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THIS DOCUMENT INCLUDES RESEARCH WHICH IS A MARKETING COMMUNICATION. It is not investment research and has not been prepared in accordance with legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research. Where a stock is indicated with *, Oriel Securities has designated research as “Connected”. Please refer to the back of this document for important disclosures and our research disclaimer.
UK gold sector Sector review and initiations of coverage Mining
6 February 2015
Searching for sustainable value MULTIPLE RECS
Unconnected research
UK gold sector – Multiple recommendations Oriel Sector Report - Mining
The past two years have served as a stark reminder of gold’s unpredictability.
The metal has traded as high as US$1,700/oz (early 2013) and as low as
US$1,150/oz (late 2014), with significant fluctuation in between as markets
struggled to find consensus on the outlook for its key drivers – inflation,
interest rates and the US dollar. Early 2015 has brought a recovery above
US$1,200/oz, offering some relief to beleaguered producers. We are cautiously
optimistic that current price levels are at least sustainable in the near term,
but gold’s rocky ride over recent years highlights the importance of asset
quality and management if value is to be created and protected across the
cycle. We initiate research coverage on one diversified large-cap, one
established mid-tier, and one emerging junior that we believe fulfil this criteria.
Randgold Resources (HOLD, 5,400p Target Price). Randgold’s highly disciplined
approach to project development and capital management has seen it emerge as the
UK market’s pre-eminent gold equity. The group now boasts a diversified suite of high-
quality assets that it has developed largely organically and with limited recourse to
equity markets, factors which distinguish it from most of its established senior peers
and which in our view justify its sector premium rating. Production of ~1.3Moz pa at all-
in costs of <US$800/oz offers good protection against pricing downside and, despite a
relative lack of “alpha” catalysts, Randgold is our top defensive pick.
Centamin plc (BUY, 80p Target Price). The low operating-cost structure of
Centamin’s Sukari mine has enabled the group to maintain margin and internally fund
expansion despite gold’s precipitous fall over the past two years, and with ramp-up to
steady-state production of 400-500koz nearly complete, free cash-flow is set to grow
even at current prices (offering the potential for a rising dividend). Last year’s
acquisition of Ampella brought some welcome project and country diversity, and could
materially add to our valuation if a viable development opportunity is proved up.
Centamin is our preferred established-producer pick on valuation grounds at current
gold prices, and also offers good leverage to higher prices.
Amara Mining (BUY, 30p Target Price). At ~10Moz, Amara has the largest resource
base of any UK-quoted junior. The scale, technical simplicity and array of already
installed-infrastructure at its flagship Yaoure project in Cote d’Ivoire in our view makes
it the highest-quality undeveloped project in West Africa, one that withstands scrutiny
at much lower gold prices and one which we believe could appeal to established mid-
tier producers. With Yaoure financed through to a construction decision by early next
year, near-term funding risk is low. Longer-term, we believe Amara has options to
address the capex hurdle thereafter, should it remain independent.
Stocks reviewed
AMARA MINING PLC
Recommendation BUY
Price 16.50
Target price 30.00
CENTAMIN PLC
Recommendation BUY
Price 67.95
Target price 80.00
RANDGOLD RESOURCES LIMITED
Recommendation HOLD
Price 5,550.00
Target price 5,400.00
All data as of close 05 February 2015
All sources unless otherwise stated: Company data, Factset,Oriel Securities
Contributing analyst Electronic
Sales
Nick Chalmers UK Sales desk
+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]
2
Mining
Table of contents
Investment summary ............................................................................................................... 3
Gold market overview .............................................................................................................. 4
Gold equities – fortunes changing? .......................................................................................................... 6
Our senior, intermediate and junior picks ........................................................................... 11
Amara Mining plc ................................................................................................................... 13
Valuation ................................................................................................................................. 15
Upcoming catalysts ................................................................................................................................ 16
Risks ....................................................................................................................................................... 16
Company overview ................................................................................................................ 17
Yaoure project – the company maker ..................................................................................................... 18
Baomahun project – development optionality ......................................................................................... 21
Management ........................................................................................................................... 22
Centamin plc ........................................................................................................................... 23
Valuation ................................................................................................................................. 25
Upcoming catalysts ................................................................................................................................ 26
Risks ....................................................................................................................................................... 26
Company overview ................................................................................................................ 27
Sukari gold mine, Egypt .......................................................................................................................... 27
Building the growth pipeline .................................................................................................................... 30
Management ........................................................................................................................... 33
Randgold Resources Limited ............................................................................................... 35
Premium quality, premium price .......................................................................................... 37
Valuation ................................................................................................................................. 38
Upcoming catalysts ................................................................................................................................ 39
Risks ....................................................................................................................................................... 39
Company overview ................................................................................................................ 40
Management ........................................................................................................................... 45
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Investment summary
It’s been a testing few years for gold equities, which have by and large underperformed gold for the past
four years, the disparity between equities and bullion emerging even before gold’s precipitous fall in H1
2013. However, there were clear signs towards the end of last year that equities’ beta correlation to gold
was recovering, and with the tentative recovery in gold prices to a >US$1,200/oz level since the turn of
the year, we may have reached an inflection point, with equities set to break a multi-year run of
underperformance.
We are cautiously optimistic that macro-economic conditions are supportive of the current gold price,
and any strengthening from current levels should therefore benefit all gold equities to some degree. But
given gold’s rocky ride over the past two years in particular, which have served as a reminder of its
unpredictability, we believe the sector should continue to be approached selectively – we prefer
companies that have the underlying asset quality and management discipline to withstand another
sustained downturn should it transpire, as well as being able to capitalise on a rising gold price.
In the case of established producers, we look for companies that have below-average cash operating
costs, strong balance sheets and the management discipline to only pursue growth opportunities that
add to the quality of the existing project portfolio. In the case of the developers and emerging producers,
we look for projects that can withstand stress-testing at gold prices significantly below current levels,
and management teams with a proven track-record of financing and developing.
With this criteria in mind, we are initiating research coverage on three UK-quoted gold equities at very
different stages of evolution: Randgold Resources (HOLD, 5,400p TP) and Centamin plc (BUY, 80p
TP) are both established low-cost producers (and amongst the very few that could withstand a
sustained significant further downturn in the gold price without having to cut back production) with debt-
free balance sheets and proven management teams, while Amara Mining (BUY, 30p TP) is an
emerging junior with a stand-out development project that holds potential for low operating-cost
production.
Figure 1: NAV and 2015E EBITDA leverage to gold (flat from today)
At US$1,300/oz gold +10% Leverage -10% Leverage
NAV (p/sh)
Amara Mining (risk-adjusted) 30 41 37% 20 -33%
Centamin 80 98 23% 61 -24%
Randgold Resources 3,104 3,683 19% 2,523 -19%
2015E EBITDA (US$m)
Amara Mining -5 -5 na -5 na
Centamin 223 276 24% 170 -24%
Randgold Resources 581 724 25% 438 -25%
Source: Oriel Securities estimates
4
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Gold market overview
Gold has been unusually volatile over the past two years, trading as high as US$1,700/oz in early 2013
and as low as US$1,150/oz in late 2014, with significant fluctuation in between as markets struggled to
find consensus on the outlook for gold’s key drivers – inflation, interest rates and the US dollar.
The early weeks of 2015 have seen a bounce off the lows of late 2014, prompted by the Swiss Central
Bank abandoning its currency cap and moving deeper into negative interest rate territory (increasing
gold’s appeal despite its lack of yield) and supported by safe-haven buying on continuing economic and
political uncertainty in the Eurozone and by robust physical demand from Asian markets in particular.
This strength in the face of a collapsing oil price (a potential driver of deflation, which traditionally has
been seen as negative for gold) and a rising US dollar (the dollar and gold are traditionally negatively
correlated) is unusual but not unprecedented – in the immediate aftermath of the 2007/08 global credit
crisis there were a number of occasions when gold and the US dollar rose in tandem, with both viewed
as liquid safe-havens in turbulent global markets and gold carrying the additional attraction of being a
hedge against the possible longer-term implications of monetary stimulus.
Figure 2: Gold and Dollar rising together seems counter-intuitive, but we’ve been here before
Source: Bloomberg
We don’t necessarily feel the dollar will weaken significantly in the immediate term given renewed
pressure on the western world’s other major currency, the euro, following the European Central Bank’s
recent commitment to substantial monetary stimulus in the Eurozone for at least the next 12-18 months.
But this in itself may not necessarily be negative for gold – a weakening euro would clearly make euro-
denominated gold attractive, and ongoing uncertainty over the wider economic and political stability of
the Eurozone may see both the dollar and gold underpinned by safe-haven buying (continuing the
atypical phenomenon of gold and the dollar rising together).
Indeed, gold’s recent resilience in the face of dollar-strength could be viewed positively for its medium-
term prospects, as a strong dollar coupled with current benign inflation and still fragile economic
recovery in the US potentially reduces the likelihood of a material hike in US interest rates in the near
term (a sustained turn in the developed-world interest-rate cycle remains the major long-term threat to
gold). Gold’s upturn in recent weeks is closely correlated with a sharp decline in the yields of
government bonds, an alternative safe-have asset class (Figure 3) – if yields were to continue this
downward trend, there could even be scope for further gold-price strength as the opportunity cost of
holding this non-yielding asset diminishes, increasing its attraction as a safe-haven from current macro-
economic uncertainties and as a hedge against the possible longer-term consequences of an extended
period of loose monetary policy to combat the threat of deflation.
Gold has shown
resilience in the face
of rising dollar
Low bond yields
supportive of gold
5
Mining
Figure 3: In the context of yields the recent uptick in gold makes sense
Source: Bloomberg
Given the prevailing macro-economic backdrop, and the fact that physical buying levels are relatively
robust (at least in Asian markets), we are cautiously optimistic that a >US$1,200/oz gold price is
sustainable in the near term.
It is extremely difficult to confidently make longer-term price predictions given the limited influence of
physical supply-demand dynamics on gold – investor sentiment, which is unpredictable and can change
quickly, plays a far larger role in price setting than is the case with industrial commodities. Moreover,
long-held relationships between gold and other macro-economic indicators can break down completely
from time to time (as at present, with gold rising in tandem with the dollar, to which it is traditionally
negatively correlated). We can envisage a bull-case scenario for gold in which the unprecedented
injection of liquidity into the global money markets over recent years (which is still ongoing in the case of
the Eurozone and Japan) ultimately results in long-term monetary debasement and inflation. But one
could make an equally compelling argument for benign inflation (it has certainly been stubbornly absent
to date, with falling oil prices a key factor in recent times) and gradually rising interest rates in the main
developed world economies, a scenario which would likely prove bearish for gold.
Oriel valuation assumption On balance our long-term view leans more towards the bull-case, but given gold’s wildly fluctuating
fortunes over the past two years in particular, we believe it would be foolhardy to adopt a significantly
higher price assumption in making financial forecasts and company valuations from an equity-analysis
point of view. Put simply, we are wary of gold equities that cannot sustain long-term real margins at
current prices, and ideally look for those that could still deliver positive cash flow at even lower prices.
We thus use a US$1,300/oz long-term (from 2016) price assumption in valuing our stocks under
coverage, recognising that equities typically trade in close relationship to the prevailing spot price. We
believe a US$1,200-1,300/oz range is defendable over the next 12 months, and consider the upper end
of this range to be suitably conservative on a longer-term outlook (US$1,300/oz correlates with the
current global average all-in production cost for the industry as estimated by Thomson Reuters GFMS).
Risks could be to the
upside on a longer-
term view
6
Mining
Gold equities – fortunes changing? The traditional logic of investing in gold equities rather than gold itself (be it physical bullion or ETF
paper-proxies) is to gain leveraged exposure (and therefore value growth), which itself has traditionally
been viewed as an instrument of wealth-preservation given its historic negative correlation with the
world’s major paper currencies and interest rates, and positive correlation with inflation.
This investment thesis has in the main been borne out over the past 20 years, with equities
outperforming the metal in times of rising gold prices and, on the flip side, moving down at greater rates
when gold falls. But as the charts in Figure 4 below illustrate, in recent years this leveraged “beta” to
gold has broken down somewhat, with gold equities significantly underperforming gold for much of the
past four years, even during periods of gold-price strength.
Figure 4: Gold equities underperformed gold for an unprecedented four years to the end of 2014
Source: Bloomberg
Gold equities merely kept pace with gold in 2010, despite the metal rising 30% for the year as a whole,
and actually lost ground across 2011 and 2012 despite gold still posting gains for both of those years.
Unsurprisingly, equities significantly underperformed over the past two years following gold’s precipitous
fall in H1 2013, making it an unprecedented four straight years of relative underperformance. Indeed, as
Figure 5 illustrates, gold equities ended 2014 at their lowest level in 20 years relative to gold.
