issue equity at a discount, and you worry about growing your value per share, the market eventually realizes that. And that’s what our focus is in management at Randgold.

As I promised, in conclusion, I thought it worth spending a little time reflecting on the latest debate around moves by African governments to change mining codes and impose punitive taxes. And I think it’s worth noting that key to this debate is the risk to long-term sustainability of the resources industry and its ability to contribute to job creation and economic development of these countries.

It’s my contention, and has been for some time, that there are many stakeholders with interests in a country’s natural resources, but it’s principally the partnership between industry or capital, governments and labor that decide the difference between success and failure and there’s no better example than what recently has happened in South Africa. We’ve had a complete breakdown in that partnership. So we’re very mindful of that and so are the governments in which we operate. And we’ve spent a lot of time engaged as an industry and in particular as Randgold Executive Management with these government officials and the bureaucrats below them.

It’s a complex issue; and we have and will continue to engage in the debate, both directly and with governments and with other stakeholders. And you would have seen and it’s gratifying to see the initial engagement we’ve led, both in the Congo and Côte d’Ivoire have resulted in the governments coming out to comfort investors that there is no intention of retroactive activity. So what really is left is how do we manage the future? And it’s up to us as industry to engage and demonstrate and deliver on those benefits that we so glibly talk about, but find hard to deliver against.

I would say that so far our engagements have been robust, as they always are with Randgold Resources, but constructive. And there’s a real appreciation on – by all the governments with which we work of the importance of the mining industry and likewise, as I pointed out, the importance of stability in – I mean, if the DRC had to contemplate changing the investment code for us in Kibali, we haven’t finished building the mine yet. It’s a little silly. And I think certainly, the Congo understand what happens, because they’ve been through the mining review fiasco, which wasn’t good for attracting further fixed, I reckon, investment in their country.

So we get a lot of traction with our discussions and the DRC is a process, it’s very clear, we’ve seen a few leaks out of this process, which the press tend to grab on to, but it’s a process that will go through the Ministry of Mines, eventually the debate will expand into the President’s Office and it’ll involve the industry and then, only after that will it be considered as legislation and taken through to Parliament. And we’ve had conversations at all those levels, including Parliament, the parliament leaders and people are very appreciative and mindful of the importance of this debate and where it comes out at the end.

I think that really sums up presentation for the quarter and again, we’d be delighted to take questions should you have any.

Question-and-Answer Session

Cailey Barker – Numis

Thanks very much, Mark. It’s Cailey from Numis. Could you just give us a little bit more color on the Gounkoto underground? I know it’s a bit early, but conceptually, is this going to replace or is it going to be supplemental to ore, what’s the sort of CapEx and things like that?

Mark Bristow

At the moment, it’s additional. The next step is to do the drilling to get the risk out of the resource at this stage, so we got a bit of conversion drilling to do, tidying up. And with that will come the pit underground interface, which could well impact on our schedule, our open cost schedule, exactly how that works out because the last thing we want to leave is quality ore.

And when we did the Yalea pit underground trade-off, very quickly the underground starts paying more than the pit, so that would impact on the size of the underground and – but it’s a relatively small development, it’s a very small area. If you look the section, it’s a very small surface area because they are two very thick zones sort of stacked next to each other. So it’s a simple spiral. It’s hardly any lateral development. And it’s a sub-level open stoping, but with some variations because of the shape of the ore body.

Capital, it would be a difficult one for me to guess at this stage. We’ll get that pre-fees out fairly quickly, certainly early in the New Year. I mean, the objective is to get this out in time for our annual report in March. So if you don’t mind, I’ll take a rain check on the capital.

Cailey Barker – Numis

Sure. How about on the production, I mean, if you got an idea ballpark?

Mark Bristow

I would, at a guess sort of 60,000 to 80,000 tonnes a month, we should be able to get up with that because of the thickness of the ore body. And again the costs should be attractive. I mean, the point I’d make to you is that on a like-for-like basis now in Yalea, we’re down to sort of $43 per ore tonne mined underground. That’s going to go up because of that capital allocation that I referred you to, but on a like-for-like basis against our feasibility. And we expect to bring that down a little further as we reach our full production profile. And so that’s a good number to – Kibali is a wider, more complex ore body to mine and that’s sitting at about $51 a tonne. So that’s the range. I don’t expect it to be far out of that range.

Cailey Barker – Numis

Okay. Thanks very much. And then just a second question on the plant expansion at Loulo and Gounkoto, what’s the sort of – essentially you’re not going to go ahead with it now in terms of investing a large amount of capital, but what would – I mean, could it come back on the cards, what would be – what you need to consider it again?

Mark Bristow

I mean, I would look at Graham here, but our original plan when we looked at it, it was to take it from 330,000 to above 350,000; we’re talking about $5 million, $4 million or $5 million. And then to go from 460,000, 470,000 to – 360,000, 370,000 to 420,000 was about $25 million, about that amount. But that was in two years’ time. We’re already at 380,000, we averaged 385,000 this quarter.

