Randgold Resources (GOLD) Presents A Compelling Investment Story
Seeking Alpha Analyst Since 2010
The 2013 decline in gold prices has definitely presented an opportunity to investors who believe in the investment value of gold. This may be the right time to look for gold miners that can generate attractive long-term returns. Randgold Resources is one such company that is capable of rewarding shareholders with capital appreciation.
Randgold is banking on its 45% stake in the Kibali mine located in Congo. AngloGold Ashanti (45%) and Sokimo (10%) hold the remaining stakes. The Kibali mine reported its first production in the third quarter of 2013, well ahead of its year-end target. The mine is now expected to exceed its 2013 production target of 30,000 ounces of gold, which will increase Randgold's production in the fourth quarter and beyond as mine production picks up. Commercial production has commenced from the open-pit mine using one mill stream while the second mill stream is expected to be completed by the end of first quarter of 2014. Going forward, the mine is expected to produce 550,000 ounces of gold in 2014. I expect Randgold's cash flows from the Kibali project to increase in line with the production increase during the coming quarters. Moreover, the increase in production will increase the company's margins.
The open-pit mine will meet the initial production at the Kibali project. Development work at the Kibali mine project is divided into two phases, with underground exploration occurring in the second phase. The company increased its underground exploration activity with the installation of a second jumbo rig, which helps increase the decline advance rate from about 100 meters per month to more than 400 meters per month. As a result, the company reported development of 1,222 meters in declines during the third quarter compared to 865 meters in declines during the second quarter. Because of the developmental work, the probable underground gold reserves have increased from 7.2 million ounces to 8 million ounces year-over-year as of the end of the third quarter. With the ongoing underground exploration, an increase in Kibali's mine life and gold reserves is expected during the coming quarters.
Why this company stands out
Gold prices dropped by 28% in 2013 with the metal posting its first yearly decline since 2000. Understandably, the stocks of major gold miners suffered from the fall in gold prices. In 2013, the stock price of Randgold declined 37%. However, Randgold's price decline was much lower than the 51% and 50% decline posted by Newmont Mining (NEM) and Barrick Gold (ABX), respectively.
Since the beginning of 2013, Randgold remained profitable, reporting a nine month income of $197 million. On the other hand, the first nine months of 2013 for Newmont and Barrick were marred by asset impairments resulting in massive losses. Gold companies calculate their reserves and resources based on long-term gold price assumptions. As a result of the sharp decline in gold prices, these companies were forced to bring down their assumptions to match prevailing gold prices, resulting in asset write-downs. Newmont changed its gold price assumption from $1,500 per oz. to $1,400 per oz. in the second quarter of 2013, resulting in an asset write-down of $1.77 billion. Barrick Gold also reduced its gold price assumption from $1,700 per oz in 2012 to $1,300 per oz in the second quarter of 2013 and recorded an impairment charge of $8.7 billion.
Newmont and Barrick are running the risk of reporting asset write-downs in the coming quarters, as both company's assumptions are above current gold prices. However, Randgold did not report any asset impairments since the company values its reserves and uses a gold price assumption of $1,000 per oz. The company's assumption is well below existing prices, so there is no danger of asset write-downs in the near future.
Better financial flexibility
A glance at the companies' balance sheets reveals that Randgold operates at a very low level of debt compared to its peers.
In a gloomy price environment, Randgold's lower debt makes it an even better investment. While there may be a lot of pessimism surrounding gold, the metal is expected to regain higher price levels sooner rather than later. With regard to gold price assumptions, Randgold has followed a conservative policy, thereby saving it from asset write-downs. Unlike many of its peers, Randgold is in no danger of reporting impairment charges in the near future.
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