Figure 5: Relative to gold, equities are just coming off their lowest level in two decades
0.0
1.0
2.0
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200
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Jan-07
Jan-08
Jan-09
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Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
US$
/oz
Gold Price FTSE Gold Mines
Source: Bloomberg
Gold equities have
underperformed gold
for some time
7
Mining
General risk-aversion (negative for equities) and/or an anticipation that gold’s multi-year bull run was
running out of steam may partly explain equity underperformance relative to gold in 2011 and 2012 in
particular, when equity valuations actually fell despite gold still holding strong. But given that equities are
in the main reactive to, rather than predictive of, commodity pricing, we believe other factors played a
bigger role, not least of which is that the gold-mining industry, by and large, failed to maximise margin
leverage to gold through the good times, as operating costs rose in tandem with gold.
As production increased into a rising gold price through 2009-2011, costs rose at a similar rate (partly
due to general inflationary pressures, but also because production growth was being delivered at the
expense of grade, with miners looking to maximise their resources in a rising price environment by
reducing reserve cut-off grades), limiting margin expansion as gold rose (Figure 6). Set against a
background of ballooning capex bills for new projects and expansions during this period (often resulting
in dilutive equity fund-raises), it is not difficult to understand why markets lost faith in the ability of gold
equities to deliver real returns, even at robust gold prices.
And as the gold price fell sharply in H1 2013, producers were slow to react to the lower pricing
environment, the resultant margin squeezes and funding holes seeing equities massively underperform
as gold settled down at a sub-US$1,400/oz level.
Figure 6: Senior/intermediate* gold companies combined production and average costs, 2009-2013
0
400
800
1,200
1,600
2,000
0
10
20
30
40
50
2009 2010 2011 2012 2013U
S$/o
z
Gol
d pr
oduc
tion
(Moz
)
Production Cash Costs All-In Sustaining Cash Costs Gold Price
*As selected by Bloomberg Intelligence (>200koz pa producers) Source: Bloomberg, Company data, Oriel Securities estimates
But cost-reduction initiatives are now coming through – Thomson Reuters GFMS calculates that
industry average total cash costs fell by 4% in the first nine months of 2014 compared with the
equivalent period in 2013, to US$736/oz (although estimated all-in costs, which include depreciation,
sustaining capex and corporate overheads, remained stubbornly high at US$1,300/oz). Some of this
has been achieved through cutting excess expenses at the corporate level and increasing productivity
rates (changes which we believe should be sustainable with disciplined management), and some of it no
doubt reflects high-grading of production where possible (which may be more challenging to sustain,
and could have adverse consequences for long-term production grades).
And there are signs that this lowering of the cost base, increase in production cut-off grades and
renewed focus on profitability over outright production growth alone is rebuilding market confidence in
gold equities – Figure 7 indicates that “beta” has returned, with gold equities displaying a stronger
correlation with the gold price over the past six months than over the preceding three-and-a-half years.
And anecdotal evidence also suggests that equities are beginning to behave more normally, with share
prices responding positively to company-specific good news (in contrast to much of the past two years,
when positive news was often taken as a liquid selling opportunity).
Margin expansion
during the good times
was constrained by
soaring costs
Cost-cutting
initiatives now
flowing through
Market beta looks to
have returned
8
Mining
Figure 7: Gold equities have displayed greater correlation with gold over the past six months than preceding three-and-a-half years
Source: Bloomberg
If the traditional relationship between gold and gold equities has re-established itself, and gold
consolidates at current levels (or indeed builds on the positive momentum of recent weeks), might we
have reached a point of inflection, with equities set to end a four-year run of under-performance? The
early weeks of 2015 are certainly encouraging (see Figure 8), although longer-term we believe much will
depend on whether gold companies have learned the lesson of maintaining cost discipline throughout
the pricing cycle.
Figure 8: Beta has returned in recent months, and equities have outperformed gold so far in 2015
1,000
1,100
1,200
1,300
1,400
1,500
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1,700
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Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15
US$
/oz
Gold Price FTSE Gold Mines
Source: Bloomberg
But equities still look attractively priced – much depends on the longer-term direction of travel, but it is
worth noting that when gold first broke through US$1,300/oz on the way up (September 2010), the
FTSE Gold Mines index was nearly three times higher than it is today, with gold having recovered to a
similar level. And UK-quoted gold equities continue to sit at undemanding EV/oz resource multiples (an
admittedly crude but still useful comparative valuation metric) – the current UK market average of
US$32/oz (Figure 11) is still below the discovery cost of many. But what is also clear from both EV/oz
(Figure 10) and EV/EBITDA (Figure 9) analysis is that the sector remains polarised, with perceived
funding risks overshadowing underlying asset quality amongst the juniors, and operating-cost structure
and balance-sheet strength having the biggest influence on market rating of the established producers.
Equities still at
undemanding
valuations,
particularly the
juniors
9
Mining
Figure 9: Top-ten UK-quoted gold producers ranked by EV/forecast 2015 EBITDA (as at close 03/02/15)
Source: Bloomberg estimates, Oriel Securities estimates
Figure 10: EV/oz resource* ranking of top 25 (by market capitalisation) UK-quoted gold equities (as at close 03/02/15)
0
50
100
150
200
250
300
Ran
dgol
d R
esou
rces
Fres
nillo
Poly
met
al In
tern
atio
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Sera
bi G
old
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old
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tam
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als
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ovsk
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ild M
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old
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goni
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dBrid
ges
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bal R
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inin
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dor G
old
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Afric
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a M
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ourc
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Cha
arat
Gol
d
EV/o
z re
sour
ce (U
S$/o
z)
*Equity-attributable gold and gold-equivalent resources Source: Bloomberg, Company data, Oriel Securities estimates
10
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Figure 11: UK-quoted primary gold equities ranked by EV/oz attributable gold-equivalent* resources (as at 03/02/15)
Company Status Country Focus Price Mkt Cap Net Cash Attrib Resources EV/oz
(p) (US$m) (US$m) (Moz AuEq) (US$)
Randgold Resources Producer Mali, DRC, Cote d'Ivoire 5,535.0 7,779 61 28.6 270
Fresnillo Producer Mexico 880.0 9,809 328 69.2 137
Polymetal International Producer Russia 600.0 3,819 -1,038 40.4 120
Serabi Gold Producer Brazil 5.1 51 -4 0.7 75
Kirkland Lake Gold Producer Canada 235.0 277 -43 4.6 70
Polyus Gold International Producer Russia 197.0 9,035 -340 140.5 67
Centamin Producer Egypt 65.8 1,146 110 18.6 56
Trans-Siberian Gold Producer Russia 13.5 22 -25 0.9 53
Acacia Mining Producer Tanzania 282.1 1,750 152 32.1 50
Metals Exploration Explorer/Developer Philippines 5.0 104 19 1.9 45
Aureus Mining Explorer/Developer Liberia 20.8 98 -14 2.5 44
SolGold Explorer/Developer Ecuador, Solomon Islands 2.2 22 4 0.4 40
China Nonferrous Gold Explorer/Developer Tajikistan 25.0 144 -36 4.7 38
Petropavlovsk Producer Russia 12.5 37 -922 25.8 37
Hochschild Mining Producer Peru 89.8 498 -251 20.2 37
Shanta Gold Producer Tanzania 11.1 78 -40 3.2 37
Scotgold Resources Explorer/Developer United Kingdom 0.6 9 0 0.3 29
Patagonia Gold Producer Argentina 2.9 46 -3 1.7 28
Anglo Asian Producer Azerbaijan 6.0 10 -52 2.3 28
Nordgold Producer Burkina Faso, Guinea, Russia US$1.72 655 -361 37.6 27
Highland Gold Mining Producer Russia 40.0 197 -239 17.3 25
Dalradian Resources Explorer/Developer United Kingdom 53.5 124 39 3.5 24
GoldBridges Global Resources Producer Kazakhstan 2.7 89 7 5.2 16
Minera IRL Producer Peru, Argentina 3.8 13 -25 2.4 16
Mariana Resources Explorer/Developer Argentina, Chile 1.3 10 3 0.5 15
Greatland Gold Explorer/Developer Australia 0.2 2 1 0.1 15
Caledonia Mining Producer Zimbabwe 43.5 34 24 0.7 14
Condor Gold Explorer/Developer Nicaragua, El Salvador 65.0 45 1 3.4 13
Conroy Gold & Natural Resources Explorer/Developer Ireland 1.0 6 0 0.6 11
Avocet Mining Producer Burkina Faso, Guinea 6.8 21 -70 8.6 11
Pan African Resources Producer South Africa, Mozambique 12.0 332 -12 33.5 10
Amara Mining Explorer/Developer Cote d'Ivoire, Burkina Faso 16.5 105 24 8.9 9
Red Rock Resources Producer Colombia, Kenya 0.1 4 -2 0.6 9
Ariana Resources Explorer/Developer Turkey 0.8 8 0 0.9 8
Orosur Mining Producer Uruguay 11.5 17 4 1.7 8
Goldplat Producer Kenya 3.3 8 2 0.8 8
Hummingbird Resources Explorer/Developer Mali, Liberia 36.5 47 7 5.8 7
KEFI Minerals Explorer/Developer Saudi Arabia 1.0 19 5 2.1 7
Galantas Gold Explorer/Developer United Kingdom 3.1 4 0 0.6 6
Chaarat Gold Explorer/Developer Kyrgyzstan 10.5 43 12 6.1 5
Central Rand Gold Producer South Africa 12.9 17 -13 7.3 4
Goldstone Resources Explorer/Developer Ghana 2.1 2 1 0.4 4
Sovereign Mines of Africa Plc Explorer/Developer Guinea 0.5 2 1 0.5 3
Vast Resources Explorer/Developer Zimbabwe 0.6 12 -1 4.7 3
Ortac Resources Explorer/Developer Slovakia 0.1 6 4 1.3 1
Bezant Resources Explorer/Developer Philippines 4.1 5 4 2.6 0
Stratex International Explorer/Developer Turkey 1.8 13 13 0.7 0
Tengri Resources Explorer/Developer Kyrgyz Republic 2.4 4 0 10.9 0
Average 32
*Gold equivalents calculated at US$1,258/oz Au, US$17.22/oz Ag, US$5,500/t Cu, US$2,128/t Z Source: Bloomberg, Company data, Oriel Securities estimates
11
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Our senior, intermediate and junior picks
Whatever the long-term future may hold for gold, the metal’s volatility over the past two years has
served as a reminder of its pricing unpredictability in the near term. We therefore believe equities should
continue to be approached selectively, with a focus on underlying asset quality and strength of
management, attributes which are key if periods of gold-price strength are to be fully capitalised on and
further periods of price weakness ridden out.
We have selected three UK-quoted gold stocks that we feel fulfil this criteria: two mid-large cap
companies – Randgold Resources and Centamin plc, both established and relatively low-cost producers
with debt-free balance sheets and proven management teams; and one small-cap, Amara Mining,
owner of a large-scale development project with potential for very low-cost production.
Randgold Resources (HOLD, 5,400p TP). Randgold’s disciplined approach to project development
and capital management has seen it emerge as the UK market’s pre-eminent gold equity – the group
now boasts a diversified suite of high-quality assets that it has developed largely organically and with
limited recourse to equity markets. Production of ~1.3Moz pa at all-in costs of <US$800/oz offers good
protection against pricing downside, and despite a lack of “alpha” catalysts it is our top defensive pick.
Centamin plc (BUY, 80p TP). The low operating-cost structure of Centamin’s Sukari mine has enabled
the group to maintain margin and internally fund expansion despite gold’s precipitous fall over the past
two years, and with ramp-up to steady-state production of 400-500koz nearly complete, free cash-flow is
set to grow even at current prices. Last year’s acquisition of Ampella added some welcome project and
country diversity, and could provide significant valuation upside should a viable mine-development
opportunity be proved up over the next 18-months. Centamin is our top established-producer pick.
Amara Mining (BUY, 30p TP). At ~10Moz, Amara has the largest resource base of any UK-quoted
junior. The scale, technical simplicity and array of installed-infrastructure at its flagship Yaoure resource
in Cote d’Ivoire in our view make it the highest-quality undeveloped project in West Africa (and with
forecast all-in costs of <US$700/oz on production of 279-325koz pa, one that withstands scrutiny at
much lower gold prices). We believe that Yaoure could appeal to established mid-tier producers, but
Amara will be looking to add significant value in the meantime – its recent US$22m equity raise ensures
that Yaoure is adequately funded through to a construction decision by early next year.
Target Prices for all three have been generated using our House gold price assumption of US$1,300/oz.
This does not necessarily reflect our long-term macro view (indeed, we believe a compelling argument
can be made for prices going higher), but we believe it is a realistic target level for spot gold over the
next 12 months (and we recognise that gold equities generally trade in relation to the prevailing spot
price). We include full sensitivity tables to gold price for all our Target Prices in the following company
pages. All have significant valuation upside to prices higher than US$1,300/oz, but just as importantly,
all still generate positive NAVs at US$1,000/oz gold.
