Randgold Outperforms Gold Prices

DENVER ( ">TheStreet ) - Randgold Resources ( GOLD) has outperformed the gold price in 2010, but some analysts wonder if it's stock is too expensive to buy.

The shares are up almost 27% year-to-date but that appreciation makes them look expensive on a forward price-to-earnings basis. Randgold is trading at almost 27X the current 2011 consensus earnings estimate vs. an industry average of 20X. Barrick Gold ( ABX) is an example of a gold stock at the cheaper end of the spectrum. It trades at just 14X next year's earnings, one of the industry's lowest valuations on this basis.

Wall Street sentiment reflects Randgold's quandary. While analysts are generally bullish with five buy ratings vs. three holds; the average price target of $97.92 is a discount of almost 7% to the stock's closing price of $104.85 on Wednesday.

In the second quarter, the company's profit soared 92%, but the West African miner had to contend with production issues and higher cash costs. I sat down with CEO Mark Bristow recently at the Denver Gold Forum to see if Randgold's blow-out results can continue and get his thoughts on whether the stock is overvalued relative to its peers.

TheStreet: Your second-quarter profit rose 92% year-over-year was that just because of a rising gold price?

Bristow: There were definitely other factors. We had a couple of extraordinary items in the results: one, a write back from an asset-backed security ... that we had written down. We tackled the institution with which we invested and we recouped our investment and we were able to write it back, and two, a realization of some exploration success.

We discovered a little project in Burkina Faso, Kiaka and we spun it into a small junior company. It's done very well ... and we crystallized some profits from that as well ... Operationally however we had a tough quarter.

You had some operational issues at Loulo, are those solved now?

I think there are two aspects to those challenges. The first one is a delay in the build-up of underground project debt at Yalea, underground project debt at Gara is going very well. But we've had some ramp up challenges with Yalea and .... that will take until the end of the year to sort out.

Number two we tripped ourselves up on an expansion on a ramp up in the plant and we just didn't get the throughput in our plant. We had a lot of availability problems, some teething problems at the plant -- that, yes, we have fixed along with our revised guidance. Quarter four will have a full quarter of throughput but we're still building up in quarter three -- that's still going to be a tough quarter for Loulo.

So it seems like by the fourth quarter all your growing pains will be worked out?

I think you'll see the measurable benefits of intervention during Q4. I think the other thing is we were always guiding to a hockey stick top to the end of the year. We have better grades in Q4, which always helps out at Loulo and we'll have Tongon production contribution, a new mine, it's low cost and substantial ... we're expecting to see close to a doubling of attributable gold production from Q3 to Q4 just driven by new mines and better grades.

In terms of the whole year production are you still looking at 470,000 ounces?

No, we corrected that and we've said that could be 10-15% down and so more like 455,000 thereabouts.

Talk about your cash costs because they rose last quarter. They were at $665 an ounce, what are you doing to lower them?

What drives our cash costs both medium and long term is better grades, it's the surest way of getting your cash costs down. Our big driver on the higher cash costs that we're dealing with now is that we're going through that transition from deep pits to underground.

The underground mine is actually a cheaper mining cost than the open pits at the moment because the strip ratios are so high in Loulo. And Morila is mining dumps, low grade dumps, so it's naturally a higher cost producer, strong cash flow but higher accounting costs. As we get into the higher grade ore bodies underground and Tongon and Gounkoto start impacting our production, the costs will go down on the back of higher grades and higher throughputs.

But longer term aren't open pits cheaper than deep pits?

The big thing is how much waste do you have to mine to mine ore? And as these pits get deeper it becomes cheaper to go underground. It's all about strip ratios and underground has a zero strip ratio.

What about production costs in terms of commodity prices and electricity costs?

Our basic input costs have been pretty steady this last year. The dollar price of oil has been steady for all intents and purposes. Steel hasn't been a big driver ... The dollar has been pretty stable as well against the currencies we operate with.

And electricity hasn't been as issue?

We generate our own electricity, its diesel based. That's been pretty steady although it's expensive where we are.

Now from what I'm hearing from a lot of analysts is that West Africa is THE place to be for new gold -- how are you looking to capitalize on that? You've been there for so long, how are you going to catch that fervor?

You know .... There are no one-day wonders in the gold or mining industry and that's how markets tend to react. As managers of mining companies, responsible managers, what we do today is only measured in years to come. What we're able to deliver today we've already done a year or two ago.

We're very relaxed in our footprint in West Africa we just opened up a new footprint in Central Africa, which we are very excited about ... We have a very big land package in West Africa. We have three new mines in the pipeline already defined at final feasibility study ready to be built.

Do you think that your stock is expensive? Some analysts say that it trades at too much of a premium and that risk/reward is not worth it.

I think the point is the market is usually smarter than most analysts ... and I think the point that really differentiates us is that because we have discovered significant new ounces every year, we're constantly unwinding that premium and we don't issue stock. We only have 90 million shares outstanding. We split them two-for-one in 2003. We're not big on issuing paper so shareholders are secure in their investment with us. And .... some of the recent M&A transactions have clearly pointed to Randgold Resources as being grossly undervalued on a relative basis.

Now Blackrock own 12% of Randgold what does that mean for you?

Our biggest shareholder is Fidelity Group and our second biggest shareholder is Blackrock. All the top 12 shareholders own well over 50% of our company. We see specialty resource funds as our clients .... we consult with them all the time.

We've also got 20% retail in our stock. We care about them as much as we care about the major shareholders.

What's your gold price target long term?

We called $1,200 before Christmas last year ...I've said that this year would trade between $1,000-$1,300 and ... we feel this year as we've seen a lot of the politicians spend time convincing the world that the global economy was fixed, that next year they're going to realize it isn't fixed. I think we've got a long haul to repair the damage that was created in the early part of this decade.

What does that mean? $1,500 gold?

I think $1,500 is achievable.

What are some trends you are noticing out of the Denver Gold Forum?

There's no trend right now. What happens when a market gets so euphoric is that you lose all trends. I think we've got a lot of discordance in the gold industry when you look at the value that is being put on real producers and the growth companies that have got specific projects that are certainly rentable and when you look at the value put on promises .... It's all a little bit off kilter. But it happens in any industry from time to time and I think we'll see some sort of normalization in the next short while.

So valuations are out of whack?

I think perhaps some are promises ahead of values.
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-- Written by Alix Steel in New York.

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