So – and again what – it’s important, it’s not just about throughput; it’s about can you – do you have the ore to put into the plug to fill it. So that’s – we were able to – we got some medium grade stockpiles around that we can fill up at the moment, but we’ve got to get our production up and you don’t want to run Gounkoto out and end up just with Loulo, if you can, and in the meantime blow capital. So our review with this guidance and this guidance is based on the current report, so the guidance – and there’s – we’re still producing more ore than we originally had in January 2012 guidance for the five-year plan, we’re producing more gold because of the grade and the fact that we’re already 50,000 tonnes a month higher throughput. So really that’s the trade-off.

So for us what we don’t want to happen is when you’ve got a – right now, the constraint in the throughput is we’re starting to pressurize residents’ time and the pumps and the plant, the rest of the plant, the milling capacity is not a constraint. And we’re also putting pressure on the front-end with a crusher. So, for us, we’ve got a project at the moment, we want to put in another crusher. And we’re looking at adding to the CIL circuit a little bit. So a grade gram is, what, $6 million – $4 million to $6 million?

Cailey Barker – Numis

(Inaudible).

Mark Bristow

$10 million over the last – over the next sort of 18 months to just crystallize that 380,000, and I’m sure we’ll get a little bit more efficiency as we go, but it’s – unless we find something else – and that’s – Baboto will help a little bit, because it’s another pit, there’s only 150,000 ounces.

Cailey Barker – Numis

Gounkoto adds life, it doesn’t really add volume. I mean, Gounkoto underground. What it does with Gounkoto is we can manage that to sort of 2019, 2020 on the same ratio with Loulo. So I think that’s really our thinking at the moment is to work on how do we optimize that and, of course, any access to additional mining rates would help us make a decision on whether we look at continuing to build the capacity of the plant.

Mark Bristow

Okay. Thanks very much.

Unidentified Analyst

Mark, how should we think about the strip ratio at Gounkoto for the fourth quarter and for 2013?

Mark Bristow

The overall life of mine strip ratio at Gounkoto is 8.6 to 1, and that’s pretty much in line with our original plans. We are still in – we’re going to have a higher strip ratio than planned next year. Let me just get it for you. How much? 9.3 next year. And the next year?

Unidentified Analyst

(Inaudible).

Mark Bristow

11, 12, 12 and then it starts coming down.

Unidentified Analyst

And what is the cost of the pushback at Morila potentially, if you do it?

Mark Bristow

$14 million, one four, the push back at Morila $14 million, sorry.

Unidentified Analyst

And finally, how much power do you think you’d need from Massawa in terms of megawatts?

Mark Bristow

About 30 megawatts, 25, it depends, if you get grid power or hydro power, you need less, because if you put diesel power and you’re going to have the ability to start the motors, you’re ability to draw power is limited. So your capacity – installed capacity has to be more, but 25 to 30.

Unidentified Analyst

Thank you.

Mark Bristow

It’s a small operation, that’s why it’s so expensive. It’s 25 to 34, 200,000 tonnes, 150,000 to 200,000 tonnes throughput because the concentrate, you are concentrating.

Bruce Alway – Société Générale

Bruce from SG. Mark, just two questions on Tongon. Firstly, I don’t know if you mentioned it, the CapEx with regards to the capacitor bank and the extra five gensets. And then any ongoing concerns on the abrasive ore, these mechanical failures, the pipes and pumps, do we need to think about looking at sustaining CapEx level over life of mine?

Mark Bristow

We’re guiding, we got a bit of work to do on this, but about $20 million to $25 million of capital next year, and then we were at $8.6 million and then $6 million is the life sustaining capital.

Unidentified Company Representative

This is not a long-term plan, the installation of the gensets will – the big thing is what we’re doing, we already got pressure to rebuild some of the gensets because they were running longer than if they were just backups. So the extra five gensets gives us that flexibility; it gives us the flexibility to run the whole plant on diesel if we wanted to; so it’s a full plant. But as soon as we get back into the grid, of course, that will benefit us because of the replacement plans for that backup power going forward.

Jon Bergtheil – Citi

Mark, could you – sorry, Jon Bergtheil with Citi. You spoke about Massawa, the words you used were whether we’re developing ourselves or bring value in another way, could you just elaborate on that?

Mark Bristow

Well, as you know. we have very strict criteria, 20% internal real rate on return. Right now, to get that, we start with 3 million ounces; we’ve got to higher grade the body – the ore body, so we end up with 1.5 million ounces. So today, that does – although we get our return, it doesn’t fit our size profile, which is like 3 million ounces of mineable gold.

The two ways that we believe we can improve on that, the first one is that we were very conservative in the way we treated the variograms of the high-grade zones in the ore body and we’ve gone back in, we’ve got a drilling program now where we’re drilling a number of detailed closed-space crosses in the ore body to really be able to model the variogram and the impact and continuity of these higher grade zones. That will give us some comfort on whether we can deliver a higher grade feed to the concentrate.