Figure 12: NAV and 2015E EBITDA leverage to gold (flat from today)
At US$1,300/oz gold +10% Leverage -10% Leverage
NAV (p/sh)
Amara Mining (risk-adjusted) 30 41 37% 20 -33%
Centamin 80 98 23% 61 -24%
Randgold Resources 3,104 3,683 19% 2,523 -19%
2015E EBITDA (US$m)
Amara Mining -5 -5 na -5 na
Centamin 223 276 24% 170 -24%
Randgold Resources 581 724 25% 438 -25%
Source: Oriel Securities estimates
Given gold price
volatility, asset and
management quality
are key
12
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13
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Amara Mining plc Initiation of coverage Mining 6 February 2015
Junior company, major asset BUYPrice: 17p Target price: 30p Unconnected research
With resources close to 10Moz – the largest gold resource base of any UK-
quoted junior – Amara is trading at a startlingly low EV/oz of <US$10/oz and at
an 85% discount to our estimate of its core (albeit unfunded) NAV. We believe
Yaoure is the highest-quality undeveloped gold project in West Africa, and
Amara demonstrating capex can be funded (ideally in a manner that minimises
dilution to shareholders) will be key to share-price re-rating.
Robust project in challenging times. Yaoure’s large scale (6.8Moz resource),
metallurgical simplicity (non-refractory ore) and prime location (situated in mining-
friendly Côte d’Ivoire, close to cheap hydroelectric power and with an enviable array of
already-installed infrastructure) more than offset its modest grade to make the project
one of the few undeveloped gold assets we see that warrants developing even if gold
were to fall below current levels. With possible production of 279-325koz (which would
place Yaoure amongst the top 10-15 largest gold mines in Africa) at projected total
cash costs of ~US$600/oz and all-in costs of <US$700/oz (which would make it one of
Africa’s lowest-cost producers), Yaoure’s economics look highly attractive at current
gold price levels (we estimate an IRR of 34% at US$1,300/oz gold) but would still hold
up at significantly lower prices (we estimate an IRR of 18% at US$1,000/oz).
Clear project milestones in 2015. Yaoure will be further de-risked technically over the
next 12 months, with a prefeasibility close to completion and scheduled for delivery in
March, and a full feasibility possible by year-end (and now funded following the
company’s recent US$22m equity raise). We believe the already compelling project
economics demonstrated by last year’s scoping study will at the very least be
confirmed by these upcoming studies, and may even be enhanced.
Baomahun provides optionality. Based on its 2013 feasibility study, the smaller but
higher-grade Baomahun project in Sierra Leone has compelling development potential
if gold returns to the US$1,350/oz level used as the base-case in that study. A smaller-
scale and lower-cost alternative (potentially with a later underground mine to
supplement the initial open pit) based on more selective mining of the deposit’s higher
grade core may make sense at lower gold prices, but further on-the-ground evaluative
work is currently on hold given the Ebola outbreak in Sierra Leone.
Market overly discounting for funding risk. Funding capex of up to US$350-400m is
a big ask for any junior, but notwithstanding the potential of developing Yaoure on a
phased basis (with lower initial capex), we believe Amara has alternatives to issuing
(potentially dilutive) equity alone – Yaoure has significant capacity for debt and is of a
quality and scale that we believe could attract a larger JV partner (or outright acquirer).
Amara has proven adept at finding innovative funding solutions in the recent past, and
demonstrating it has viable options for Yaoure will be key to reducing its shares’ current
heavy discount to core NAV. Initiating with a BUY and a 30p risk-adjusted Target Price.
Share price performance (indexed)
90100110120130140150160170180190
Feb-14 May-14 Aug-14 Nov-14 Feb-15Absolute
Rel. FTSE All-Share / Mining - SEC
Key data
Key financials
Year to Dec 2013A 2014E 2015E
Sales (US$m) 52 0 0
EBITDA (US$m) (8) (7) (5)
EPS adj (US$) (0.27) (0.10) (0.02)
Net cash (US$m) (2) 2 3
PE adj (x) (0.9) (2.5) (14.9)
All data as of close 05 February 2015
All sources unless otherwise stated: Company data, Factset, Oriel Securities
Contributing analyst Sales
Nick Chalmers UK Sales desk
+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]
Stock code AMA LN
Market cap (£m) 69
FTSE AIM All Share/Basic Resources na
1mth perf (%) 6.3
3mths perf (%) (1.8)
12mths perf (%) 13.0
12mth high-low (p) 28 - 14
Free float (%) 81
14
Mining
Key data1 Key operational data and financial ratios (x)
2013A 2014E 2015E 2016EProduction (koz) 42 40 0 0Gold price (US$/oz) 1,381 1,288 1,281 1,300Total cash costs (US$/oz) 1,384 1,340 0 0All-in sustaining costs (US$/oz) 1,510 1,522 0 0
2013A 2014E 2015E 2016EPE adj (0.9) (2.5) (14.9) (14.9)EPS growth (%) na 63.4 83.0 0
Key profit & loss data (US$m)2013A 2014E 2015E 2016E
Sales 52 0 0 0EBITDA (8) (7) (5) (5)EBITDA margin(%) (14.4) nm nm nmEBIT (14) (7) (5) (5)EBIT margin (%) (27.0) nm nm nmAttributable Net Profit (47) (27) (6) (6)EPS normalised (US$) (0.27) (0.10) (0.02) (0.02)
Key balance sheet data (US$m)2013A 2014E 2015E 2016E
Net debt/(cash) 2 (2) (3) 119
Key cash flow data (US$m)2013A 2014E 2015E 2016E
Cash flow from operating activities 7 (0) (5) (5)Cash flow from investing activities (21) (23) (15) (118)Cash flow from financing activities (7) 13 21 0Net cash flow (20) (9) 1 (122)
Key information Business description
Amara Mining is a gold exploration and development company
quoted on AIM in London. The group's principal asset is the
prefeasibility-stage Yaoure gold project in Cote d'Ivoire, while it also
owns the smaller but more advanced Baomahun project in Sierra
Leone.
Senior management
John McGloin - chairman and chief executive
Pete Gardner - finance director
Peter Brown - group exploration manager
Key dates
March 2015 - Yaoure prefeasibility study
End 2015 - Yaoure feasibility study
Major shareholders
Aurum Holdings (RDV Corporation) - 18.4%
Franklin Templeton - 9.4%
Ingalls & Snyder - 8.4%
Website
www.amaramining.com
1Year end DecemberSource: Company data, FactSet, Oriel Securities estimates
15
Mining
Valuation
We value Amara on a sum-of-the-parts basis, incorporating risk-weighted NPV estimates of the
company’s Yaoure and Baomahun projects using an 8% discount rate and our House long-term gold
price assumption of US$1,300/oz.
In the case of Yaoure, our DCF model uses the published scoping study operating and cost parameters
for the 6.5Mtpa throughput rate scenario (see p18). Although 8Mtpa was the base-case scenario in the
scoping study, the 6.5Mtpa scenario results in a stronger IRR at current gold prices, and has lower
upfront capex requirements (and therefore slightly lower funding risk relative to the 8Mtpa case), and we
believe it will be the preferred case in the upcoming prefeasibility study (which will continue to evaluate
a range of throughput scenarios). We assume construction commences in 2016.
Our DCF model of Baomahun is based on the published (in January 2014) summary operating and cost
parameters resulting from initial optimisation work on the original July 2013 feasibility study (see p21).
The optimisation work demonstrated that a smaller-scale (1Mtpa ore throughput) open-pit development
with a supplementary underground component in later years would enable the higher-grade core of the
deposit to be mined selectively, providing more robust returns at gold prices lower than the US$1,350/oz
assumption used as a base-case in the feasibility study of the larger-scale (2Mtpa) but open-pit only
project. Given uncertainty over the current development plan, we assume it is another two years before
construction commences at Baomahun.
In setting target prices for companies with scoped but still unfunded projects, we treat the project as an
option, with the development capex representing the strike price. We thus heavily risk adjust the
underlying core NPV of such projects to arrive at a fair present equity value. In the case of Yaoure, we
have elected to attribute to our Target Price just 30% of our estimated full (but unfunded) project NPV,
reflecting its still relatively early-stage (operating and cost parameters published to date are at scoping-
study level only, although the resource has been significantly de-risked since, with 65% now classified
as indicated) and the substantial funding hurdle that must be overcome to reach production. Despite the
greater level of technical and economic assessment that has been undertaken at Baomahun (at least for
the open-pit project – the underground concept is still at scoping stage), we apply the same 70% risk
haircut in valuing this project, reflecting the still significant uncertainty surrounding Baomahun’s
development prospects – work is essentially on hold at present owing to a combination of Ebola and the
prevailing gold price.
After also adjusting for our estimate of Amara’s cash position at end 2014, adjusted for the subsequent
US$22m equity issue, and our NPV estimate of future corporate-level cash expenses, our resultant un-
funded but risked Target Price is 30p per share. This represents approximately 80% upside to
Amara’s current share price and we set our recommendation at BUY. There could be considerable
upside to our Target Price as Yaoure is further de-risked and funding options emerge. We would arrive
at a similar valuation level were we to remove the risk adjustment on the project NPV but dilute our
resulting company NAV by assuming Yaoure is 100% equity funded at Amara’s current share price.
Figure 13: Sum-of-parts valuation and Target Price derivation
US$m p/share*
Yaoure (AMA attributable) NPV8% 545 86
Baomahun (AMA attributable) NPV8% 186 29
Net cash (estimate) 24 4
Corporate-level costs NPV8% -52 -8
Core un-risked NAV 703 111
Yaoure risk adjustment 70% -382 -60
Baomahun risk adjustment 70% -130 -21
Target Price 191 30
*Based on 420m shares out post Feb 2015 equity issue, and an exchange rate of £1 = US$1.51 Source: Oriel Securities estimates
16
Mining
Figure 14 below illustrates the sensitivity of our risked Target Price to long-term (from 2016) gold price
assumption and discount rate, while Figure 15 shows the same sensitivity analysis applied to our un-
risked core NAV estimate.
Figure 14: Risked Target Price (p/sh) sensitivity to long-term (from 2016) gold price and discount rate
Gold price (US$/oz)
Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600
12% 1 7 14 19 26 32 37
10% 3 10 17 24 31 38 44
8%* 6 14 22 30 38 46 53
5% 11 21 32 42 52 62 71
*Valuation base case Source: Oriel Securities estimates
Figure 15: Core (unfunded) NAV (p/sh) sensitivity to long-term (from 2016) gold price and discount rate
Gold price (US$/oz)
Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600
12% 10 31 51 71 91 112 130
10% 19 43 66 89 112 136 156
8%* 30 58 85 111 138 165 189
5% 53 87 122 154 188 223 253
*Valuation base case Source: Oriel Securities estimates
Upcoming catalysts Yaoure prefeasibility study (March 2015)
Yaoure full feasibility study (by end 2015)
Project funding progress (by end of 2015)
Risks Our cash-flow model of Yaoure and resulting financial forecasts are based on scoping-study level
operating and cost parameters – such estimates carry a higher degree of error than prefeasibility
and full-feasibility study estimates. However, we believe the risks may be to the upside, with a
number of optimisation opportunities identified in the scoping study having the potential to enhance
the project economics.
Our cash-flow model of Baomahun assumes some contribution from underground mining in the
later years – the underground development option has not been evaluated to the same degree of
rigour as the feasibility-stage open-pit project.
Funding – there can be no certainty that funding (debt, equity or third-party project-level
investment) will be available to realise our core underlying project valuations.
Gold price – we believe there is merit in developing Yaoure, and potentially Baomahun, at current
gold-price levels, but this may not be the case were gold to fall significantly lower and remain at
such levels for a sustained period of time.
17
Mining
Company overview Amara Mining was formed in November 2003 (under the then name Cluff Gold plc), listing on London's AIM market in December 2004. Initially focused on operating two small-scale heap-leach projects in Burkina Faso and Côte d’Ivoire, the company underwent a significant transformation in 2012, hiring current chairman and CEO John McGloin and shifting its focus to two substantial development projects, Baomahun in Sierra Leone and Yaoure in Côte d’Ivoire. Resources more than doubled in the intervening period to 9.6Moz (now the largest resource base of all UK-quoted gold juniors), more than justifying management’s change in strategy. And now the plan is even simpler – with the last of the two heap-leach operations closing in 2014, and further work at Baomahun on hold owing to a combination of the current gold price environment and ongoing challenges posed by the Ebola virus in Sierra Leone, Amara is focused fully on advancing what we consider to be the key asset in its portfolio, the large-scale Yaoure project, in our view one of the highest-quality undeveloped gold projects in Africa.
