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Randgold can overcome the problems in the Congo - buy

By Gary Newman | Sunday 11 February 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

It isn’t often that I look at shares in a FTSE100 company and can easily see a very high chance of a 25% or more gain in share price over the coming months.

But that is exactly what I see when I look at African gold miner Randgold Resources (RRS), which is an old favourite of mine in this sector, especially when it has been anywhere near the current share price of 6,088p to buy.

I believe that gold will perform well during the coming year and this company was nearly one of my picks for 2018 (I went for Polymetals instead in the end as I saw more potential upside), so with the share price now nearly 20% lower I am even more convinced that it will yield a nice return for both longer term investors and also traders looking at a recovery.

Around a week ago the share price took a big hit, with over £900 million being wiped off of the market cap over the course of a couple of trading sessions, when it released its results for Q4 and outlook for 2018.

Given the reaction to these results, which included the unaudited figures for the whole of 2017, anyone would have thought that they were negative.

But in fact they showed that the company had increased output for the seventh consecutive year whilst at the same time reducing cash cost per ounce. The forecast for 2018 is for similar levels of production at 1.3 million to 1.35 million ounces – compared to 1.315 million ounces in 2017 – and at a cost of $590 to $640 ($620/oz in 2017), so although we may not see the growth that investors here have become accustomed to that certainly shouldn’t have caused such an adverse reaction.

Unfortunately, what appears to be another good set of annual results for Randgold, has also been accompanied by a new mining bill in the Democratic Republic of Congo being approved by parliament and awaiting the signature of the president. This has been in the pipeline for several years, but miners operating in the country had hoped that it would be altered and that the proposed changes to royalty and tax policy wouldn’t be so draconian.

Although this won’t have any short term effect on Randgold, in the longer term it will certainly affect its 45% owned Kibali mine, which produced 268,000 ounces for the company last year, resulting in a gross profit of nearly $130 million, and has had a lot of money invested into it.

The longer term impact of these changes remain to be seen, especially given that they contradict the terms on which the company initially agreed to invest large amounts of money into developing Kibali, under the previous mining charter which dates back to 2002.

During 2017 Randgold made a post tax profit of around $335 million, and that resulted in basic earnings per share of nearly $3, so whilst a reduction in profitability at Kibali would have an impact, I would argue that the company still looks very attractive. Last years figures give a PE ratio of around 28 currently.

The company is also in a good position financially with nearly $720 million in the bank, and having generated net cash flows from its operating activities of nearly $550 million during 2017.

It also decided to reward shareholders with a 100% increase in its dividend for the year at $2 per share, and whilst that isn’t exactly a huge yield at a little over 2%, it still isn’t bad for a mining company.

In terms of gold itself, in the past week we have seen signs that the markets may not be quite as strong as people think, and although one major blip doesn’t mean the bull run is over, it may mean that people start thinking about putting at least some money into safer havens, such as gold.

Alongside that we have also seen large pullbacks in cryptocurrencies, and people who were starting to think that they may replace gold as a store of value in the shorter term may well be having second thoughts.

For me this means that gold is likely to have a good year, and the knock-on effect will be that Randgold will benefit from that, and despite the potential problems at Kibali, I can see plenty of value here at the current share price of 6,088p and I would class this as a strong buy.


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