And of course, we’ve – also what we did with the exploration team is we just candled our targets, because we’ve been looking at them for too long and they’ve already generated (inaudible) we got a big ground holding there, it’s very prospective, lot of gold in the system, Massawa on its own is about four kilometers long of continuous mineralization, but in – lenses of much higher grade.

And so – and then of course, if you can drop the costs and power costs of $0.35 compared to $0.10 or $0.14 makes a big difference on your pay limits and again will bring more ounces into the reserves. If that all fails, I know you bankers would love to have a 3 million ounce project to go and sell to a whole lot of people that are probably over-capitalized and reserve-constrained. Does that answer your question? But we’re not taking calls yet.

Unidentified Analyst

Mark, I just wonder what the recoveries were, if you – what were the recoveries coming...

Mark Bristow

Yeah, it’s about 30 – 30 to 35. We’ve done a lot of – enough work to know even bioleaching is like 80, pressure oxidation is 90. The ore is very – it’s just got a very strong exothermic geochemistry. And I mean it reacts very well to pressure oxidation. So, it’s definitely the right way to go. And we’ve said a lot of time looking at deleterious minerals, all the things that end up missing was the pressure oxidation process. And we’re at a stage now where we can’t really improve on that unless we do plant scale test work, full scale test work, that’s our next step. And some bulk samples will help was also understand the ore body.

Unidentified Analyst

(Inaudible) Merrill Lynch. Would you mind just giving us an outline on how the environment is in Mali at the moment? And George, just your opinion and observations of the situation and outlook, and your dealings with the authorities and so forth?

Mark Bristow

Yeah, we’re very real citizens of Mali. As I pointed out earlier, we are – represent – 2011, we represented 9% of the GDP, we pay about 6% or 7% of the budget in taxes, and growing. I mean, Mali is a very special country. As you’ve seen, we have been able to operate under some very difficult circumstances; no one has ever threatened our business. It’s a very welcoming and peaceful nation and it’s very disturbed about what’s happened in the north, which is a pride for Mali, both their democracy and the situation, they’re unrelated. The one, the collapse of the democratic structure in Mali was essentially a result of the government losing its mandate with the people.

The northern crisis is a product of an unforeseen or unintended consequence of the Libyan intervention by the international community. But if you look at on an international timeframe, the responses have been amazing. There was a coup; the constitution was reinstated within a fortnight. Very quickly there was a recognized constitutionally based interim government appointed and then there was a response from civil society that it wasn’t broad enough and it was renegotiated and it now has a recognized and accepted transitional government led by some very competent people, I might add.

And on the back of that, we’ve just seen all the international aid programs get reinstated, the recognition across the globe by the majors, the powers and at the same time there has been – I mean, ECOWAS structures, West African Economic Union, has really played a big role and along with France in mobilizing the international community and – which is the population support and what they want is their country back. So – and there is a very clear and sanguine view on this.

First of all, there was a dilemma because the guys who started the fight were the Tuaregs that are technically Malian, or more than technically. And so the launching of military offensive over your own citizens was always an issue. They’ve come full circle and they’re back on the right side of the table, and so it leaves the desperados. And this is driven by drug trades and hostages. And we always like to hang on to things, and give it a religious sort of connotation, but it’s much more criminal than that. And so the appreciation is that it’s fairly contained challenge to deal with that issue. And to make it effective it needs careful planning, proper skilling of the military, and execution is got to be done properly.

And so you’ve seen publicly now the various major powers supporting that initiative both in the sense of intelligence and logistics and equipment, hardware as well as skills training. So I think – and certainly there is an appreciation, as this is not a cavalier, let’s go to war process, this is a serious thing and I think the sincerity of that engagement has already driven some of these people to start engaging in discussion.

I think the other key step, or shoe that dropped was Mrs. Clinton’s visit into Algeria, because that’s a key player in this process. It’s a super-power in that area, and it’s equally disturbed about having major disruptions on its backdoor. And again, all the other countries, whether it’s Mauritania, or Niger, or Senegal, even Ivory Coast, they’re mindful of the damage it can do to the enormous progress that we’ve seen in West African politics over the last 10 years.

So – and I think there is – certainly speaking to the Mali authorities at all levels there is a very real realization of the severity and responsibility. And I believe that the execution when it happens will be mindful of that. Today, it hasn’t impacted on us. We’re very good at managing dynamic situations and our immediate response is to ensure that we keep our people updated that we’re fully integrated in the thinking and ensuring that we don’t allow any opportunity to impact on our business or our people because of strange people running around doing silly things. But certainly as far as the authorities and the regional authorities go, whether it’s logistics or security or military protection we’ve got a lot of that at the moment and Ivory Coast, even in our operations, there’s a heightened appreciation that you got to look at this as a regional challenge.

Okay, as usual there’s a little bit more wine left outside and a couple of snacks, and we’ve got members of our team here, and I’ll pop across and catch up with you, if you got any questions that you don’t want to make public. We’ll be happy to answer them. Thanks very much for coming everyone.

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Source: Randgold Resources' CEO Discusses Q3 2012 Results (Media Presentation) - Earnings Call Transcript
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