Figure 16: Amara projects location map
Source: Amara Mining
Our medium to long-term operational forecasts, financial estimates and valuation assume both Yaoure and Baomahun are ultimately developed, although clearly this assumption is contingent on both the outcome of further feasibility work and availability of funding. If this scenario is borne out, and assuming the company remains independent, Amara could ultimately emerge as a 300-400koz producer by the end of the decade, which would place it in a very select group of UK-quoted mid-tier gold companies.
Figure 17: Amara – from junior producer to developer to mid-tier producer?
Source: Oriel Securities estimates
At 9.6Moz, Amara has
the largest resource
base of any UK junior
Long-term production
potential of 300-
400koz pa
18
Mining
Yaoure project – the company maker Previously known as Angovia, Yaoure was first mined by Compagnie Minière d’Afrique (CMA), who
extracted 1.9Mt of ore at 3.9g/t Au over five years before closing the mine in 2003 due to low gold
prices. CMA sold its 90% interest in the project (the 10% balance is held by the Côte d’Ivoire
Government) to Cluff Gold in 2004, and the latter subsequently re-opened the mine in 2008 as a heap-
leach operation exploiting the near-surface oxide resources. But technical issues prevented the
operation from hitting production and cost targets, and it was placed on care and maintenance in 2011.
Following John McGloin’s appointment as executive chairman in 2012, Amara began re-evaluating the
project for the potential of its deeper-lying sulphide mineralisation to sustain a substantial open-pit-
CIL/CIP operation. A series of extensive drilling campaigns over the following two years led to
successive resource upgrades, the most recent of which (January 2015) puts total project resources at
6.8Moz at an average grade of 1.25g/t (4.4Moz indicated and 2.4Moz inferred).
Drilling in 2013 was focused principally on defining the wider footprint of sulphide gold mineralisation,
and led to a substantial increase in reported resources from under 0.5Moz to current levels. The
objective of the largely in-fill drilling campaign in 2014, of which the latest resource update is a result,
was to improve the geological understanding of mineralisation controls and gold distribution within the
conceptual open-pit shells that were used as the basis for the various scenarios run in a preliminary
economic assessment (PEA) of the project’s development potential completed in early 2014 (and in the
process promoting inferred category resources to the indicated category in preparation for the upcoming
prefeasibility study (PFS), which will include a maiden reserve calculation).
Figure 18: Yaoure project resources*
Tonnes (Mt) Au grade (g/t) Gold (Moz)
Indicated 106 1.29 4.4
Sub-total M&I resources 106 1.29 4.4
Inferred 63 1.19 2.4
Total resource 169 1.25 6.8
*As at 5 Jan 2015 (at 0.5g/t cut-off and US$1,500/oz gold) Source: Amara Mining
Up to 325koz pa targeted at <US$700/oz all-in sustaining costs The PEA confirmed the potential for Yaoure’s development as an 8Mtpa open-pit, tank-leach operation,
the large scale offsetting the moderate grade. Gold output was estimated at an average of 325koz pa at
total cash costs of US$655/oz (and all-in sustaining cash costs of US$691/oz) over an initial 12-year
mine life, with upfront capex estimated at US$408m. On these metrics the PEA concluded a project IRR
of 32% assuming a US$1,250/oz gold price, and an NPV of US$688m using an 8% discount rate.
Smaller-scale throughput scenarios were also evaluated using higher cut-off grades for an US$800/oz
conceptual open-pit shell (rather than the US$950/oz pit shell used for the 8Mtpa base case), with
modelled rates of 6.5Mtpa and 5Mtpa yielding still strong IRR’s of 33% and 25% respectively but with
lower upfront capex requirements of US$357m and US$331m. The positive results of these alternative
throughput scenarios indicate the potential to mine higher-grade material more selectively in the event
of sustained lower gold prices (the 6.5Mtpa scenario has estimated total cash costs of just US$594/oz,
and all-in sustaining cash costs of US$624/oz, with average gold output at a still high 279koz pa), while
the 5Mtpa scenario also points to the potential for a staged development strategy (possibly starting at
even lower annual rates than 5Mt). However, given the five-year tax holiday from first production that is
available in Côte d’Ivoire, there is clear benefit in maximising revenues in the early years.
Optimisation work is currently underway as part of the PFS work programme, including comprehensive
metallurgical testing and reviewing capex reduction possibilities. We believe this work could further
improve the project economics as presented in the PEA. The PFS is scheduled for completion in
March of this year, and we expect this to lead directly in to a full feasibility thereafter. The latter
could be completed by the end of this year or early next year, and is fully funded following
Amara’s recent US$22m equity issue.
Amara has grown
Yaoure’s resource
from 0.2Moz to nearly
7Moz in under 3 years
Yaoure could sustain
279koz pa at all-in
cash costs of
<US$700/oz
19
Mining
Figure 19: Yaoure is one of Africa’s largest and lowest cost-structure gold projects
Source: Amara Mining
Scale, metallurgy and existing infrastructure the key Yaoure’s compelling economics (which we believe rank the project amongst the strongest in Africa –
see figure 19 above) are driven by the scale of the operation envisaged, the relatively simple mining and
processing methods required, and the excellent array of already-installed infrastructure, all of which
more than compensate for the relatively low average grade of the deposit.
Simple, bulk-scale mining is possible given the extensive footprint of the resource and the continuity of
mineralisation (even the higher-grade zones display good continuity, and occur within a matrix of still
mineralised but lower-grade ore, meaning even more selective mining should be possible at bulk scale),
while metallurgical test work undertaken to date indicates that the ore is free-milling and should be
amenable to conventional, straightforward tank-leaching processing techniques.
The project further benefits from an advantageous location – having been a site of active mining in the
recent past, significant infrastructure is already in place, including an employee camp, a water-storage
facility and tarred roads running within a few kilometres of the site (and a dual carriageway to within
40km). But perhaps most important is Yaoure’s proximity to the Kossou hydroelectric power
station just 5km away, which should see electricity (which makes up around 40% of Yaoure’s
processing costs) supplied at highly-competitive rates – Amara believes power costs of
US$0.09/kWh are realistic (compared with average costs of US$0.15-0.30/kWh for mines elsewhere in
West Africa that rely on conventionally-sourced grid power or diesel gen-sets).
Moreover, we consider Côte d’Ivoire to be a favourable mining jurisdiction relative to many other
countries in the region, with competitive gold royalty and corporate tax rates of 3% and 25% respectively
and a five-year tax holiday available from first production. The State’s 10% free carry in mining ventures
is also lower than in some neighbouring countries.
Upside opportunities Our production and financial forecasts for Yaoure are based on the operating and cost parameters
generated for the 6.5Mtpa throughput scenario. That PEA highlighted a number of opportunities for
optimising the project economics through increasing average head grades, lowering the overall strip
ratio and reducing upfront capex. These opportunities include: the selective mining of defined higher-
grade zones; reducing drill data gaps in the conceptual pit shell (and thereby potentially lowering the
strip ratio through reallocation of material currently deemed waste to mineable resource); a staged
development approach; and optimisation of the process flow-sheet, equipment and project layout.
These opportunities continue to be investigated, and we believe could result in enhanced headline
economic metrics in the upcoming prefeasibility study, which is scheduled for March 2015.
Moreover, Yaoure still holds longer-term exploration potential – mineralisation has not been drill-closed
off along-strike or down-dip of the currently defined resource, while gold anomalies have been detected
in parallel structures to the west of the known deposit. And the resource area forms a very small part of
the wider 367km2 licence area – substantial scope remains for low-cost regional exploration.
Yaoure benefits from
an array of existing
infrastructure and
proximity to cheap
hydro-electric power
Project economics
could be enhanced
with planned
optimisation of
development
parameters
20
Mining
Figure 20: Yaoure still has significant resource upside potential
Source: Amara Mining
Funding options Clearly, funding what could be up to a US$400m capex bill is a big ask for a company currently
capitalised at just over US$100m (adjusted for recent equity raise). However, as noted the project
economics are still compelling if Yaoure were to be built on a smaller scale at lower cost, while there is
also potential for constructing on staged basis, which could see the initial capex requirement further
reduced (although we believe much of the infrastructure required for an eventual 8Mtpa operation would
still need to be put in place during the first phase, limiting the initial capex savings from such an
approach). Whatever the eventual starting scale chosen, we believe Amara could look at a number of
potential funding options which do not rely solely on the issue of new equity on a large-scale, which
would not be attractive at Amara’s current share price level given the heavy discount to NPV.
Perhaps the most obvious funding route would be attracting a joint venture partner with greater financial
resources to invest at the project level – Amara is the sole owner of Yaoure (though the Government
has the right to a 10% free-carried interest) and we believe it could thus retain significant valuation
upside were it to sell down its interest (at a fair price) in return for greater funding certainty. A larger
player may of course see merit in acquiring Amara outright, but unlike many of its junior peers we do not
believe Amara is vulnerable to being taken on the cheap, as the recent US$22m equity raise (which was
well supported by existing shareholders) ensures it is adequately funded to complete a definitive
feasibility study on Yaoure, taking the project to the point of investment decision by early 2016.
We also believe Yaoure has capacity for a degree of debt funding, be it conventional project finance or
royalty/gold streaming related. Amara has recent form with the latter, having in 2012 secured an
unhedged US$20m facility from Korean industrial conglomerate Samsung C&T Corp to fund working
capital whilst it progressed the development of the Sega project in Burkina Faso (a satellite operation to
the now closed Kalsaka heap leach), with Samsung in return receiving a portion of Sega’s gold
production at small discount to the prevailing gold price. The agreement provided for a longer-term
strategic partnership between the two groups, and now that the streaming concept has been proven at
Kalsaka/Sega, we believe there could be scope for a similar structure (with Samsung or another group)
to be put in place at Yaoure.
Management has
track-record of
sourcing innovative
funding solutions
21
Mining
Baomahun project – development optionality Located 180km east of Freetown in Sierra Leone, Baomahun was once Amara’s lead development
project, but has taken a back seat to Yaoure over the past 18 months owing to a combination of
significant drilling success at the latter but also to the deteriorating gold price, which has made
Baomahun’s economics less compelling. The outbreak in Sierra Leone of the deadly Ebola virus in 2014
has added a further layer of uncertainty, but we believe Baomahun still represents a solid second
growth opportunity for Amara, with optimisation work last year indicating that the project could still
deliver economic returns at current gold pricing levels were the deposit to be mined more selectively at
a smaller-scale, but at higher grade, than envisaged in the feasibility study.
Figure 21: Baomahun project resources*
Mt g/t Total
Indicated 38.4 1.82 2.25
Sub-total M&I resources 38.4 1.82 2.25
Inferred 6.6 2.50 0.53
Total resources 45.0 1.92 2.78
* As at June 2013 (at 0.5g/t cut-off for open-pit resources, 2.0g/t for underground resources) Source: Amara Mining
The June 2013 feasibility study considered a 2Mtpa open-pit and CIL processing operation to exploit
some 1.2Moz of gold reserves at an average grade of 1.6g/t. This maiden reserve was calculated from a
total project resource base of 2.8Moz at 1.9g/t, with a US$1,100/oz gold assumption used. Gold
production was forecast to average 149koz pa over the first six years of the projected 11.5-year mine
life, with life-of-mine (LoM) total cash costs averaging US$799/oz and an estimated total upfront capex
requirement of US$253m. At the study’s base-case gold price assumption of US$1,350/oz, this scenario
yielded a post-tax IRR of 22% and an NPV8% of US$127m. However, at US$1,200/oz the IRR and NPV
dropped to 13% and US$41m respectively.
But the feasibility study highlighted optimisation opportunities that could improve the capital efficiency,
and a revised set of parameters were presented in January 2014. This optimisation study demonstrated
the potential for more robust economics in a lower gold-price environment (a US$900/oz open-pit shell
was used) if Baomahun were to be developed at a smaller-scale focused on selective mining of its
higher-grade core. Assuming a 1Mtpa open pit and plant, and a higher head-grade of 2.2g/t,
Amara estimated production could average a still reasonable 88koz pa over the first six years,
but at lower LoM average total cash costs of US$711/oz. Crucially, the total upfront capex
requirement of this smaller-scale project was estimated to be 43% lower, at US$143m. On these
parameters Amara calculated a post-tax IRR of 17% at US$1,250/oz gold, and an NPV8% of US$50m.
The optimisation study also highlighted the potential to further enhance the economics with
development of a supplementary underground operation after the first six years of the open pit,
exploiting higher-grade resources at depth (where mineralisation remains open). This could double the
mine life to 20 years and increase production to >90koz pa from year seven, and Amara believes the
additional, but unspecified (we assume US$75m in our model) capex requirement could be internally
funded from the initial open-pit operation. On this basis the company estimates that the supplementary
underground operation could boost Baomahun’s optimised post-tax IRR to 25% and the NPV8%
to US$192m at US$1,250/oz gold. We would however stress that the underground option, though
based on mining defined resources, has not yet been assessed to feasibility-study level, and therefore
we consider there is a higher degree of risk attached to the resulting forecasts.
