A 25% hike in the dividend has put the shine back on Randgold Resources (RRS) with the shares rising 285p to £63.70 on the fourth quarter (Q4) results. This is despite a 27% rise in costs and only a 4.9% increase in quarter-on-quarter production, having revised its expectations downwards in December.
On paper, the increased shareholder payout and a 20% rise in quarter-on-quarter gold sales looks impressive. Yet Randgold could afford to pay a significantly higher dividend – it still only yields 0.5%, even after factoring in today's higher payment – and it is production, not sales, which illustrates the health of a miner.
A fire in December at its Tongon mine in Cote d'Ivoire was a key reason behind significant cost escalation; so too were higher extraction and processing costs and lower gold recoveries at its Loulo mine in Mali. The latter could remain an issue in the early part of 2013, warn analysts. One of the problems has been the occurrence of copper which is impacting gold recoveries at the processing plant.
So why have the shares regained strength after four months of steady decline? The dividend hike is almost certainly the main reason. Yet the results may have also provided a stark reminder that Randgold is a rare entity on the UK stock market that runs a transparent business, flagging up problems as they occur and quickly finding solutions.
The FTSE 100 miner ended 2012 with $387 million cash, despite $563 million of capital expenditure. The miner has no debt and 2013 will represent its peak year for capital expenditure, thereafter it could see an even-better cash position. Indeed, Randgold has previously told [ITALICS] Shares that this will be the point when it re-bases the dividend to have a much-higher yield.
Several analysts went to visit Randgold's operations in late January and subsequent research notes imply that they liked what they saw. Liberum upgraded the stock from 'hold' to 'buy' following the trip, rating Randgold as its top pick of the UK senior gold producers.
Numis also went on the trip and says Randgold 'looks to have made it as underground miners', which was one of the biggest market concerns a few years. The resources group has historically been an open pit miner and investors were worried it lacked the skills to go underground. They needn't have worried as Randgold has shown the necessary expertise with Loulo's expansion from open pit to underground. The adjacent Gounkoto complex is potentially next on the block to test the miner's new-found skills.
Keep an eye on developments with a new mining tax in the Cote d'Ivoire which could reduce profit margins at Tongon. There is also the matter of water management at Kibali, the massive gold mine in the Democratic Republic of Congo which is scheduled to start production at the end of this year. Numis notes: 'Weathered material in the top of the pit looks set to make open pit mining challenging at times. We believe water management will be critical, especially for underground. The good news is costs are a mere $515 an ounce due to four hydro power plants being installed. We saw the first hydro plant being put constructed with completion due Q1, 2014.'
As for the future, Liberum provides a good summary of the stock's attractions. It believes the company's tier-one long-life assets and 'impressive operational management team' will deliver sustainable 'attractive' free-cash generation, returning more than 40% of its £5.8 billion market cap over the next five years. The investment bank concludes: 'Beyond the expected short term weakness, production and mark-to-market earnings compound annual growth rate of 17% and 23% respectively is far stronger than peers and the 2014 financial year EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 59% is best-in-class.'