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Should my bromance with Randgold Resources continue?

By Chris Bailey | Thursday 9 August 2018

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.

You always have to watch your biases in the world of investment. There are some shares or sectors that for personal, historical or other exogenous/endogenous reasons you just love or hate. Regular readers will know that Randgold Resources (RRS) has been one of my structural favourites for many a long year, with the stock one of my largest (and most successful) holdings during the final part of my institutional fund management career, contributing to outperformance and the like.

The basic story back then was - unsurprisingly - not so different to the bull case today. Large, high grade mines in areas of west and central Africa few other corporate names can seem to effectively operate in, funded prudently by the company and staffed/managed largely by local workers. Today's second quarter numbers nod towards all these aspects with gold production up 9% quarter on quarter at 313, 302 ounces and total cash cost per ounce down 3% at $697. The gold price might have been shabby recently but that is still a decent margin.

Beyond some inevitable link with the broad direction of the gold price move, what has been holding back the shares of Randgold? Problem one this year has been its operations in the DRC. This has nothing to do with its mining operations, which have moved at the Kibali mine to a record level of output and are set to beat forecasts. This is all to do with the still ongoing discussions with the DRC government about royalty split. It has been flexing its muscles across the entire resource spectrum and Randgold and others (including Glencore (GLEN)) have been trying to find a workable compromise. I think this is part of the dance that goes on in all resource production areas and it is in the interests of the DRC government to find a deal given the magnitude of employment and tax revenues covered. Certainly the biggest geographic zone for Randgold activities (Mali) has taken this view and the newish deal signed with the government there reads well regarding the ongoing development of the 'Gounkoto superpit'.

The second issue has been in the Cote d'Ivorie where the Tongon mine did produce good quarterly production numbers. However - as the company notes - 'since the end of the quarter, however, a new work stoppage halted operations and the mine is working on a recovery plan to get back to full production with expected annual production revised to around 250koz'. As I heard the company's CEO note on a financial TV channel earlier, when a third of the company's local employees were previously wrapped up in the country's civil war, labour relations can get slightly excitable at times!

But put all this together and full year production is now just in-line rather than (no doubt) some residual hopes of a (Randgold trait) full year beat. Personally I still think this is possible but better to low ball now and...beat later. Otherwise cash flow generation looks good (net cash over $600 million) and the development pipeline full.

For me the core story for Randgold remains intact. Operational challenges in Africa are just part of the game but, fundamentally, the fusion of grade, cash and prospects still works well. Of course you can debate what price you should pay for all this and a 20-something P/E and a 2.5% yield may not excite many - or may not be an appropriate way to even value gold names in any case. All I know is that the gold price today feels out-of-favour and rude - and may be the final piece of the jigsaw. Hello a return to a share price starting with a '6' sooner rather than later would be my call today. In short, my bromance continues.

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