2013 feasibility study
scenario not
compelling at current
gold price
Economics could be
enhanced with
supplementary
underground mine
22
Mining
Management
John McGloin – chairman and chief executive John McGloin joined Amara in April 2012, prior to which he was a senior mining equities analyst (and
Head of Mining) with Collins Stewart and, before that, with the Arbuthnot and Evolution Securities. A
geology graduate from Camborne School of Mines, Mr McGloin worked for many years in Africa’s
mining industry and then mining consultancy before moving into stockbroking. He has acted for many
mining companies over the years including African Platinum, Randgold Resources, Avocet Mining,
European Goldfields and Titanium Resources Group.
Pete Gardner – finance director Pete Gardner joined Amara in October 2009, prior to which he was CFO of Alexander Mining plc. Mr
Gardner is a qualified Chartered Accountant with a breadth of experience in financial management and
corporate finance in the natural resources sector. Since joining Amara, he has implemented a number of
improvements to the group’s financial reporting systems and procedures. Based in the company’s
London office, he travels to West Africa when required.
Peter Brown – group exploration manager Peter Brown joined Amara in August 2011, bringing more than 25 years’ experience in minerals
exploration and evaluation in Africa, South America, the Middle East and China. He was previously chief
geologist at NunaMinerals, with whom he served as a member of executive board. Mr Brown holds a
BSc in geology from Dundee University and a PhD from Southampton University.
Peter Cowley – non-executive director Peter Cowley joined Amara in January 2008 and is a geologist with 40 years’ international experience in
the minerals industry, particularly in Africa. Mr Cowley is currently CEO of Loncor Resources Inc and a
director of Banro Corp. He was previously managing director of Ashanti Exploration Ltd and group
technical director of Cluff Resources plc.
Geoff Stanley – non-executive director Geoff Stanley joined Amara in October 2008 and brings 26 years’ international experience in the
minerals industry. He has worked in exploration in Australia and as a gold analyst with a number of
securities firms in Australia and the US. Mr Stanley is a director of Crescent Gold Ltd, Riverfield Capital
Ltd, Indo Gold Ltd and Bannerman Resources Ltd.
Hendrik Faul – non-executive director Hendrik Faul joined Amara’s board in May 2012 and is currently CEO of Anglo American's copper
division and was previously the group’s head of mining. Mr Faul brings over 20 years’ experience in
surface and underground mining, processing, logistics and marketing, and has held numerous senior
roles including CEO for Anglo American’s zinc operations and general manager for that group’s Lisheen
Mine in Ireland. He is currently also a non-executive director of Palabora Mining Company.
Peter Hain – non-executive director The Right Honourable Peter Hain MP joined Amara in March 2013 and brings over 22 years’
international experience to the company, including a great depth of understanding of African politics
through his role as Minister of State at the Foreign Office from 1999 to 2002. During his time Mr Hain
worked closely with the Sierra Leone government and was involved in a number of key initiatives and
negotiations to bring stability to the country and facilitate a strong working relationship with the UK.
Alex Davidson – non-executive director Alex Davidson joined Amara in November 2013, and was previously executive vice president,
exploration and corporate development for Barrick Gold, the world’s largest gold producer. Mr Davidson
brings over 25 years' experience in designing, implementing and managing gold and base-metals
exploration programmes throughout the world. He is currently also a director of Yamana Gold, Capital
Drilling, US Silver & Gold, Volta Resources, MBAC Fertilizer Corp and Orca Gold.
23
Mining
Centamin plc Initiation of coverage Mining 6 February 2015
Positioned for growth on all fronts BUYPrice: 68p Target price: 80p Unconnected research
Sukari’s low operating-cost structure has ensured relatively healthy margins
in spite of gold’s precipitous fall over the past two years, and with the ramp-up
to steady-state production of 400-500koz pa nearly complete, free cash flow is
set to grow in 2015 even at current prices. This raises the possibility of higher
dividends, and positions Centamin strongly to execute on organic growth
and/or M&A opportunities if they arise. We initiate with a BUY and 80p TP.
Strong foundations. Centamin's unhedged and debt-free position and long-life, wide-
margin operation in Sukari positions it strongly to grow free cash irrespective of further
recovery in the gold price, giving it flexibility to pursue other development opportunities
and maintain a dividend (we estimate a >40% operating margin in 2015 at current gold
prices, based on forecast production of 420koz at <US$739/oz total cash costs).
Further expansion potential. Sukari's large existing resource base (and additional
resource potential) offers the possibility of extending the projected mine life but also the
potential for some further expansion of production levels – management is confident
that the recently expanded process plant is capable of operating above its 10Mtpa
nameplate capacity (the rate we assume in deriving our estimates).
First mover advantage in Egypt. Sukari is Egypt’s first modern-day commercial gold
mine, and Centamin’s success in originating and developing the asset, and the in-
country relationships that it has built along the way, may give it a strategic advantage to
execute on any other opportunities that may present themselves in what in our view is
a highly-prospective country for new gold discoveries. Centamin has already identified
several targets on its wider exploration landholdings around Sukari.
Becoming more than a one-country, single-asset company. Last year’s acquisition
of Ampella added an advanced exploration asset to the project pipeline – the 3.25Moz
Konkera project in Burkina Faso is now undergoing systematic drilling to define the
optimal route to production, with an initial study of its development potential possible
within the next year. Added to earlier-stage exploration projects in Ethiopia and Côte
d’lvoire, this gives medium-term diversification potential (reducing the obvious risks
attached to being a single-operation and single-country company). And unlike many of
its UK-quoted peers, Centamin has the balance sheet to execute on development
opportunities as they are proved up.
Potential upside to our valuation. Our 80p Target Price is set at our core NAV
estimate (calculated at an 8% discount rate and US$1,300/oz gold), and we initiate
coverage with a BUY recommendation. Demonstrating a viable mine-development
opportunity on the Ampella portfolio (or at its earlier-stage exploration projects in East
Africa) could see significant blue-sky upside to our core NAV estimate, and may also
see Centamin attract a market premium to NAV, in-line with its more diversified peers.
Share price performance (indexed)
90100110120130140150160170180
Feb-14 May-14 Aug-14 Nov-14 Feb-15Absolute
Rel. FTSE All-Share / Mining - SEC
Key data
Key financials
Year to Dec 2013A 2014E 2015E
Sales (US$m) 504 485 535
EBITDA (US$m) 234 184 213
EPS adj (US$) 0.17 0.10 0.11
DPS (US$) na 0.02 0.03
Net cash (US$m) 106 146 213
PE adj (x) 5.9 10.9 9.1
EV/EBITDA (x) 4.6 5.8 5.0
Div yield (%) na 2.30 2.66
All data as of close 05 February 2015
All sources unless otherwise stated: Company data, Factset, Oriel Securities
Contributing analyst Sales
Nick Chalmers UK Sales desk
+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]
Stock code CEY LN
Market cap (£m) 783
FTSE All-Share / Mining - SEC 14322
1mth perf (%) 11.8
3mths perf (%) 32.1
12mths perf (%) 36.0
12mth high-low (p) 84 - 47
Free float (%) 89
24
Mining
Key data1 Key operational data and financial ratios (x)
2013A 2014E 2015E 2016EProduction (koz) 357 377 420 470Gold price (US$/oz) 1,384 1,256 1,275 1,300Total cash costs (US$/oz) 706 747 739 739All-in sustaining costs (US$/oz) 957 963 995 968
2013A 2014E 2015E 2016EPE adj 5.9 10.9 9.0 7.3EV/EBITDA 4.6 5.8 5.0 4.3Div yield (%) na 2.3 2.7 3.2EPS growth (%) na (45.6) 20.4 23.1
Key profit & loss data (US$m)2013A 2014E 2015E 2016E
Sales 504 485 535 611Operating costs (293) (363) (391) (436)Other costs (28) (13) (13) (13)EBITDA 234 184 213 251EBITDA margin(%) 46.5 37.9 39.7 41.1Depreciation (51) (75) (81) (89)EBIT 183 109 132 162EBIT margin (%) 36.4 22.5 24.6 26.6Net interest 1 0 0 0PBT rep 184 110 132 162Tax (0) 0 0 0Net Profit 184 110 132 162Non-controlling interests 0 0 0 0Attributable Net Profit 191 110 132 162EPS normalised (US$) 0.17 0.10 0.11 0.14DPS (US$) na 0.02 0.03 0.03
Key balance sheet data (US$m)2013A 2014E 2015E 2016E
Non current assets 1,029 1,099 1,126 1,145Current assets 269 305 375 489Non current liabilities 8 8 8 8Current liabilities 78 43 58 66Net debt/(cash) (106) (146) (213) (323)
Key cash flow data (US$m)2013A 2014E 2015E 2016E
Cash flow from operating activities 245 154 208 252Cash flow from investing activities (283) (101) (108) (108)Cash flow from financing activities 0 (12) (34) (35)Net cash flow (41) 40 67 110Cash at end of year 106 146 213 323
Key information Business description
Centamin plc is a gold exploration, development and production
company dual listed on the London and Toronto Stock Exchanges.
The group's principal asset is the Sukari gold operation, Egypt's first
modern, commercial-scale gold mine.
Senior management
Josef El-Raghy - executive chairman
Andrew Pardey - chief executive
Pierre Louw - chief financial officer
Key dates
23/03/2015 - 2014 full-year results
09/04/2015 - Q1 2015 production results
09/07/2015 - Q2 2015 production results
Major shareholders
BlackRock - 9.6%
Directors & Management - 7.1%
Van Eck - 5.7%
Website
www.centamin.com
1Year end DecemberSource: Company data, FactSet, Oriel Securities estimates
25
Mining
Valuation
We value Centamin on a sum-of-the-parts basis, incorporating an NPV estimate of Sukari (at an 8%
discount rate and our long-term House gold price assumption of US$1,300/oz) based on the company’s
current operating and cost guidance for the mine. Our modelled open-pit production profile assumes
only current open-pit reserves are mined, but in the case of the underground mine we assume some
future reserve replenishment (both from conversion of current underground resources and further drilling
of high-grade underground prospects) such that current underground production levels are maintained
for a further eight years. This assumption is somewhat speculative, but we feel fair given the company’s
visibility on current underground resource-to-reserve conversion potential and its confidence that higher-
grade zones extend beyond current drilling limits.
After also including currently defined resources at Konkera in Burkina Faso (the principal asset acquired
through last year’s takeover of Ampella Mining) at a UK peer-group based market multiple of US$32/oz,
and adjusting for corporate items, we arrive at a sum-of-parts NAV for Centamin of 80p per share.
Figure 22: Sum-of-parts valuation and Target Price derivation
US$m p/share*
Sukari - CEY attributable NPV8% 1,234 71
Batie West (Konkera) US$32oz 104 6
Projects value 1,339 77
Net cash (2014 YE estimate) 146 8
Corporate-level costs NPV8% -102 -6
Core NAV 1,383 80
Target multiple 1.0x
Target Price 80
*Based on 1,152m shares out and a £1 = US$1.51 exchange rate Source: Oriel Securities estimates
We consider it appropriate to value an established, single-operation producer at 1x core NAV, and
therefore set our Target Price for Centamin at 80p per share. This provides 18% upside to
Centamin’s current share price and we therefore recommend BUY. We note that many established
mid-tier producers have historically traded at premiums to NAV (e.g. Randgold Resources is currently
trading at close to 2x NAV according to our estimates), and believe there may be potential for Centamin
to attract a premium rating over the longer term should the outstanding legal disputes be resolved in its
favour (see p30) and/or should another development opportunity emerge from its exploration portfolio
(adding diversity and thereby lowering the risk exposure associated with being a single operating-asset
company).
Our Target Price equates to 6x our estimate of 2015 EBITDA, just below the average one-year forward
EV/EBITDA multiple of 7.1x for the top ten established UK-quoted gold producers (see p9).
The table below illustrates the sensitivity of our underlying core NAV to long-term (from 2016) gold price
assumption and discount rate.
Figure 23: Core NAV (p/sh) sensitivity to long-term (from 2016) gold price assumption and discount rate
Gold price (US$/oz)
Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600
12% 34 46 57 68 80 91 103
10% 36 49 61 73 86 98 111
8%* 38 52 66 80 94 107 122
5% 42 59 76 92 109 126 143
*Base-case valuation assumptions Source: Oriel Securities estimates
26
Mining
Upcoming catalysts 2014 full-year results (23 March 2015)
Q1 2015 production results (9 April 2015)
Q2 2015 production results (9 July 2015)
Konkera (Burkina Faso) project updates (2015/2016)
Risks Our cash-flow model of Sukari assumes significant additions to underground reserves to sustain
current underground production levels for a further eight years (current underground reserves are
sufficient for just two more years of mining). The group has a track-record of reserve
replenishment, but there can be no guarantee that this will continue to be the case going forward
(although recent underground drilling results have been highly encouraging).
