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By Chris Bailey | Tuesday 8 August 2017
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I know, I know...I do have a bit of a perma love-up with Randgold Resources (RRS), London's largest listed gold company but as it is a year since I wrote my latest paean I felt an update was overdue following last Thursday's numbers.
Let's get the easy stuff out of the way first. Randgold reported a 53% increase in profit compared to H1 2016 helped by gold production increasing by 16% over the same period. Why this leverage? Well it is all about keeping costs under control with total cash cost per ounce of $572 for the quarter and $595 for the half-year down respectively 8% and 13% compared to a year ago. That's useful darts with the gold price pushing above $1260 an ounce. Meanwhile the balance sheet remains rock solid with net cash, a free cash flow yield of 2.7% and a very pleasant rise in the interim dividend.
To put some of the above into context, global mine production fell by one tonne or 0.2% year-on-year in the first quarter of 2017 and with the second quarter data still accumulating the aggregate first half results are unlikely to be much better. Meanwhile global average total cash costs rose by 8% in Q1 2017 to $814/oz. Global gold companies are not only growing more slowly, they are extracting gold less efficiently.
The (er...) golden element in the process is undoubtedly the high grade - or the amount of gold in a tonne of soil - at Randgold's mines. Too many larger cap gold companies get caught in that horrible vicious circle of developing projects of a significant size that become bloated and less economic if the gold price falls back. Do a quick search of all the write-downs by industry behemoths in the last five or so years if you want to know why most large cap gold stocks are a waste of space.
Randgold's criteria of looking for a double digit return at $1000/ounce gold (i.e. nicely lower than the prevailing gold price) has helped keep it out of trouble. New significantly sized mines are still being developed by the company on this criteria. That bodes very well for the future. The company has been helped versus some others in being active in countries like Mali, Cote d'Ivorie and the DRC where economic deposits of gold have been less picked over. However you still need to operate successfully.
Less unique today is a continuing focus on building relationships with governments (as stakeholders and tax recipients) and local populations (as not just a workforce but fledgling managers). Randgold pioneered many of these initiatives and the proof of its good sense is reflected in the copy tactics I see in pretty much everyone of its peers.
Bottom line is that Randgold remains the 'gold' standard in the industry. As I noted around a year ago 'you have to have at least a little gold in your portfolio in these times of uncertainty, strife and central bank policies'...and if you can find another sector play which can look Randgold in the face on matters such as production scope, cost efficiency, grade and political savvy then please let me know. In the meantime the love-up continues.
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