Jurisdictional risk is part of mining. You can’t pick up the assets and move them. That’s why places like North America command premium prices. West Africa, then, would hardly seem like a good place to be in the gold business. The region is nearly synonymous with the dysfunction that can spell doom for mining companies: broken political mechanisms, unpredictable economic policy, rapid changes of government via collapse or revolution, and ugly armed insurgencies. But one company is not only thriving in that pressure cooker — it has emerged as an interesting way to play gold. And inasmuch as mines have a tendency to be found in tough jurisdictions, Randgold perhaps deserves a place in the portfolio.
Randgold is a young company, having gone public in 1997. Its CEO, Mark Bristow, has been there for the duration and holds a Ph.D. in geology from the University of Natal. Randgold is very much a geologist’s company, with four of its five operating mines discovered by its own teams (the fifth, the Kibali project in the Democratic Republic of Congo, saw its resources more than double after Randgold came aboard as a stakeholder). Its first big success was the Morila mine in southwestern Mali, about 170 miles outside of the troubled nation’s capital. Morila, which poured its first gold in 2000 and was first discovered the same year the company went public, is now entering the final phases of its mine life. Bristow and his team got Morila up and running in just three years with support from the Malian government, which still holds a 20 percent stake in the project. It has proven to be an exemplary asset, producing more than six million ounces of gold, 2.4 million of which are attributable to Randgold. It’s a sign of both the company’s strategic vision and technical expertise that Morila, which was to go offline three years ago, has seen an extension to its productive life into 2017, with a politically shrewd and popular plan in place to convert its infrastructure for agribusiness so that it might continue to help the local economy.
Mali is a useful lens for thinking about Randgold more generally. From the early 1990s to 2012, the country was regarded as a bastion of socioeconomic stability in the region, a fact that seems to have been instrumental in the successful development of Morila and of the Loulo mine, Randgold’s current flagship project near Mali’s border with Senegal. By the start of the second decade of the 21st century, Randgold was firing on all cylinders, largely due to its success in Mali. The company was also busily exploring other prospects, with a big discovery in Senegal at Massawa, commencing production at its Tongon mine in Cote D’Ivoire, and buying a 45 percent stake in the abovementioned Kibali project.
Then came the ouster of Malian President Amadou Toumani Touré in 2012, motivated in large part by the massive instability in the country’s north, where a poisonous mix of Islamist groups were rapidly expanding their operations. The coup dealt Randgold a blow: its share price plunged by 13 percent on the news of the putsch. But Bristow, a South African with military experience against guerillas in Angola and Swaziland in the 1970s and already an experienced operator in the tougher spots in Africa, did not lose heart. He kept channels of communication open with the military officers behind the coup, who recognized the economic importance of Randgold to the country (the company is Mali’s largest investor and biggest single taxpaying entity) and continued to conduct business as usual until Operation Serval, France’s military intervention, helped stabilize things. By the fall of 2012, Randgold had not only recouped its losses: its share price had reached new heights propelled by a record production year and continuing success at Kibali and Loulo, both of which have since continued to outperform expectations in terms of cost, output, and schedule. The company’s share price has come down since those heady days in step with the entire gold mining sector and the price of bullion itself. But as Bristow noted at the last earnings (which saw Randgold beating forecasts), “It’s easy to achieve when the stars are all aligned but it’s a lot more difficult in a market as challenged as this one, which makes these results even more pleasing.”
That confidence appears well earned. The company is going ahead as planned with its projects in the Côte d’Ivoire; it saw yet another record year of gold production in 2015; and it managed to up its cash on hand year-on-year by almost 158 percent, from $82 million to $213 million despite the adverse conditions.
That Randgold has kept up its sterling (so to speak) performance should surprise no-one. Its track record is enviable. It’s managed to operate for decades in an industry rife with allegations of fraud and corruption without have any mud slung at it. The company has a great nose for assets and the ability to squeeze the maximum out of the mines it does choose to develop. Unlike other peers, it has stuck to its core business of gold and not ventured into other metals. With a strong balance sheet, Randgold keeps breathing room to undertake prospective projects not as desperate measures to plug pipelines holes, but as part and parcel of its bigger development strategy. The company controls costs effectively as well, keeping cash costs per ounce in the comfortable $679-to-$715 range, all the more remarkable given how quickly things can become treacherous where they operate. And that goes hand in hand with a broader fiscal discipline. Randgold is as of press time debt-free.
Randgold effectively works its individual assets. Though Morila is entering its final phases, the company currently operates a flagship asset in the Loulo-Gounkouto complex comprising two underground mines and an open pit mine with a projected life lasting until 2027. Randgold is now targeting annual production from Loulo and Gounkouto in the 600,000 oz. per year range, 80 percent of which is attributable to the company, with the remaining 20 percent owned by the Malian government. Loulo seems a lot like Morilo, which managed to make and beat production goals. The past year has seen significant improvements in safety and efficiency as well, in part because of a move away from mining subcontractors to Randgold’s own employees to get the gold out of the ground. Kibali, which poured its first gold in 2013, looks to hold the same promise. Randgold as noted owns 45 percent of Kibali (it also operates the mine) in partnership with AngloGold Ashanti and a Congolese parastatal company, SOKIMO. Randgold produced more than 642,000 ounces in 2015 from Kibali and targets 600,000+ in 2016. The mine is projected to remain open and productive until 2031. And then there is the prospective mine at Massawa, located in eastern Senegal atop the so-called Mako Belt, potentially one of the richest ore regions in Africa. Randgold’s initial estimates on Massawa report measured, indicated, and inferred resources of 4.7 million ounces, of which they own 83 percent. And as a kicker a 50 percent interest in the strike extent in the Mako Belt means that any further discoveries there will add a significant portion of their value to Randgold.
Great assets, a well-developed pipeline, savvy leadership and a seeming ability to weather all manner of geopolitical storms: that’s Randgold in a nutshell. So what’s the play? At current gold prices around $1200, and assigning the company a 10 percent discount rate given where it operates, we derive an NAV per share of $79.11. Of course, only a bull on gold would buy the shares. So assuming a seven percent discount rate in a more bullish gold market, with gold at $1,500 gold, NAV per share climbs to $114, at $1,800, it hits $145, and at $2,000 $165. By that time, gold stocks will likely be at premiums to NAVs, assuming Randgold remains an independent company. We note as well that with the recent gold rally and the company’s positive earnings, Randgold’s share price has appreciated significantly as we have gone to press. Gold stocks are volatile, so investors should make sure to pick an entry point they are comfortable with. Of course, once the real bull run has started there won’t be another chance, but it’s impossible to know if that has happened yet.
West Africa can look like a very bloody question mark as a place to house a company’s bread-and-butter assets. But other miners large and small have taken far more serious blows in supposedly far less risky locales. Eldorado shut down its Greek operations and Gabriel has hit a roadblock in Romania; Newmont struggles with permitting in Indonesia and Barrick will be writing down hundreds of millions on a stalled project in Chile. And don’t forget the bitter lesson Anglo American learned from the protests around its proposed Pebble mine — located in Alaska, no less. The company pulled out in 2013. Mining is a tough business no matter where you are. But sound strategic vision and execution matter just as much as, if not more than, location. If you want exposure to a rising gold price and the mines that Africa has to offer, Randgold seems like a well-captained ship to navigate the region. And if you believe gold will take off, the value the company presents will leave the politics far below.