Centamin currently has just one cash-generating asset, and therefore has a high degree of
operational risk exposure to Sukari and geo-political risk exposure to Egypt.
While we believe the long-running legal dispute regarding the Sukari concession agreement will
ultimately be resolved in Centamin’s favour, there can be no certainty over the outcome nor on the
timescale of the process.
Should the gold price fall below our long-term price assumption of US$1,300/oz for a prolonged
period of time there would be a material negative impact on our financial estimates and valuation.
27
Mining
Company overview
Founded in Australia in the 1970s as a grassroots exploration company, Centamin has been focused on
exploring, developing and ultimately operating the Sukari project in Egypt since first turning its focus to
that country and its highly-prospective share of the Arabian-Nubian geological shield in the mid-1990s.
Following the commencement of production at Sukari in 2009 the company has evolved into one of the
pre-eminent small-mid tier gold producers globally, and its shares are quoted on both the main board of
the London Stock Exchange and on the resource-stock heavy Toronto Stock Exchange.
Sukari gold mine, Egypt The Sukari gold mine is located in Egypt’s Eastern Desert, 700km as the crow flies from Cairo and
25km inland from the Red Sea. Its land mass comprising a significant portion of the western side of the
mineral-rich Arabian-Nubian geological shield, Egypt was a prolific producer of gold in ancient times. Yet
little modern-day exploration was undertaken prior to Centamin entering the country in the 1990s, and
Sukari remains to this day the only commercial-scale gold mine developed in Egypt in modern times.
Centamin's interest in Sukari is held via its wholly-owned Egyptian subsidiary Pharaoh Gold Mines
(PGM), which in turn holds a 50% equity stake in the operating company, Sukari Gold Mines (SGM).
The 50% balance of interest in SGM is held by the Egyptian Mineral Resource Authority (EMRA).
Under the terms of the project’s Concession Agreement, PGM has full operating rights and is
responsible for solely funding SGM, but is entitled to recover all sunk and ongoing capital and
exploration costs (at a rate of 33% of total accumulated costs per annum) as well as all current
operating expenses (other than the State’s 3% royalty on gold revenue), from operational cash flows
prior to surplus cash being distributed to the JV partners. After such deductions, residual net cash flow
is shared equally by PGM and EMRA, except that for the first two years in which there are net proceeds
for the entire year (2017 and 2018 according to our estimates) an additional 10% is paid to PGM as an
incentive (i.e. 60% to PGM and 40% to EMRA), and for each of the next two years an additional 5%
goes to PGM (i.e. 55% to PGM and 45% to EMRA). What’s more, the project has a 15-year income tax
exemption, renewable for a further 15 years thereafter on agreement.
Figure 24: Profits from Sukari will ultimately be shared 50:50 with the Egyptian State
Source: Centamin plc
Sukari is Egypt’s first
modern-day
commercial gold
mine
Centamin benefits
from preferential
share of profits in the
early years and tax
exemption for the life
of mine
28
Mining
The Sukari deposit comprises sheeted veins hosted by an altered granitoid porphyry intruded into a
brittle-ductile shear zone. The majority of gold mineralisation is fine-grained and disseminated and
associated with fresh un-oxidised sulphide minerals (pyrite and arsenopyrite), but some weak oxidation
is present from surface down to a depth of 10-20m. Higher-grade mineralisation tends to be associated
with discrete veins. The deposit has a strike length of at least 2.3km and ranges in thickness from 100-
600m. Mineralisation has been intersected down dip to depths of 1,200m from surface.
Since declaring a maiden resource of 1.3Moz in 2000, Centamin’s exploration efforts have grown total
gold resources to a substantial 15.4Moz (as at 30 September 2013), of which 8.2Moz have been
converted to reserves (7.7Moz open-pit and 0.5Moz underground).
Figure 25: Sukari resources* and reserves
Tonnes (Mt) Au grade (g/t) Gold (Moz)
Measured 184 1.0 6.0
Indicated 205 1.1 7.5
Sub-total M&I resources 390 1.1 13.5
Inferred 42 1.4 1.9
Total resources 432 1.1 15.4
Proven 113 1.1 4.0
Probable 102 1.2 4.1
Stockpiles 16 0.5 0.2
Total P&P reserves 230 1.1 8.2
*As at 30 Sep 2013 (open-pit at 0.3g/t cut-off, underground at 2.0g/t cut-off) Source: Centamin plc
A rapid expansion programme has been underway at Sukari since commissioning in 2009, with the
plant’s capacity having been increased in stages from an initial 4Mtpa to its current 10Mtpa nameplate
capacity, and the main open-pit mining operation being supplemented with a smaller-scale but
significantly higher-grade underground operation. This phased expansion has seen gold production
increase from 150koz in 2010, the first full-year of operations, to 377koz in 2014. Management is
targeting 420koz for 2015, and sustainable output of 450-500koz pa thereafter.
Open-pit mining is undertaken at a higher rate than processing in order to optimise feed grades in the
early years (ore from the higher-grade underground mine is fed directly to the plant). On current
schedules, the resulting low-grade stockpile will be processed after cessation of mining during the last
six years of the >20-year life. Based on past performance of the plant, management believes actual
throughput may exceed nameplate capacity, and could reach at least 11Mtpa. There may thus be
upside to our base-case production estimates, which assume steady 10Mtpa throughput rates.
Figure 26: The open-pit operation remains the foundation of Sukari’s production profile
Source: Centamin plc
Greenfield discovery
to >15Moz resource
Production ramping
up to steady-state
450-500koz by end of
this year
29
Mining
Though low-to-moderate grade overall, Sukari has a number of significantly higher-grade (>5g/t) north-
plunging mineralised zones that start towards the base of the planned final open-pit shell and continue
at depth. Centamin took the decision during the latter stages of the open-pit project build to develop
underground access to these zones, with the intention of both bringing forward production from high-
grade resources lying deep within the eventual open-pit shell and to further drill expected depth
extensions of these zones. Development of the Amun decline began in early 2010, with commercial
production from this new underground mine realised by the end of that year. Development of a second
decline (Ptah) is now underway in order to ensure continued underground access to lateral higher-grade
zones (and continued access to drill depth extensions) post intersection of the northern part of the Amun
decline by the deepening open pit (scheduled to occur in 2018 on the current open-pit mining plan).
Figure 27: Underground development has facilitated early access to Sukari’s high-grade zones
Source: Centamin plc
The maximum ore capacity of the underground operation is 1.5Mtpa, and, in contrast to the open-pit
mine, all underground mining is undertaken on a contract basis. As at 30 September 2013, underground
reserves stood at just over 0.5Moz at an average grade of 7.2g/t, but we are confident that ongoing
underground drilling will see further resource to reserve conversion (total underground resources are
currently 1.3Moz at 5.7g/t) as well as expansion of the underground resource inventory as high-grade
extensions are followed at depth (Centamin’s recent Q3 2014 report highlighted a number of impressive
underground exploration results). But we would stress that replenishment of underground reserves
will be critical if Sukari is to maintain a 450-500koz pa production rate over the longer term.
Figure 28: Our medium-term production and cost profile estimates for Sukari
0
200
400
600
800
1,000
0
100
200
300
400
500
2013A* 2014E 2015E 2016E 2017E 2018E
Tota
l cas
h co
sts
(US$
/oz)
Gol
d pr
oduc
tion
(koz
)
Gold production Total cash costs
Source: Oriel Securities estimates
A second decline is
under development to
ensure long-term
access to high-grade
underground ore
Underground drilling
results indicate
potential to materially
increase resources
30
Mining
Court cases still to be resolved Centamin is embroiled in two domestic court cases in Egypt, one relating to a third-party claim brought
against the Concession Agreement for Sukari between Centamin and the Egyptian State, and the other
relating to historic fuel subsidies that Sukari benefitted from early on in its operation. The legal process
in Egypt can be lengthy and complex, and though the ultimate outcome is clearly impossible to predict
with any certainty, on the evidence of Centamin’s public comments on the matters to date we believe
the likelihood is a satisfactory resolution.
Concession Agreement case
In October 2012 Egypt’s Administrative Court handed down a judgment in relation to a claim (brought
against the government by, amongst others, an independent member of the previous parliament) that
argued for the nullification of the Sukari Concession Agreement on the grounds that incorrect
administrative procedures may have been followed in relation to the signing of the original agreement
between Centamin, the Arab Republic of Egypt and the Egyptian Mineral Resources Authority (EMRA).
The Court ruled that the Concession Agreement itself was valid, but judged that insufficient evidence
had been submitted to it to demonstrate that the entire 160km2 "exploitation lease” agreed between
Centamin and EMRA had received approval from the relevant Minister at the time and thus was not
valid (although it did state that it had sufficient evidence to prove the existence of an exploitation lease
for an area of 3km2). Centamin however maintains that it is in possession of the executed original
documentation which clearly shows that the 160km2 exploitation lease was approved by the Minister of
Petroleum and Mineral Resources (whom has publicly expressed his support of Centamin and stated
his view that the lease is valid and its terms fair), but that it appears that this document was not supplied
to the Court (as Centamin was not party to the case at that time). As such, in November 2012 both
Centamin and EMRA formally appealed the judgement to Egypt’s Supreme Administrative Court – this
appeal process is still ongoing but the initial Administrative Court decision has been suspended to
enable normal operations at Sukari to continue during the appeal process.
There is little visibility on when the appeal process will conclude, but Centamin anticipates that there will
be a number of further hearings and adjournments before a final resolution is reached. However, the
company has received independent legal advice that the correct procedure was followed with regards to
the granting of the Concession Agreement, and is therefore confident of an outcome in its favour.
Moreover, we note that a new investment law came into force in April 2014 (although is currently being
challenged itself) that restricts third parties from challenging contractual agreements between the
Egyptian State and investors. This law could be applied retrospectively, potentially leading to the
dismissal of the Concession Agreement case altogether.
Fuel case
Separately, Centamin is in an on-going dispute with the Egyptian Government regarding the price at
which Diesel Fuel Oil (DFO) is supplied to Sukari. The mine previously benefited from subsidised DFO
prices, but has since January 2012 been paying its fuel supplier, Chevron, at the international price for
diesel. Nevertheless, during 2012 Centamin received a demand for US$60m from Chevron for the
repayment of past fuel subsidies (covering the period from late 2009 through to January 2012). Based
on legal advice, Centamin believes it has no case to answer, and has made no provisions in its
accounts in relation to these historic subsidies. Moreover, the company has commenced proceedings in
Egypt’s Administrative Court regarding these matters, arguing that an instant move to international fuel
prices was not a reasonable outcome and that it may therefore be entitled to repayment of any funds
advanced thus far at the higher rate should the court proceedings be successfully concluded.
Building the growth pipeline With Sukari now reaching production levels the scale of the resource warrants after a multi-year phased
expansion programme, Centamin is placing an increased emphasis on organic growth, with exploration
efforts focused both in and around Sukari in Egypt, but also elsewhere in eastern Africa and, following
the acquisition of Ampella Mining early last year, in western Africa. The group anticipates its ongoing
exploration budget to be set at around US$25-30m pa, of which around US$10-15m will be dedicated to
work on the Ampella portfolio in West Africa.
Centamin is confident
the Concession
Agreement will be
upheld
Centamin’s accounts
already reflect fuel
costs at full
international prices
Exploration budget of
US$25-30m to drive
organic growth
31
Mining
Growth in Egypt Sukari already boasts a substantial resource (15Moz) and reserve (8Moz) base by any standards, but
we believe there is still significant upside potential to be realised through the continued exploration of
Sukari Hill itself and other prospects within the wider 160km2 Sukari tenement area.
The immediate focus is on the further drilling of deeper-lying high-grade structures at Sukari Hill to
expand underground resources and reserves and ensure the longevity of the underground operation
(both at Amun, the current operational decline and therefore only area to have declared underground
reserves, and Ptah, where a new decline is being developed outside the boundaries of the final open-pit
shell and which will therefore be the longer-term source of underground production). Recent drill results
have been highly encouraging (Figure 29), and give us confidence that Centamin will continue to
replenish underground reserves depleted through mining and also expand the resource base, work
which will be crucial if it is to maintain a 450-500koz production rate over the longer term given the low
average grade of the core open-pit operation.
Figure 29: Recent drilling supports further expansion of underground resources and reserves
Source: Centamin plc
Elsewhere in Egypt, Centamin has defined seven other prospects on the wider 160km2 Sukari licence
area, the most advanced targets being Quartz Ridge and V Shear. Little in the way of recent exploration
work on these regional targets has been undertaken given the understandable focus on expanding
higher-grade underground resources at Sukari, but we believe they hold potential to emerge as satellite
projects to Sukari given all lie within potential truckable distance to the existing process plant.
