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Randgold - 7 years of production growth, but costs overshoot

Nicholas Hyett | 5 February 2018 | A A A
Randgold - 7 years of production growth, but costs overshoot

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Gold production rose 5% to 1.3 million ounces, a seventh consecutive year of volume increase at the Africa focussed gold miner. Lower costs and a broadly unchanged gold price meant profits rose 14% to $335m, although costs still came in behind market expectations.

The Randgold board have proposed a final dividend of $2 a share, up 100% on a year ago.

The shares fell 1% in early trading.

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Our View

Gold miners are strange beasts.

The gold exposure makes them somewhat defensive - the gold price rises when things are going badly in the wider economy and so do goldminer profits. But miners often operate in the most politically volatile regions in the world, exposing investors to wild currency swings and unfavourable government policy - hardly a recipe for a relaxed investment.

Historically Randgold has been one of the better names in the sector, with a particular reputation for keeping costs under control. As a result it's been able to offer investors a small but steadily growing dividend over the last few years - something of a rarity in the UK gold sector. The shares currently offer a prospective yield of 2.6% for 2018.

A solid track record has earned the stock a fairly lofty average rating of 2.2 times book value, although it currently trades on 2.3 times. On a price to earnings measure, the group trades on 26.4 times next year's earnings.

An upwards trend in gold prices since late 2015 has means the sector has been enjoying something of a bonanza. But there's a cautionary tale hidden in all the good news.

Shares in FTSE 250 goldminer Acacia are down 59% over the last 12 months after a disagreement with the Tanzanian government over the export of some of its product. As a result the group has had to reduce capacity at some of its mines and negotiations remain ongoing.

These kinds of risks are inherent in emerging market operations, and with mines in Mali, Côte d'Ivoire and the Democratic Republic of Congo, Randgold is operating in some potentially tough jurisdictions.

For all that, Randgold looks in pretty good health at the moment. The group expects to produce between 1.3-1.35m ounces next year, at costs of $590 to $640 an ounce. Randgold's high quality, low cost assets should mean it is in a strong position, although as ever profits will be as much a function of the gold price and currency fluctuations as factors under Randgold's control.

Importantly though, the group's debt-free balance sheet includes $700m of cash and the dividend is well covered by free cash flow. At the moment, Randgold looks well placed to weather the downs as well as the ups.

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Full year results

Total cash costs for the year were $620 an ounce, down 3% on the previous year, with average gold prices received of $1,258 an ounce. Lower average cost per ounce reflect higher production across the group - but particularly at the Tongon and Kibali mines.

The flagship Loulo-Gounkoto mining complex in Mali produced over 730,000 ounces in 2017, with overall production rising 3% thanks to a slight improvement in tonnes processed and recovery. Costs per ounce fell 4% to $543 an ounce.

The smaller Morila and Tongon mines both saw rising production drive a reduction in average costs per ounce. However, the Kibali mine, which produced over 268,0000 ounces last year, saw a slight increase in full year costs as lower grade ores increased operating expenses.

Full year capital expenditure of $304m was broadly in line with guidance.

The group finished the year with net cash of $720m, up 39% on the previous year.

Find out more about Randgold shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.