Randgold Resources shares fell almost 12% in morning trading after the gold miner saw profits fall 8% on the quarter, driven by lower than expected output at the Tongon and Kibali mines. Overall, output across the group was lower than expected even after the previous warning about challenges to production at the two mines.
Overall production fell 4% quarter on quarter to 281,494oz, with total costs per ounce up 12% to $727/oz. A higher average gold price received of $1,264/oz, compared to $1,187m in the previous quarter, reduced the impact on the bottom line.
Output from the Cote D'Ivoire Tongon mine declined 7% on the quarter to 50,391 ounces, with total cash costs per ounce up 3.6% to $932/oz. The slowdown in production comes after one of the mine's two milling circuits lost 46 days following a breakdown. The mill has now been repaired.
The Kibali mine in the Democratic Republic of Congo saw a major slowdown in throughput, following the exhaustion of the main KCD pit in Q1 and the necessity of handling multiple ore types from satellite mines. Kibali produced 122,532oz in Q2, down 6% on the prior quarter, with total cash costs increasing to $823/oz (Q116: $740/oz). New satellite pits are expected to improve feed flexibility and grades going forwards.
The flagship Loulo-Gounkoto complex ended the quarter ahead of target, with second quarter production of 170,190oz. Total cash cost per ounce increased by 18% to $648/oz for the quarter as a result of lower grade quality and higher underground mining costs.
Despite lower than anticipated production in the second quarter the group continues to expect to meet 2016 market guidance.
Our view: Randgold has a good track record of keeping costs under control, and has offered investors a small but steadily growing dividend over the last few years - something of a rarity in the UK gold sector. That has earned the stock a lofty average rating of 2.5x book value and, before today's results, left it trading on almost 31x prospective earnings.
The stock has been a beneficiary of rising gold prices over the last year, which should have signalled a bonanza period for miners. However, Q2 results highlight the risks of even the most dependable miners, in the most benign of conditions.
Disruption at two key mines has hit production, and that has in turn dramatically increased the cost of production per ounce - as the benefits of scale fell away. In management's defence the production headwinds were arguably unforeseeable, and the issues at Tongon at least now seem to be resolved with improvements at Kibali.
The continuing commitment to full year guidance is ambitious but welcome. If the group can resolve its problems on the ground, its high quality, low cost assets should mean it is in a strong position to benefit from higher gold prices compared to the start of the year. Perhaps more importantly though, with no debt on the balance sheet and the dividend covered more than 4x by cash last year, Randgold is well placed to weather any local difficulties in its operations, even if they do look set to hold back near-term earnings.
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