Growth beyond Egypt The Arabian-Nubian geological shield in which Sukari sits extends further south from Egypt in eastern
Africa and across the Red Sea on the Arabian Peninsula, and several gold and base-metals operations
have been established in similar geology in these neighbouring countries. Centamin holds significant
exploration ground in Ethiopia’s portion of the shield, both directly (its wholly-owned Sheba properties in
the north of the country) and in joint venture arrangement with AIM-quoted Alecto Minerals plc (ALO LN,
which is exploring ground in the east and south of the country). Work on these properties to date has
yielded encouraging results but has yet to progress to resource definition.
Underground reserve
replenishment will be
required to maintain
450-500koz rate over
the longer term
32
Mining
Following the acquisition of ASX-quoted Ampella Mining Ltd early last year, Centamin also has a
substantial exploration footprint on the more established West African gold province. Ampella was
progressing exploration projects in both Burkina Faso and directly across the border in Cote d'Ivoire,
where it held exploration ground of some 2,200km2 and 1,200km2 respectively. The most advanced of
these projects is Batie West in Burkina Faso, where Ampella had drill-defined the 3.25Moz Konkera
resource (1.92Moz at 1.7g/t indicated and 1.33Moz at 1.7g/t inferred).
Since closing the acquisition, Centamin has initiated a systematic exploration programme at Batie West
aimed at better defining the wider resource potential of the project and the scope for developing a
sizeable gold operation. As of the end of Q3 2014, Centamin had drilled 16,247m of reverse-circulation
holes and 1,489m of diamond-core holes, focused mainly on surface regions of known prospect areas in
the vicinity of the existing resource. We expect the project to be advanced to at least scoping study
stage by early 2016, and consider it the company’s principal near-term growth catalyst.
Figure 30: Ampella acquisition has given Centamin a substantial exploration footprint in Burkina Faso
Source: Centamin plc
The 3.25Moz Konkera
resource holds
development
potential
33
Mining
Management
Josef El-Raghy – executive chairman Josef El-Raghy holds a Bachelor of Commerce degree from the University of Western Australia and had
a ten-year career in stock broking prior to Centamin. He was formerly a director of both CIBC Wood
Gundy and Paterson Ord Minnett. His expertise in international capital markets has greatly assisted
Centamin in its fundraising and development activities.
Andrew Pardey – chief executive Andrew Pardey was appointed CEO in January 2015, having previously served as group COO since
May 2012 (prior to which he was general manager of operations at Sukari since 2008). He was a driving
force in bringing Sukari into production, having joined during the mine's construction phase. Mr Pardey
holds a BSc in geology and has over 25 years' experience in the mining and exploration industry, having
previously held senior positions in Africa, Australia and other parts of the world with companies including
Guinor Gold Corp, AngloGold Ashanti and Kalgoorlie Consolidated Gold Mines.
Pierre Louw – chief financial officer Pierre Louw is a senior manager with 25 years’ experience in the mining industry with both major and
mid-tier gold and copper producers. Mr Louw is a member of the South African Institute of Professional
Accountants and has extensive international experience having worked in Tanzania, Australia, Zambia
and his native South Africa. Mr Louw was previously finance director for Equinox Ltd’s Lumwana copper
mine in Zambia (2005 to 2010), prior to which he worked as business and financial manager for
AngloGold Ashanti’s Geita gold mine in Tanzania (2000 to 2004). He has held management roles in the
AngloGold corporate office where he worked as Divisional Manager and with Johannesburg
Consolidated Investment Co, with whom he began his career in 1986. He holds a National Diploma in
financial accounting from the University of Johannesburg.
Andy Davidson – head of business development Prior to joining Centamin in August 2012, Andy Davidson worked for nine years as a mining analyst,
including three years as an equity research director with Numis Securities in London. Before this, Mr
Davidson was a senior minerals exploration geologist, including six years with Ashanti Goldfields closely
involved in the discovery and development of the world-class Geita project in Tanzania. Mr Davidson
holds an MSc in Mineral Project Appraisal from the Royal School of Mines and a first class honours
degree in geology.
Ed Haslam – senior independent non-executive director Ed Haslam is currently chairman of LSE-listed Talvivaara plc (since June 2007) and since May 2004
has been a non-executive director of Aquarius Platinum Ltd. In addition, Mr Haslam has been the senior
independent director of Namakwa Diamonds Ltd since December 2007. Previously, Mr Haslam had a
long and distinguished career with Lonmin plc, joining the group in 1981 and becoming chief executive
in 2000 before retiring in April 2004. Mr Haslam has also held various positions with Falconbridge Nickel
Mines and British Steel Corp, and was a director of Cluff Gold until September 2007.
Trevor Schultz – non-executive director Trevor Schultz holds a Masters Degree in economics from Cambridge University, an MSc Degree in
mining from Witwatersrand University and has completed the Advanced Management Programme at
Harvard University. With over 40 years' experience at executive management and board level with
leading international mining companies (including BHP Billiton, RTZ/CRA, Pegasus Gold and Ashanti
Goldfields), Mr Schultz was most recently chief executive of Guinor Gold Corp. His roles have included
the development of several new mining operations in Africa, South America and the USA, negotiations
with various governments and their agencies, and project financing and capital raisings. Mr Schultz is
currently a director of private equity group Pacific Road Capital Management.
34
Mining
35
Mining
Randgold Resources Limited Initiation of coverage Mining 6 February 2015
Premium quality, premium price HOLDPrice: 5550p Target price: 5400p Unconnected research
A stand-out performer in an industry that has struggled to create real value
through a multi-year gold bull cycle, Randgold has deservedly become the go-
to investment in the sector, and continues to deliver solid returns despite a
flattening growth profile and muted gold price. But such quality comes at a
(perhaps justifiable) premium price. We initiate with a HOLD and 5,400p TP.
Priority on profitability over growth alone. Randgold has established an enviable
suite of high-quality operations in Africa, its strict internal investment criteria (new
projects must have at least 3Moz reserve potential and be capable of delivering an IRR
of greater 20% at US$1,000/oz gold) ensuring a near three-fold increase in production
has been achieved over the past seven years (we estimate consolidated gold output of
(1.2Moz for 2014) whilst still maintaining a cash cost position comfortably below the
industry average (we estimate Randgold’s 2014 total cash costs at US$700/oz).
Capital discipline sees value passed to shareholders. But it is perhaps capital
discipline that has most distinguished Randgold from its peers over the past decade,
with exploration and new mine builds funded without regular recourse to equity capital
markets (the group has embarked on just one major equity raise over the past seven
years, and that was undertaken at a significant premium to NAV). Shareholders have
thus retained undiluted exposure to margins (and thus leverage to gold price), a rare
phenomenon in the gold sector over recent years and one which we feel helps explain
the premium at which Randgold’s shares now trade relative to its closest peers.
Well positioned to take advantage of current soft markets. This highly-valued scrip
coupled with an ungeared balance sheet and solid margins going forward mean
Randgold is advantageously positioned to execute on M&A opportunities should they
arise. The group’s success to date has been built on organic growth (of its five
operating mines, only Kibali was not a Randgold discovery), but with it now several
years since its last major discovery, we believe there may be an increased focus on
M&A going forward. The still depressed valuation of much of the gold sector may
provide a unique opportunity in this regard, but we are confident Randgold’s best-in-
class management team will remain characteristically disciplined – the problem may be
finding available assets that match the quality of its existing portfolio.
But looks fully priced. Trading at sector-leading P/E, EV/EBITDA and P/NAV
multiples of 30x, 14x and 1.8x respectively, Randgold is (justifiably) already fully priced
in our view, and in the absence of a meaningful grassroots discovery or value-accretive
M&A, we see no obvious catalyst for outperformance in the near to medium term (aside
from positive gold price movements). But the group’s low cost structure, ungeared
balance sheet, operational diversity and best-in-class management make it our top
defensive pick, and we initiate coverage with a HOLD.
Share price performance (indexed)
8090
100110120130140150160
Feb-14 May-14 Aug-14 Nov-14 Feb-15Absolute
Rel. FTSE All-Share / Mining - SEC
Key data
Key financials
Year to Dec 2013A 2014E 2015E
Sales (US$m) 1,138 1,120 1,198
EBITDA (US$m) 540 514 554
EPS adj (US$) 3.02 2.75 2.86
DPS (US$) 0.50 0.50 0.60
PE adj (x) 28.1 30.9 29.7
EV/EBITDA (x) 14.5 15.2 14.1
Div yield (%) 0.59 0.59 0.70
All data as of close 05 February 2015
All sources unless otherwise stated: Company data, Factset, Oriel Securities
Contributing analyst Sales
Nick Chalmers UK Sales Desk
+44 (0)20 7710 7450 +44 (0)20 7710 7600 [email protected]
Stock code RRS LN
Market cap (£m) 5,156
FTSE All-Share / Mining - SEC 14322
1mth perf (%) 22.1
3mths perf (%) 40.4
12mths perf (%) 17.5
12mth high-low (p) 5888 - 3868
Free float (%) 94
36
Mining
Key data1 Key operational data and financial ratios (x)
2013A 2014E 2015E 2016EProduction (koz) 910 1,173 1,253 1,273Gold price (US$/oz) 1,377 1,264 1,275 1,300Total cash costs (US$/oz) 715 700 664 660All-in sustaining costs (US$/oz) 785 767 727 724
2013A 2014E 2015E 2016EPE adj 28.0 30.7 29.6 30.4EV/EBITDA 14.5 15.2 14.1 12.9Div yield (%) 0.6 0.6 0.7 0.8EPS growth (%) na (8.9) 3.9 (2.6)
Key profit & loss data (US$m)2013A 2014E 2015E 2016E
Sales 1,138 1,120 1,198 1,273Share of JV profits & other income 60 85 105 86Operating costs (740) (782) (861) (880)Other costs (49) (52) (52) (52)EBITDA 540 514 554 606EBITDA margin(%) 47.4 45.9 46.2 47.6Depreciation (131) (143) (164) (179)EBIT 409 371 389 427EBIT margin (%) 35.9 33.1 32.5 33.6Net interest (6) (1) 0 0PBT rep 402 370 389 427Tax (77) (79) (91) (130)Net Profit 326 290 298 297Non-controlling interests (47) (36) (33) (39)Attributable Net Profit 278 254 265 258EPS normalised (US$) 3.02 2.75 2.86 2.78DPS (US$) 0.50 0.50 0.60 0.65
Key balance sheet data (US$m)2013A 2014E 2015E 2016E
Non current assets 2,970 3,056 2,994 2,881Current assets 406 446 704 1,088Non current liabilities 81 82 82 82Current liabilities 238 197 243 266Net debt/(cash) (35) (102) (347) (719)
Key cash flow data (US$m)2013A 2014E 2015E 2016E
Cash flow from operating activities 464 342 441 532Cash flow from investing activities (728) (224) (102) (66)Cash flow from financing activities (72) (65) (79) (94)Net cash flow (336) 52 259 371Cash at end of year 38 105 350 722
Key information Business description
Randgold Resources is an Africa-focused gold mining and
exploration company with its shares quoted on the London Stock
Exchange and NASDAQ. The group currently operates five mines -
Loulo, Gounkoto and Morila in Mali, Tongon in Cote d'Ivoire and
Kibali in the DRC.
Senior management
Mark Bristow - chief executive
Graham Shuttleworth - chief financial officer
Christopher Coleman - non-executive chairman
Key dates
09/02/2015 - Q4 2014 and full-year results
07/05/2015 - Q1 2015 results
06/08/2015 - Q2 2015 results
Major shareholders
BlackRock - 17.3%
Van Eck - 7.9%
Wells Fargo & Co - 4.9%
Website
www.randgoldresources.com
1Year end DecemberSource: Company data, FactSet, Oriel Securities estimates
37
Mining
Premium quality, premium price Randgold has established an unrivalled suite of high-quality operations in Africa, its strict internal
investment criteria (new projects must have at least 3Moz reserve potential and be capable of delivering
an IRR of >20% at US$1,000/oz gold) seeing a near three-fold increase in production delivered over the
past seven years (we estimate consolidated gold output of (1.17Moz for 2014) whilst maintaining a cash
cost position below the industry average (we estimate 2014 total cash costs at US$700/oz).
Figure 31: Group consolidated* production and cash cost forecasts
*Loulo-Gounkoto and Tongon fully consolidated, Morila and Kibali on Randgold’s equity-attributable share Source: Oriel Securities estimates
This unwavering commitment to growing profits over chasing ever-increasing production scale alone is
driven by what we consider to be a sector best-in-class management team, led by CEO Mark Bristow.
The group has steadfastly stuck to a mantra of disciplined organic growth, with four of its five operating
mines direct products of greenfield exploration programmes in West Africa, at an average discovery cost
of <US$20/oz. And Randgold has been equally disciplined when it comes to funding mine builds, re-
investing cash flow from operations rather than launching regular equity issues or taking out expensive
debt (features that have been common place across the wider gold industry over the past decade).
