August 03, 2009Time To Switch Out Of Randgold? The Offer For...

August 03, 2009

Time To Switch Out Of Randgold? The Offer For Moto And The Latest £200 Million Raise Could Act As Sell Signals To Investors.

By Charles Wyatt / www.minesite.com

“When the ducks quack, feed them.” It is an old stockmarket adage to the effect that, when investors appear to be jumping over each other to drive a stock to unrealistic levels, it is time to issue more shares and turn this demand into cash. So it was with Randgold Resources last week. First came the results for the second quarter of 2009, which were respectable enough, and then came the announcement that the company was going to raise £209 million by issuing shares at £36.35 each. The price compares with a peak of £45.00 per share back in May, when the gold price was on the trot, and £40.00 per share at the time of the announcement. Even at £36.85 the shares are selling at 70 times earnings and the Questor column in the Daily Telegraph is still recommending them as a buy. Do the journos there not remember the end of the IT boom in the 1990s when the scales suddenly fell from the eyes of investors as they realised the incredible prices they were paying for some of the stocks?

The two announcements of results and funding came soon after Mark Bristow, the chief executive, had launched a bid for Moto Goldmines, a company which has a hefty gold resource of 22.5 million ounces in the Democratic Republic of Congo. Only at the end of May did Moto acquire legal ownership of a 70 per cent interest in the Moto gold project, after it paid what is politely called a ‘pas de porte’ of US$4.5 million. This followed the Mining Review which has been ongoing in the DRC since the middle of 2007 and which has effectively meant that Moto has not been able to make much effective progress during that time. Now it will soak up money like a sponge to bring the gold mine into production and there are fears that Randgold may be paying too much in its battle with Redback Mining, which has also bid for the company.

Bristow is more used to working in Mali. Mali is a landlocked country trying to diversify away from total dependence on agriculture, and gold mining is making that happen. He is therefore treated with the respect he may not find in DRC where every brigand in the world has operated at one time or another. No doubt about it, he has done well by Mali and the message should move ahead of him. First off it was all a bit of a flop, as Randgold became just another western company which could not make the Syama gold mine work properly. Then along came AngloGold and helped bring the Morila mine into production. Randgold has since done well by bringing Loulo into production, and Tongon will follow at the end of this year just when Morila is fading away.

But the question that has to be asked is whether it is worth paying 70 times earnings for a company with this type of production profile? Yes, it has a pipeline of new projects such as Gounkoto and Massawa, but they are not even at the feasibility stage so production is some years away. Some analysts accept that they will be in production by 2013, but there are plenty of risks yet to be overcome. Or is it, as has been suggested elsewhere, that the rating of Randgold is so high because it is the only pure gold counter listed on the FTSE 100. Fund managers tend to be lazy and risk-averse and this could seem to some to be a good enough reason to buy the shares. The Randgold share price has provided the upward curve they seek despite the fact that the Morila, once known as Morila the Gorilla, mine is coming to an end. Bristow has fallen out with Randgold’s partner AngloGold on this one and rows over the eventual clean-up operation should not be ignored.

This means that for most of next year Loulo will be the mainstay of Randgold while production from Tongon in Cote D’Ivoire ramps up. What is not clear is whether this will sustain the current rating of the shares, especially given that the offer for Moto is in paper and Moto shareholders may simply cash in their shares and look around for an alternative. When wise heads among London’s analysts such as John Meyer and Charles Kernot suggest that it may be time for existing Randgold shareholders also to move towards the exit, the bell is starting to ring quite loudly. It is not the job of Minesite to recommend investments, but it would be amusing to think that some of these investors might consider a switch to the ASX listed company Resolute Mining.

Resolute, under chief executive Peter Sullivan, is the company that has just brought the Syama gold mine in Mali - the one Randgold could not fix and sold to Resolute for peanuts - into production. In the year to end June 2009 Resolute’s established operations produced a total of 293,057 ounces at an average cash cost of US$597 per ounce. This year Resolute’s mines at Golden Pride in Tanzania, Ravenswood in Queensland, and the newly re-developed Syama in Mali are together forecast to produce approximately 400,000 ounces of gold at an average cash cost of around US$583 per ounce. Peter Sullivan won his spurs several times over by bringing Syama to this stage during a horrendous period for the stockmarket.

Two other alternatives worth a look might be Centamin Egypt and European Goldfields. Centamin has just poured first gold at its big Sukari gold mine in the Western Desert of Egypt – an area with a fascinating history of gold mining. The resource amounts to 13.2 million ounces and Josef El-Raghy, the chief executive, reckons that production will rise to an annual rate of 200,000 ounces of gold in 2010 and 300,000 the following year. Some analysts seem to worry about political risk in Egypt, but it has to be a much better bet than countries in West Africa, and Josef’s father is Egyptian.

European Goldfields comes into the list of possible alternatives because chief executive Dave Reading was previously with Randgold. No hubris at European Goldfields, however, just hard work. Admittedly it is not a pure gold company, despite its name, as it is also a base metal producer, but during 2011 it will have four mines in production at an annual rate of 400,000 ounces of gold, three million ounces of silver, 30,000 tonnes of copper and 70,000 tonnes of lead and zinc. And political risk is minimal as these mines are in Greece and Romania.