The raw facts of the Randgold Resources (LSE: RRS; NASDAQ: GOLD) story are impressive. It has found five world-class deposits since the company was founded 17 years ago, and all of them are located on big geological anomalies. In every mine that Randgold has started, it has made net profits in the first quarter of operations. The company poured the first gold at its newest mine, Kibali in the Democratic Republic of the Congo (DRC), ahead of time and on budget in the third quarter of 2013. Its flagship Loulo–Gounkoto mine complex in western Mali helped power Randgold to an 80% quarter-on-quarter profit increase for the three months ended Sept. 30, 2013, despite a 3% drop in the gold price. Its other mines are Morila in Mali, and Tongon in the Ivory Coast. For the group, Randgold increased production by 19% to 233,676 oz. gold in the third quarter and cut its cash cost by 17% to US$662 per oz. on the back of higher production. It remained net-cash positive despite capital expenditure on Kibali. The third quarter saw Randgold post a 670,000 oz. increase in reserves, at $1,000 per oz.
Mark Bristow has been CEO since the incorporation of Randgold, which was founded on his pioneering work in West Africa. Bristow, who holds a PhD in geology from Natal University in South Africa, held a breakfast meeting in Toronto on Nov. 29, 2013, to discuss the company’s third-quarter results, and commented broadly on the state of the gold industry, valuations and political risk in Africa. Below are edited excerpts of his remarks.
On the gold industry
The gold industry is in a terrible state at the moment, and I would point out that I have been warning people about this for some time. When you look at the performance of the gold stocks — literally with a few exceptions — most gold stocks are now trading below the price per share they traded at in July 2002. There are some exceptions, and Randgold Resources is one of them. You can see how closely we have tracked the gold price since it started rising in 2002. So the question has to be asked: “What’s driven that?” Fundamentally there have been two things. We haven’t replaced the ounces we’ve mined as an industry. In fact, for the last 12 years, we haven’t even reached 50% of replacement. And this is a serious situation, and no one identified it. And in fact, it’s interesting that analysts, almost to a person, criticized Randgold at the end of 2012 when we didn’t increase our reserves. But we kept our grade the same, because everyone got on this bandwagon and no one understood the impact of just adding reserves at a higher gold price. And so when you don’t replace quality with quality, this is what happens — the grade comes down materially. And unlike 1999–2000, the industry is bust today. It is completely broke . . . it’s got to deal with some tough decisions . . . for Randgold, we’re not gold bulls, we really do worry about making profits and running a business, and it frustrates me that we are in an industry that is definitely inelastic . . . we’re watching the industry [do what] it did in 1992, 1993, 1996 and 1997 — supply gold into the industry at a loss, a significant loss.
The other thing that fascinates me about the last [third] quarter is that . . . our bankers and our analysts turn around and say: “Look at the operating results for the last quarter: an improvement.” But no one looks at the debt. The industry produced more gold last quarter at a higher loss than it ever has in history, and everyone thinks it’s turning around.
We calculated our reserves as an industry on a consolidated, weighted basis at US$1,400 an oz. for the beginning of this year. You can’t make money at US$1,250 if you calculated reserves at US$1,400, because reserve calculations don’t use capital. Another way to look at it is that if you take a basket of input costs from 2002, the input costs on average have gone up 150%. That means if the gold price has gone up 400%, there’s a large margin. But it’s not thick because of the grade. And you can cut head office, you can cut capital, you can cut exploration — but it doesn’t change the underlying profitability of a tonne of rock. The only thing that affects base costs in the mining industry is the grade of the rock you mine.
On Randgold’s third-quarter results
We are in a particularly pleasing third quarter. Everyone, I think . . . was surprised. I would point out that they shouldn’t have been, because we weren’t even above our guidance. We were in line with our guidance and we reguided the market in March, where we took some ounces out of Loulo–Gounkoto and focused on cash flow, because 2013 was a big capital year for us, it was our peak funding year . . . the quarter itself was full of firsts. It was the first time we produced more than 160,000 oz. at Loulo–Gounkoto. It’s the first time for a long time that we showed a drop in costs per ounce both quarter-on-quarter and year-on-year, and of course the key player was the first gold at Kibali ahead of schedule. We still have some challenges in our business, as one always has, and we still have a box to tick on Tongon and the recoveries. And also key for us was that we started seeing exploration results that are meaningful. As you know, we are big on exploration. We’ve never chased our budget up . . . we’ve been spending about US$50 million on exploration a year, but we’ve got some really interesting numbers coming through suddenly, and that’s really the only way, as I’ve said many times, that one can create value in the mining industry.
