For a well managed gold miner an increase in the gold price in combination with rising production can only mean one thing: strong profits growth. Randgold Resources (LON:RRS) was not an exception to this rule with profits in 2009 up 79% on a year ago at US$84.3 million. Of this nearly half of the profits for the year (46%) came from the last quarter.
In the first quarter of 2010 profits growth was maintained, with a rise of 83%, driven mainly by the higher gold prices. For investors Randgold resources offers exposure to a business that will continue to grow output, has strong cashflow and cash balances, as well as being a leveraged play on the gold price.
During 2009 Randgold had cash operating costs of $473 and obtained a sales price of $864 an ounce giving it a cash profit margin of $391 an ounce. If we assume that the cash price received for gold ounces produced in 2010 comes in at $1,250 this would be an increase of 44.7% on the prior year.
However, if cash costs stay the same at $473 then the cash profit margin would rise to $777 in 2010. This represents an increase of 98.7% or nearly double. Thus a near 50% increase in the gold price received would double profits for Randgold if costs stayed the same.
Gold miners that can increase production offer even better exposure and it is here that Randgold stands out. Output increased 14% rise in 2009 to 488,255 ounces (428,426 in 2008). This look sets to continue into the long-term as the attributable mineral resources rose by 75% during the year and total mineral resources were up 69%.
This was driven by new projects and a resource conversion drive. Thus at the attributable level the measured, indicated and inferred resources rose from 16.13m ounces to 27.33 million ounces. Excluding the Morila mine the average grade of reserves is 4 grams per tonne.
At present the bulk of output, at 72%, came from the flagship Loulo mine in the West African country of Mali. Thus the Randgold story has to a large extent been about the development of mining outside of historically mature areas such as South Africa and Ghana.
The Loulo mine produced 351,591 ounces - up 37% on the year before - with growth coming from the completion of…
