Contractor woes dampen Randgold

Bad news struck the Randgold Resources (GOLD-Q) camp in Mali recently, as it was forced to dump an important contractor, putting the completion date of a hard-rock crusher at its Loulo gold mine in doubt.

In a press release issued on Jan. 6, Randgold says the company contracted to construct the crusher, MDM Ferroman, has defaulted on its contract, and that operations will be taken over by Randgold’s capital projects team.

MDM owes Randgold’s 80%-owned subsidiary, Socit des Mines des Loulo (Somilo) an undisclosed amount of money, and while it says it will try to retrieve the funds, it warns that an increase in costs could ensue.

Victor Flores, a gold analyst with HSBC Securities in New York City, says that while the news isn’t good, he doesn’t expect it to have a damaging effect on Randgold’s operations or share price.

In New York on Jan. 6, the company’s shares were relatively stable at US$17.57 — off 0.4% or 7 on volume of roughly 500,000 shares.

Flores estimates the ordeal will cost Randgold somewhere in the ballpark of US$10 million — an amount he says the company has the financial resources to handle.

Currently producing gold from soft rock at the Loulo mine, Randgold had planned to have the hard-rock crusher completed by Dec. 16. Flores says the company has enough soft ore stockpiled to carry production into April, which should give it enough of a cushion to complete the crusher.

“It isn’t good news, but at the same time it’s not a disaster either,” Flores says. “The company has the technical skills and the financial resources to complete the crusher, and in the meantime the plant is producing gold.”

Flores doesn’t hold shares in Randgold, but HSBC has had an investment banking relationship with the company in the last 12 months.

Randgold’s press release says Somilo knew since mid-2005 that MDM was in financial trouble, and may not be able to complete the Loulo project.

Somilo provided additional financing for MDM and negotiated with its creditors on its behalf. But Somilo then learned that the delivery of crushers had been cancelled by the supplier because of non-payment by MDM. Somilo stepped in, took over the contract and paid the supplier directly.

The crushers are currently being shipped to the site in hope of preventing further delays.

Randgold says MDM is still working on-site and is obliged under its contract to co-operate and assist with an orderly hand-over. Somilo has called in all of MDM’s various securities.

Randgold Resources chief executive Mark Bristow said in the release he would update the market on new schedules and completion dates over the next few weeks.

“At this stage, we do not believe that this development should materially impact on our operational plans for 2006, but there will probably be additional costs if MDM are unable to repay their debt,” Bristow said. “In the meantime, should it become necessary, Somilo has made contingency plans to continue running the plant on soft and semi-soft ore until the hard-rock circuit has been completed.”

Around 30 km to the southeast, MDM has suffered a similar fate at Nevsun Resources‘ (NSU-T, NSU-X) Tabakoto mine.

Nevsun says it will complete the work remaining at Tabakoto itself, with MDM assisting with commissioning and performance testing. A new start date for commissioning the mill with ore feed is being considered.

Judy Baker, vice-president of business development and investor relations at Nevsun, says the company has been paying suppliers directly for the past year, and has been decreasing the scope of MDM’s work since September 2005.

Nevsun has also boosted its estimate of capital spending to US$63 million from the original US$40.

Tabokoto is home to proven and probable oxide reserves of 548,000 tonnes grading 3.98 grams gold per tonne; another 2.8 million tonnes of primary mineralization grade 5.5 grams gold. The estimates are based on a gold price of US$350 per oz., and are good enough to support annual production of about 105,000 oz. for about five years. The nearby Segala deposit and other satellite zones offer potential to expand and extend the life of the mine.

The company expects to reach full commercial production in the first quarter of 2006, instead of October 2005 as originally planned.

MDM is also building a processing plant and related infrastructure at European Minerals‘ (EPM-T, EPMCF-O) Varvarinskoye copper-gold mine project in northern Kazakhstan. The work is being done under a US$55.7-million lump-sum turnkey contract.

Under the contract, MDM was to have provided performance security on a 4.2-million-tonne-per-year processing plant, something European Minerals says the contractor has failed to do. As a result, the company has notified MDM that it has 14 days to clarify its position or risk having the contract terminated.

Meanwhile, work continues under European Minerals’ management. The company is currently reviewing its construction options, and has contacted suppliers to confirm equipment deliveries.

The first gold pour at Varvarinskoye is expected by the end of 2006, with average annual production pegged at 145,000 oz. gold and 18.4 million lbs. copper over the first decade of a 15-year mine life. Cash costs are projected at US$130 per oz., after copper credits.

The project is home to proven and probable reserves totalling 60.3 million tonnes grading 1.2 grams gold per tonne and 0.81% copper, for 2.3 million ounces contained gold and around 269 million lbs. copper.

So far, European Minerals says it has spent around US$49 million on the US$125-million project.

While the company says termination of the contract may see it default on its recently arranged, US$75.4-million debt-facility agreement, it is confident alternative financing could be arranged to complete construction. Still, the company warns that the plant’s completion could be delayed. The company is currently seeking waivers of defaults from its lenders.


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