On the DRC and Kibali
The DRC and that whole Great Lakes area has really changed a lot, and it’s going to keep changing at quite a pace. Just recently Kenya announced with the Chinese that a new railroad will go from the Kenya port all the way up to south Sudan, and into the DRC. So there’s a lot of money going into that part of the world. The M23 defeat is a critical step forward.
But another material thing is that we are actually shipping gold directly [by air] from the [Kibali] mine . . . to Kenya. We have a . . . licensed airfield at Kibali with immigration and customs, and the full Monty, and we ship directly out of DRC . . . if we had said to you that we’re going to ship out of DRC without going via Kinshasa two years ago, it wouldn’t have happened. And that’s how much things have moved on, to get people on-site, to get their head around measuring the gold, checking the assays, signing off on the weights, paying the royalties and then shipping directly. There’s a lot happening in these countries, particularly in that region.
Our big challenge at Kibali is managing the drop-off in employment as we come to the end of the capital project. We’ve got big farming initiatives. We’re quite far down the road now in facilitating an investment by an Asian group into palm oil, which will mop up the [un]employment. We really worried about the local labour — that’s unskilled labour that is coming out of the mine as we close the capital projects. And we’ve got some interesting initiatives for those that are interested. One of the farming initiatives that we initiated as part of the relocation program has just won a contract to supply maize to the World Food Programme. Out of a group of 100 farmers [in the co-operative], they’re clearing $100 per person per month, which is quite significant for that part of the world.
We are guiding 550,000 oz. next year for Kibali and we’ll do about plus 600,000 oz. for the next 10 years. And on a real basis, that means on today’s money terms that we produce at under US$600 total cash costs. And I’ll remind you that at Randgold we do not have corporate general and administrative expenses, so our total cash costs are everything except tax, capital and discovery costs.
We run our business on a five-year rolling plan. We guide on five years, as well as detail on one year . . . we’ve always had as a target, as our next milestone, to exceed 1.2 million oz. on a consolidated basis in 2015. We’re running the risk of getting to that point next year if everything works, and I’ll take you through what makes up that guidance. On Morila, we should do 140,000 oz. At Kibali, plus 600,000 oz. after 2014. So from 2015 for 10 years to 2025. And at Tongon, it’s 260,000 oz. to 280,000 oz. next year, and it will be 300,000 oz. for six years at US$750 per oz. And Tongon has no capital. The last bit of capital is , and it’s really US$1.5 million to $2 million a year.
If you look at Loulo–Gounkoto, we’re guiding 570,000 oz. for , so we’ll beat our revised guidance of 560,000 by a little bit. The costs are well within guidance. Next year Loulo–Gounkoto will do 640,000 oz., and then 700,000, 735,000, 750,000 and 750,000 in 2018 . . . the reason we’re slowly lifting the production is because the grade just steps up gently — 0.2 gram per tonne — and the costs come down to US$600 to US$650. We’ll stay above 650,000 oz. a year until 2021 at Loulo–Gounkoto. We only start getting to the reserve grade at about 2023.
On making money
We make money at US$1,000 an oz., because we plan to make money at US$1,000 an oz. and always have. We use US$1,000 per oz. to allocate capital . . . at US$1,300 per oz. . . . we should have US$1.8 billion in the bank [by the end of 2018]. So we’re very profitable at US$1,300 per oz. At US$1,000 per oz. — after capital, and assuming we continue to pay dividends at the current dividend rate — we should have about US$380 million in the bank [by the end of 2018].
