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Randgold - Production ticks up but profits sag

Nicholas Hyett | 9 August 2018 | A A A
Randgold - Production ticks up but profits sag

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Gold production in the second quarter was up 9% quarter-on-quarter at 313,302 ounces, with costs per ounce down as a result. However, profits for the period were 12.2% below Q1 at $58.4m as depreciation increased.

Randgold shares were trading 2.6% lower 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.

An upwards trend in gold prices since late 2015 had been supporting the sector. But strikes and proposed changes to mining regulation have taken the wind out of the Randgold's sails. That's left the shares drifting downwards, and a weak first quarter means it'll be a stretch to achieve full year targets - although the company still reckon they can be met.

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.

Historically it's 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 steadily growing dividend over the last few years - something of a rarity in the UK gold sector. Recent weakness in the shares mean the prospective yield currently stands at nearly 4.1%.

A solid operating performance has earned the stock a fairly lofty average rating of 2.4 times book value, although it currently trades well below that, at 1.2 times.  

The group expects to produce between 1.3-1.35m ounces next year, at costs of $590 to $640 an ounce. High quality, low cost mines should mean it's 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 $600m of cash and the dividend is well covered by free cash flow. At the moment, we think Randgold's well placed to weather the downs as well as the ups.

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Half Year Results

Total cash cost per ounce was 3% below that reported last quarter at $697, thanks to increased production (although remains well above where it was this time last year). Increased production also meant that total gold sales rose 5% to $411.5m despite a 2.4% fall in the gold price to $1,299/oz.

The flagship Loulo-Gounkoto mining complex saw gold production rise 4% in the quarter to over 150,000 ounces as throughout out increased - grade and recovery remained broadly unchanged.

Among the group's smaller mines: Morila saw production fall 2%, Kibali production rose 17% and Tongon production rose 12%. Kibali was boosted from the ramp-up in underground mining, while Tongon production jumped after industrial action last quarter.

Feasibility studies in the Massawa Central Zone in Senegal continued during the quarter, and the group believes the project could generate healthy returns at current gold prices. Further exploration activity is underway in Mali, Cote D'Ivoire and the Democratic Republic of Congo. Total exploration and corporate costs fell 5.7% in the period to $14.9m.

Net cash generated in the quarter was $95.5m, up 49% quarter-on-quarter but down 28% year-on-year.

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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.