In spite of this success and the fact that Randgold Resources has demonstrated its credentials as a sustainable gold producer its path from junior explorer to mid-tier operator has not been a totally smooth one.
About a year or so ago its Loulo project in Mali overtook the established Morila mine, which it shares with AngloGold Ashanti, as Randgold Resources’ most important project. Hence the last thing it needed was the failure of the project contractor MDM, which forced Randgold to take emergency measures that included a court injunction against MDM.
“It is not an easy thing to chase a contractor off your property,” Randgold Resources CEO Mark Bristow says. “But we were really at risk and had to act. We took over the whole project at the end of 2005. We even replaced the artisans on site with our own. The management team on site, who have proved themselves invaluable, reviewed the steelwork, brought in the crusher and changed the scheduling plan, and essentially fixed phase 1 of the Loulo project.”
On the plus side this event gave Randgold Resources an opportunity to definitively prove its credentials as an operator of gold mines. Randgold Resources is thus fully established as a group that adds value to its assets by bringing them to account itself. It is now on the production treadmill, something that often sees a company’s premium eroded. Randgold Resources however has not pursued production for the sake of production, a mistake Bristow has seen other companies make. “The way the AIM market in London encourages juniors to get into production with small projects is potentially a mistake as it dilutes their focus from searching for the genuinely large and worthwhile deposits,” he says.
Bristow and Randgold Resources have been patient about the way they have built projects and won’t produce for the sake of it, unlike companies such as Ashanti Goldfields which took on debt to buy more ounces, not all of which were good ounces, and later was effectively bankrupt as a result of diverging its focus from its key assets.
“For example, we walked away from the Syama project, which Resolute is now planning to develop at this higher gold price,” Bristow says. “The reason is that at US$260/oz when we walked away it would not have been viable, but it certainly becomes so at above US$400/oz which is why we made the decision to acquire it in the first instance.”
Following the discovery of the successful Morila project, which in about two years will start to see its output decline, the longer life Loulo project is its next phase. Morila, in which Randgold has a 40% share (as does AngloGold Ashanti) has a life of mine to 2013 unless further resources are found. Production will decrease from 2009 but it will still produce an estimated 500,000 ounces of gold a year for the next two years, then drop to 400,000 ounces the year after and then to 220,000 ounces for the following year, before tapering off further from then on. Morila, however, remains important for Randgold. It is once again operating well, following what Bristow sees as the mine operator AngloGold Ashanti having taken its eye off the ball, something he also attributes to skills being spread very thinly across the mining industry these days. Also AngloGold Ashanti would not have the same priority focus on Morila that a company like Randgold would have with the mine having been the latter’s primary producing asset.
The tapering off of Morila’s production means that Randgold is already forced to deal with the problem all producers have, that of finding replacement ounces while also ideally trying to grow their business. In spite of the MDM setback, which could cost Randgold Resources US$30 million – of which it expects to recover at least US$12 million – and which delays the development schedule of Loulo by some six months, that project continues to be an exciting one and will provide a good base for further growth.
“The mining and building up of the stockpiles is going well, though the original plan to produce using the soft ores while the comminution system is commissioned for the hard ores has been disrupted. We have had to make use of mobile crushers and this has added to costs and brought about interruptions,” Bristow says.
During the first quarter of this year Loulo, which is 80% owned by Randgold Resources, produced almost 65,000 ounces of gold as it looks to meet its approximate 250,000 ounces a year production schedule for the open pit phase with the 300,000 ounce a year underground phase 2 still under development. The Yalea underground plan will see underground and surface mining integrated and the plant optimised for this. The nearby Loulo 0 deposit will also be developed as an underground mine below the open pit, at a later stage. The head grade of 2.9 g/t is being achieved at Loulo, which at the end of 2005 had 5.6 million ounces of proven and probable reserves. Its orebody remains open in all directions and has also continued to grow its resources and Bristow continues to see surface exploration at Loulo further expanding the potential of the mine.
The Tongon project in the Côte d’Ivoire, which has a resource of 3 million ounces of gold, remains the next project on Randgold’s radar, and Bristow hopes it can come into production by about 2010 to replace the decline in Morila’s production, but all this depends on the detailed drilling programme and politics. The resource can expand as the Northern Zone of Tongon has not been included in the mentioned resource and grades are expected to be higher in this zone. In addition to Tongon Randgold Resources has an exploration portfolio in Côte d’Ivoire, which hosts both greenstone and archean proterozoic gold terrain, and it has been granted additional ground in the south for exploration. Randgold has traditionally been a group that prefers to take geological risk rather than political risk, but with the established territories for gold mining increasingly well covered producers have to consider riskier destinations. Randgold has always considered Africa its hunting ground, but Bristow says that it has started to show an interest in Russia and parts of Europe. Africa though does remain its primary focus, and when considering where Randgold Resources will look he omits Eritrea and Ethiopia as destinations as he believes they are difficult places in which to operate. As for the DRC Bristow does not deny the prospectivity of the country but says it remains early days for gold in particular.
“Were the company interested in copper and diamonds the risk would not be too high. Gold, however, is located in the more volatile east and northeast regions of the country.”
Bristow feels quite comfortable with the scenario in the Côte d’Ivoire, having visited the country three times this year and the impression he gets is that all the parties involved in the country’s recent civil conflict are war weary and would like to see a resolution. At the same time Randgold Resources has met with all the groups involved including the ministry of defence, the ministry of mines and the government of the region, and there has been an appreciation that the company has no political affiliations but is a commercial group looking at developing a project, or projects, that will benefit the country in general.
“During our meetings with the various delegations no politician from either side tried to exploit the situation for political gain, and the focus was on finding solutions so we can go ahead. One of our criteria for returning to work on the ground is that we must be able to do so without having to bring in a private army to make this possible,” Bristow says. The company has also taken a delegation comprising both sides to Loulo to show them what it has been doing.