On access to capital
We have a US$200-million facility. We haven’t drawn in it because we got over our peak funding without having to draw on it, but it’s a nice backstop to be able to manage the current situation without having to be held ransom by the market . . . back in 1999–2000, you’ll remember we were the only company that didn’t issue equity under stress. And already we’ve seen the first round of stressed paper issues, and this time, all of our key shareholders are resource-fund managers that don’t have money to invest in equity, and it’s a big focus for us to make sure that we are well-positioned to manage our business without having to go out to the market and place equity.
Right now when we look at stuff in our backyard there’s nothing that appeals to us on value. And our focus is on exploration and tying up the collapsing juniors in earn-in deals. We’re about to announce another one. We’ve got three already.
On gold prices
Right now at these gold prices we are fine. We pull in cash every week at these gold prices, but [who knows] where the gold prices are going to go to in the short-term . . . I guess the frustration for me is that all my colleagues in the gold industry are working very hard to f – – k the gold price up. And how long is it going to take? It’s bizarre. The point is that it’s this liability issue. If you look at Barrick . . . it could be the best gold company on this planet — in fact, it could be one of the best companies on this planet. If you take its top six assets, it’s a very, very, profitable business. It really is. But that means you have got to close 21 operations, or list shit companies. There are a lot of shit companies in this industry.
On political risk in West Africa
This is always a topic I have to deal with, but I tell people that if you’re going to invest in a gold stock, the biggest single risk you face is management, not geopolitical risk. Every one that has been running around saying the Organisation for Economic Co-operation and Development, no risk, look at where we are — Alaska, North America — and look at what’s happened to . . . businesses. And we are sitting in undoubtedly high-risk places, but we manage it differently.
Looking at the specific risk, everyone is now all friendly towards Mali. Mali now has got an elected government, it’s a completely different risk to last year where it was a nominated government . . . now you’ve got a government in place, and they’re all great guys, fantastic. The president is a great guy, and he was actually the prime minister when I first went to Mali 17 years ago. But it’s a different dynamic now because they are elected politicians and back in power, so the wheelings and dealings are different. There’s a lot of money in Mali, which helps, because of the United Nations. It’s a small economy. The biggest risk in Mali is that the economy really collapsed, and it’s not a robust economy, so a lot of people are out of work. There are a lot of illegal people in the country, because the borders opened up over the last two years through the crisis, and there’s a lot of work being done to try to get things back to normal.
Ivory Coast is probably one of our best countries now. It’s gone a long way from the Civil War. The new government is a competent government, it’s an engaging government. We had this incident where the minister of mines got a bee in his bonnet and announced a windfall tax of 50%, and tried to ram it through parliament. That was a year ago. We’re now at the stage of signing off on a mining code that looks pretty good. It certainly will put Ivory Coast in the best mining-code category in Africa. The engagement has been constructive and really intellectual. The risk in Ivory Coast remains the dissent between the ruling party or the ruling government and the main party, which Laurent Gbagbo represented in the trial at the Hague. So what they haven’t done properly and what needs to be worked on harder is the whole reconciliation initiative from the north and south. So it’s a different risk, you have to manage it carefully. We’re in the north. And even the northerners believe they haven’t gotten enough out of it, and they fought the war. So there’s a constant nation-building exercise that needs to be put in place. It is happening, but it’s slow. The positive thing is that gross domestic product grew at 9% last year, which is excellent. I mean, it’s off a low base, but it’s significant.
We’ve made huge inroads in DRC. We are dealing with a mining-code debate, it’s a big challenge in DRC because it’s so dynamic a country . . . the real issue in the DRC is that 90% of the miners in the country are not part of the mining code. They don’t operate under the law, and they don’t contribute to the treasury. It’s always interested me down in Katanga, in the copper belt. Why people can’t make money at 3.5%? Well, you go down there and you see why. It’s a mess. Every one is stealing from everyone. Everyone extorts everyone, from the government to the local community to the investors.
