Randgold Resources (Price: 5120p | Target: 6181p | Rec: Buy)
RRS’s 1Q13 report highlighted that it had undertaken a prudent review of its operations with the aim of managing cash flows, i.e., identifying capex savings where possible.
This highlights that not even the better managed lower cost producers are immune to sharp falls in the gold price, particularly when they are undertaking a demanding capital schedule.
RRS remains in a solid position, with no gearing and a strongly cash generative portfolio of operations.
Nevertheless, its caution is justified as an operation the size and complexity of Kibali is brought on stream through this year.
* RRS’s quarterly included adjustments to its forward capital spend, to better manage cash flows in light of the recent drop in the gold price.
The net savings, reducing FY13E capex from $670m to $626m, seem trifling for a company that at the end of 2012 had over $370m of cash, no debt and strong cash generation.
We had forecast FY13E operating cash flows in excess of $600m, leaving RRS with a year-end cash balance of $226m.
* However, even RRS’s modest caution does appear justified given the demanding, predominantly non-deferrable capital schedule.
RRS notes that under a sustained $1,400/oz gold price its cash balance would have fallen below $100m by Sep’13 (under the same scenario our FY13E operating cashflow would reduce from $576m to $450m).
RRS’s forecast cash balance at this gold price now remains above $120m with RRS also at an advanced stage in securing a $200m facility, proving an additional layer of “insurance”, particularly as Kibali comes on stream in the 4Q13.
* We retain our gold price assumption of $1,675/oz for the year, but acknowledge the downside risk to this.
Our TP, which is based on an equal blend of NPV and FY13E earnings multiples has reduced to 6181p per share.
At the spot gold price, our TP would fall further to 5021p per share; a positive investment case is therefore contingent on the expectation of improving gold prices.
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Analyst: Hunter Hillcoat
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