“We are ready to start building the Tongon project within 24 months of initiating feasibility work on it,” Bristow says. “We have begun drilling 10 holes to gather key data to allow us to plan the bankable feasibility drilling and have reopened our offices in the country. All this has been done in an above board manner and the risks now are really about how long it will take to develop the project rather than that whether it will be developed.”
After the Côte d’Ivoire, Randgold Resources is also drilling some exiting targets in Senegal with drilling having taken place at three of a total of seven planned targets for the year, and it is also doing drilling work in Tanzania in the North Mara and Kiabakari areas. It has an early stage exploration portfolio in Burkina Faso and is looking to generate targets in Ghana.
Randgold Resources remains an exploration focused group even though it has become a reasonably substantial producer, and Bristow himself visits all the projects of any significance twice a year. BHP Billiton’s CEO Chip Goodyear recently pointed out the importance of exploration at a conference in Denver saying not only is it important for mining companies to do exploration, but they must do it well. That was emphasised by an internal study BHP Billiton did of all global mining companies that spent more than US$100 million a year on exploration between 1992 and 2004. For these the average cost per world class equivalent discovery was US$918 million. Those in the top quartile did better than US$515 million per world class equivalent discovery, while those in the bottom quartile the cost was more than US$5 billion per world class equivalent discovery.
Bristow agrees with this and says that exploration is the ultimate way to replace production and create value, not mergers and acquisitions. A significant amount of new discoveries have been due to juniors. However, Bristow notes that typically juniors are regarded as high risk, as minerals exploration is a high risk business, but those that succeed have done very well indeed. However, with juniors now being forced to show some production it has changed the speculative side of the industry. This is different from the traditional role of juniors which when they made a discovery either sold and made a windfall profit, or entered a new phase of risk and became developers of the project.
“Consolidation has seen the erosion of industry exploration spend and intellectual capital, as juniors are moving towards developing small gold projects rather than exploring for new deposits”, Bristow says. This can be seen perhaps in the fact that the amount of exploration spend in 2005 was US$2.7 billion, same as the 1997 peak, but so far the result is little more than 100 tonnes of new production.
“Junior companies have discovered or rediscovered viable large-scale deposits because the dollar spend per unit of intellectual capital is higher than for major companies. Junior companies also have easy access to equity risk capital, are more adaptable and entrepreneurial which gives them a higher capacity for risk and allows entry into new regions.”
Between 1985 and the present, junior and midcap companies have discovered or played a role in the discovery of close to half of the new gold discoveries of greater than one million ounces. The question Bristow poses is whether the current generation of juniors will be as successful as those of the early 1990s, of which Randgold Resources was one.
Randgold Resources has done well with its discovery cost being US$8/ounce of resources and US$14/oz for gold reserves, but Bristow says, “The transition from a junior to a significant producer has significant risk attached, and requires a long term plan. As a result in order to build an integrated gold business as a junior needs investment ahead of the curve, and Randgold Resources was able to do that by commissioning the Morila mine and making discoveries such as Tongon during the bottom of the gold cycle in the late 1999s and turn of the millennium.”
Another risk to the exploration sector is that as Bristow puts it, it risks going stale and this will tempt governments to interfere believing they can do better. This has already been seen to start to happen in South America and no doubt it will spread to Africa if the industry does not manage its assets more efficiently. For example, in Tanzania there are 1,800 tenements, belonging to 600 companies, of which only 12 are actually undertaking exploration and of these only seven are currently active. Similarly in Ghana where there are 212 permit holders, but only 27 companies actively exploring. In Mali it is 165 permit holders and 19 active explorers, in Burkina Faso it is 30 permit holders and 14 active explorers, and in Senegal the figure is 14 permit holders and 7 active exploration companies.
On the production side, Bristow is cautious about taking too much of the current high gold price into his planning, while at the same time he does feel that there are a number of drivers that sustain the metal’s price. Since 1972 the gold price has averaged US$350/oz and since the peak in 1979 the gold price has averaged US$383/oz.
“The gold price fell to its lows during the stable geopolitical phase the world went through during the early 1990s and with the current geopolitical standoff with the US and Iran and similar scenarios, together with the China and India development story – regions where people have a history of liking gold and now have more disposable income – these indicate that the factors driving the gold price up will remain in place.
“There is also a shortage of supply with the current US$2.7 billion a year spent on exploration, similar to the 1997 peak, having failed to find significantly large new gold deposits,” Bristow says. “Many of the gold projects Exploration manager, Paul Harbidge, and divisional geologist, Louis Venter in discussion with Randgold Resources geologists in Tanzania. recently initiated are based on deposits discovered decades previously and now being brought to account because of more favourable political developments in the various countries and regions and the favourable gold price.”
For the start of 2007 Randgold will use a gold price of US$475 when it does its planning, higher than the US$425 it has been using at the moment. However, that does not impact on the company’s reserves as it is simply converting surface to underground reserves, something that the current oil related expenses tend to encourage. A typical open pit operation, which requires a fleet of diesel driven mobile mining equipment and also has to have its own diesel generators, will have seen its operating costs go up by about US$50/oz just due to diesel costs, excluding the other diesel-related costs such as transport. If such a trend continues, it may even see South African deep level underground gold producers become low cost operators once again.
In terms of the future development trends in the gold mining sector, Bristow sees three of significance. One of these relates to comminution, with mining companies moving away from SAG mills as they work to increase the efficiencies in this area. In addition he sees a migration from surface to underground mining as raw material and fuel costs and improvements in underground mining technologies instigate such a change. He also sees an improvement in logistics management as being one of the key focus areas for gold mining companies. MRA