But the shining light there is Freeport. It’s demonstrated what you can do in an industry when you’re a real company running a real business. And it is definitely making a big contribution. So if you look at the Glencore business, you look at the Freeport business, you look at our business — those are three key visible and transparent businesses, and so parliament is saying that there is an empathy to revising the mining code, because there is no money coming into the treasury. And we’re saying: If you revise the mining code you’ll kill the country, and you still won’t get any money in the treasury because you’re not capturing the people. And that debate is raging right now, it’s a real debate . . . what’s interesting is that there’s a new cabinet coming, a new government. There’s been big pressure put on Kabila to change the cabinet from parliament, from his own coalition, and he’s been working on it now for a couple of weeks. So the whole country is paralyzed. Everyone said there were to be no major decisions made until it is sorted out. There are a lot of things in the air, all over the place. But the positive thing is that the government has appointed World Bank finance advisors as independent advisors. They have their own advisors, they’ve retained their own legal counsel and they’ve got external advisors, and the engagement is transparent. It’s really pretty robust. And I’ve met and do continually meet with the senior executives of government, and also the senate president and the parliamentary president, who are responsible for signing in any change in law. Our big focus at the moment is that we have stability agreements in the DRC, and we want them enforced. That’s the first step in our engagement with them. But it’s dynamic.
On reinforcing agreements
You have to keep reinforcing these things, otherwise you end up like some of the big mining companies here in North and South America, where you just get rolled over. You can’t do that. We’re robust in our defense of our agreements. In Ivory Coast we stopped the legislation in mid-stream. We sent it back. And we do that. We’re not shy. We’re big players in these economies and we behave like a corporate citizen, we go and bash the tables with government. Otherwise, you just get rolled over. In Africa particularly, and I’ve watched it in South America. The debate starts and the industry is too scared to get involved, and before you know it, the debate has left you behind and you’ve got a new set of legislation, and you haven’t even been consulted. We make a big noise. We call press conferences. I have a quarterly press conference in Kinshasa, an open afternoon, where now even the ministers come, and we discuss Kibali in an open forum. And I do it every quarter in the Ivory Coast . . . in Mali we do it every six months. Just to keep Randgold’s investment and profile in the headlights, as far as all the local press goes.
We do it all the time — keep that visibility, or otherwise people forget about it. And a lot of times you’ll see politicians deal with us sleight of hand because the view of the Joe Blow is that we just come in there, mine the gold, ship it out and take all the money. So there is a constant re-education of people. You’ve got to do it, because the government won’t say it. I remember going to the president of Mali one time and saying to the president: “Look, you know how much money we pay you every quarter, it’s 20% of your budget. Are you going to tell the people in Mali or am I going to do it? Who is going to tell the truth, because your guys are suggesting we don’t make a contribution.” And he said, no, he would do it, and he did.
Under Mali’s mining codes, every investment is a convention, which is a law in itself, so you can’t change it. We still operate under the 1991 code. There are two subsequent mining codes since we invested, and most of our permits we have are still under the old 1991 code. We’ve encouraged them to go back to the 1991 code, because they have had no new investments since then.
On doing things differently
We do things counter-cyclical to the industry. The industry has always expanded in the peaks and gone bust in the troughs, and it’s certainly true to form now. And we try to do it the other way around, so this is the time we really step up. Our biggest competitors in a bull market are the juniors, because they get under our feet. Because we need ground to be successful in our strategy of building our own portfolio. So right now we’re having a field day with the juniors, consolidating our footprints in our chosen areas. And again, we look after all our shareholders, because most of our shareholders are invested in the juniors too. So we give them a double chance.
We have four legs to our exploration strategy: the Mako belt in Senegal, Western Mali, the whole of the Ivory Coast, and northeastern DRC . . . Ivory Coast is our priority exploration focus . . . we’ve spent US$50 million a year since the year dot, and we have found five world-class deposits, of which four we’ve built. And we’re the most successful on this planet. But you don’t know you’ve found something until you drill it, and the one thing that’s for sure is that you don’t have to drill a second hole. When you hit these world-class deposits, like Gounkoto, on the first hole you heard us say “We’ve got something.” We drilled two holes, a kilometre apart, hit the same orebody, and you know it’s there. I always say it’s like hunting buffalo. When you see that big buffalo, you don’t pick the binoculars up and have a look at it, you just shoot it. It’s the same thing in exploration. The key is that it’s a numbers game. We have between 100 and 150 targets in our portfolio at all times, and we turn over about 50 to 60 a year.
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