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Randgold Resources - Sticking to ambitious full year targets

Equity research team | 3 November 2016 | A A A
Randgold Resources - Sticking to ambitious full year targets

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Sticking to ambitious full year targets

Randgold saw profits increase 58% year on year, as lower costs and a higher gold price boosted performance. However, earnings per share came in below market expectations, sending the shares down 5% in morning trading.

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 3x book value, although it currently trades on 2.3x. On a price to earnings measure, the group trades on almost 24x 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 highlighted the risks of even the most dependable miners, in the most benign of conditions.

Disruption at two key mines hit production, and 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 seem to have been resolved, but it has left the group playing catch up for the full year.

The continuing commitment to full year guidance is ambitious, requiring a record fourth quarter, but welcome. If it can avoid further operating problems, Randgold's high quality, low cost assets should mean it is in a strong position to benefit from higher gold prices. 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 the downs as well as the ups.

Third quarter results:

Third quarter gold production in the quarter slipped slightly versus a year previously, although represent a 7% increase on the second quarter after technical problems at the Kibali and Tongon mines were resolved.

Increased output has coincided with an 19% increase in the average gold price received versus a year earlier, at $1,333/ounce, and helped propel total cash costs per ounce 9% lower to $663.

The group has confirmed that it is on course to meet guidance for the full year, with output of between 1.25 and 1.3 million ounces at a price of between $590 and $630/oz. If the gold price remains above $1,250 per ounce, the group expects to finish the year with a net cash position of around $500m.

Forecast cash flows over the coming years are expected to fund the three new projects which Randgold are looking to develop over the next five years, as well as increasing dividends.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.