We are initiating our coverage on Randgold Resources with a Buy recommendation and a target price of £67.43. This represents an NPV multiple of 2.3X, which we believe accurately reflects the forthcoming growth in the company.

Investing in Randgold is an exposure to fast growth, with production forecast to more than triple over the next four years. Our current target price is based on the existing reserves being mined, ie we have not included a percentage of the resources. Given the successful exploration over the past few years and knowing that the areas along strike and at depth of some of their proposed new mines are highly prospective, it does suggest potential upside to our target price.

The company is virtually debt free and as at 31 March 2010 had cash of $506M on the balance sheet. We believe that all of the proposed new mines can be developed from internal cash flow, with no need for bank loans or project finance. With the hedge book due to be closed later this year, we do not expect any further hedging to be put in place.

Randgold commenced paying dividends in 2007and since that time has paid an increasing annual dividend each year. Our calculations indicate that the gold price could drop to $700/oz and dividends could be maintained, plus the mines developed.

Apart from the exploration upside, Randgold are also investigating building dams and using the hydro-electric power generated to power its mines. Should this be successful, it has the potential to save around $80M per year in operating costs.

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