In our view it is this disciplined management of both costs and capital whilst growing the business,
together with a track-record of making significant grassroots discoveries, that has seen Randgold
become the marquee name in the UK-quoted gold equities market. Its shares trade at sector-leading
P/E, EV/EBITDA and P/NAV multiples of 30x, 14x and 1.8x respectively, a premium which would be
difficult to justify were it not for the fact that, quite simply, Randgold routinely outperforms its mid and
senior-tier peers, whether it be delivering against its production and cost targets or exploration success.
But with production now plateauing at around 1.3Moz pa, Randgold is entering a consolidation phase –
this in itself is not necessarily a negative, but if at least part of the group’s market premium reflects its
historic ability to find and develop company-transforming assets, then the pressure is on the recently
overhauled exploration team to find the next mine (it is now five years since the last major discovery,
Gounkoto). We would never rule out a bonanza find given Randgold’s track record and extensive
ground-holdings in prospective addresses, but M&A may now look more attractive to a group that has
historically been somewhat ambivalent towards it (the joint acquisition of Kibali its only major buy),
mindful of the risks of diluting rather than creating value on a per-share basis. Capital constraints across
the industry have resulted in many assets trading at substantial discounts to NPV, potentially providing a
unique opportunity for well-capitalised companies to unlock value through M&A.
Despite the lack of visible catalysts for outperformance in the near-to-medium term, we consider the
downside risks attached to Randgold are relatively low given the group’s low cost structure, ungeared
balance sheet, operational and geographical diversity and (perhaps most importantly) its disciplined
management approach. We therefore believe Randgold will continue to be the defensive gold
stock of choice in the UK market, and initiate coverage with a HOLD and 5,400p Target Price.
Production has
reached a sustainable
>1Moz pa at cash
costs of under
US$700/oz
Success built on
exploration – real
value creation
Premium market
rating justified in our
view
M&A may now look
more compelling
38
Mining
Valuation Our sum-of-the-parts core NAV estimate is detailed below, calculated using an 8% discount rate and our
House gold price assumption of US$1,300/oz (from 2016). We base our production and cost forecasts
on Randgold’s published short-term (five-year) and long-term (ten-year) market guidance, but assume
some reserve upside in our cash flow models according to the group’s guidance on future brownfield
developments (see pp42-43). Our NPV estimate of the undeveloped Massawa project is based on the
published 2010 prefeasibility study parameters – we consider this a more speculative component of our
NAV estimate given Randgold has yet to make an investment decision on the project, but believe the
risks could be to the upside given that current work is aimed at optimising the project economics.
Figure 32: Sum-of-parts valuation
US$m p/share
Loulo-Gounkoto NPV8% 1,903 1,355
Kibali NPV8% 1,373 978
Tongon NPV8% 740 527
Morila NPV8% 31 22
Massawa NPV8% 345 246
Exploration nominal 100 71
Projects valuation 4,493 3,198
Net cash (at 30/09/14) 61 43
In-the-money options 9 6
Corporate-level costs NPV8% -224 -160
Company NAV 4,339 3,088
*Assuming 93m shares out and in-the-money options, and £1 = US$1.51 exchange rate Source: Oriel Securities estimates
Randgold’s current share price equates to approximately 1.8x our base-case core NAV estimate – an
US$1,800/oz gold price assumption would be required for our NAV to equate to the current price without
application of a multiple. The table below illustrates core NAV sensitivity to gold price and discount rate.
Figure 33: Core NAV (p/sh) sensitivity to long-term (from 2016) gold price assumption and discount rate
Gold price (US$/oz)
Discount rate 1,000 1,100 1,200 1,300* 1,400 1,500 1,600
12% 1,456 1,833 2,206 2,578 2,949 3,319 3,690
10% 1,587 2,000 2,407 2,812 3,218 3,622 4,026
8%* 1,742 2,196 2,643 3,088 3,533 3,977 4,421
5% 2,030 2,559 3,080 3,598 4,116 4,634 5,150
Source: Oriel Securities estimates
In contrast to most other UK-quoted gold companies, Randgold has a multi-year track-record of positive
operational cash flow, EBITDA and net profit, and we therefore feel it is appropriate to set our Target
Price in relation to its historic earnings and cash-flow multiples. Applying an equally-weighted blend
of Randgold’s three-year average EV/EBITDA, P/E and P/CF multiples to our 2015 EBITDA,
earnings and operational cash-flow forecasts results in a (rounded) Target Price of 5,400p. This
is within 5% of Randgold’s current share price, and we therefore recommend HOLD.
Figure 34: Historic market multiple and Target Price derivation
2012A 2013A 2014F 2015F
EBITDA US$m 665 540 512 554
EV/EBITDA x 12.8 10.7 12.2 11.9
Attributable Net Profit US$m 432 278 252 265
P/E x 20.6 20.8 25.1 22.2
Cash flow from operating activities US$m 148 464 339 441
P/CF x 60.4 12.5 18.6 30.5
Average multiple-derived Target Price GBp 5,400
*Assuming 93m shares out and in-the-money options, and £1 = US$1.50 exchange rate Source: Oriel Securities estimates, Bloomberg
39
Mining
Upcoming catalysts Q4 2014 and full-year results, and Gounkoto underground feasibility study (9 Feb 2015)
Q1 2015 results (7 May 2015)
Q2 2015 results (6 Aug 2015)
Risks Our Target Price is derived by applying historic market multiples to our 2015 forecasts – we
believe Randgold’s traditionally high multiples (relative to its mid and senior gold peers) reflects
what has to date been a strong forecast growth profile, but also market expectations that past
exploration successes will be repeated. Given the group is now entering somewhat of a
consolidation phase in terms of production, current multiples could be at risk over the longer
term if the company fails to deliver further exploration success and/or growth by other
means.
Our cash-flow models of Randgold’s key operations assume future reserve additions. The group
has a strong track-record of resource growth and reserve replenishment, but there can be no
guarantee that this will continue to be the case going forward.
Should the gold price fall below our long-term price assumption of US$1,300/oz for a prolonged
period of time there would be a material negative impact on our financial estimates and valuation.
40
Mining
Company overview
Since its creation around two decades ago as a junior explorer, Randgold has evolved into the UK
market’s pre-eminent gold company, and is the largest pure-gold play by market capitalisation quoted
on the LSE. Focused solely on Africa, exploration has been the foundation of the group’s success, with
major discoveries to date including the 7.5Moz Morila deposit, the 7Moz Yalea deposit and the 5.5Moz
Gounkoto deposit (all in Mali), the 4Moz Tongon deposit (Côte d’Ivoire) and the 3Moz Massawa deposit
(Senegal). With the exception of Massawa, all of these discoveries have been taken to production, and
the group recently built its fifth mine, the giant Kibali operation in the DRC, a product of its first major
foray into M&A (Kibali was jointly acquired with AngloGold Ashanti as a feasibility-stage project in 2009).
Figure 35: Randgold’s African footprint
Source: Randgold Resources
As at 31 December 2013, total gold resources under control stood at 45Moz (at an average grade of just
over 3g/t), of which Randgold’s equity-attributable share was 29Moz. Total and equity-attributable
reserves stood at 24Moz (at an average grade of 3.6g/t) and 15Moz respectively, with reserves reported
at an economic cut-off grade calculated at a conservative US$1,000/oz gold price assumption.
Figure 36: Resources* and reserves* by asset
Tonnes (Mt) Au grade (g/t) Total gold (Moz) Attributable (Moz)
Loulo-Gounkoto (80%) 101 4.3 14 11
Morila (40%) 29 0.7 1 0
Tongon (89%) 45 2.5 4 3
Massawa (83%) 59 2.4 5 4
Kibali (45%) 215 3.2 22 10
Total resources 448 3.1 45 29
Loulo-Gounkoto (80%) 50 4.7 8 6
Morila (40%) 14 0.7 0 0
Tongon (89%) 31 2.2 2 2
Massawa (83%) 21 3.1 2 2
Kibali (45%) 90 4.0 11 5
Total resources 206 3.6 24 15
*As at 31 Dec 2013 (resources reported at a cut-off grade based on US$1,500/z gold, reserves at US$1,000/oz) Source: Randgold Resources
Multiple >3Moz
resource grassroots
discoveries
41
Mining
This substantial reserve base sustains group consolidated (all assets >50% owned are fully
consolidated in Randgold’s accounts, assets <50% owned are JV accounted) production of >1Moz – we
estimate 1.2Moz for 2014 (up from 0.9Moz in 2013, reflecting the first full year of production contribution
from Kibali), rising to a steady-state of around 1.3Moz in 2015. Moreover, the inherent low operating
cost-structure of Randgold’s mines (driven by the relatively high-grade of its resources and
straightforward mining methods and processing techniques employed) enables this production base to
maintain comfortable gross operating margins (>30%) even at current gold pricing levels – we forecast
2014 total cash costs at US$700/oz (compared with US$715/oz in 2013), falling to US$664/oz in 2015.
Figure 7: Consolidated* production and cash cost forecasts
*Loulo-Gounkoto and Tongon fully consolidated, Morila and Kibali on Randgold’s equity-attributable share Source: Oriel Securities estimates
Loulo-Gounkoto Complex (Mali) – still the bedrock of group production The Loulo-Gounkoto complex in western Mali comprises the Yalea and Gara underground mines at
Loulo and the adjacent Gounkoto open-pit, with ore from both processed through a central facility at
Loulo. Geologically, the complex lies within the Kedougou-Kenieba inlier of Birimian rocks, which is host
to a number of other substantial gold deposits in both Mali and across the border in neighbouring
Senegal. Loulo-Gounkoto is owned 80% owned by Randgold and 20% by the Government of Mali.
Open-pit production commenced at Loulo in 2005, and gold output has built steadily thereafter, first with
the commissioning of the underground operations in 2007 and then with the addition of open-pit
production in 2011 from neighbouring Gounkoto (a greenfield discovery by Randgold two years earlier).
The complex is now firmly established as a long-life, high-production asset, with 2013’s gold production
total of 580koz set to be trumped by 2014 figures (we forecast 655koz, which would represent a beat on
Randgold’s production guidance of 640koz provided at the beginning of the year) following plant
upgrades. Production should increase to over 700koz pa by the end of 2016 on rising head grades, and
with total cash costs of <US$700/oz the operation should comfortably maintain solid operating margins,
even in the event of further deterioration in the gold price.
Kibali (DRC) – the emerging giant The large-scale Kibali project comprises 10 permits covering an area of 1,836km² in the Moto goldfields
of north-eastern DRC, some 560km north-east of the city of Kisangani and 150km west of the Ugandan
border town of Arua. The project is a joint venture between Randgold (45%), AngloGold Ashanti (45%)
and the Congolese para-statal organisation SOKIMO (10%).
After acquiring the project (in conjunction with AngloGold Ashanti) through the ~US$500m takeover of
junior Moto Goldmines in 2010, the 22Moz resource was subject to an intense period of evaluation and
re-working, culminating in a development plan for a ~600koz pa combined open-pit/underground
operation (backed by 11Moz of reserves) at an estimated eventual total capital outlay of US$1.8bn (of
which we estimate around 85% had been expended by the end of 2014).
Production broke
through 1Moz in 2014,
and we estimate at
~US$700/oz total
cash costs
Loulo-Gounkoto
could sustain
>700koz pa over the
longer term
42
Mining
The first phase of production (open pit) came on stream in late 2013, and we estimate 2014’s output at
530koz, which should rise to 600koz this year. The underground mine is still under construction, with
first ore expected to be accessed this year and steady-state levels reached in 2017. The higher-grade
(>5g/t) underground ore will replace a portion of the lower-grade (~3g/t) open-pit ore feed to the plant,
ensuring a ~600koz pa gold production rate is sustained over an estimated 17-year life. We estimate
total cash costs will average under US$600/oz, offering healthy margins even at current gold price
levels.
Tongon (Côte d’lvoire) – getting back on track Tongon is located in the north of Côte d’lvoire, 55km south of the border with Mali. Randgold holds an
89% equity interest, with the balance held by the Government of Côte d’lvoire (10%) and a local
company (1%). Brought into production in 2010, the open-pit has around five years remaining on current
reserves, but the operational life could be extended should nearby satellite discoveries be developed.
After a successful initial start-up focused on the oxide portion of reserves, production levels stuttered,
and costs rose, following the transition to treating 100% sulphide ore in 2012. Plant upgrade initiatives
began in 2013 to address efficiency issues, and the latest of these (an upgrade of the crushing circuit
(completed in Q4 2014) and flotation circuits (scheduled completion in Q1 2015), to improve throughput
rates and gold recovery levels respectively) are expected to bear fruit going forward, with production
increasing to a sustainable rate of around 300koz pa at total cash costs of around US$650/oz
(compared with 234koz at US$828/oz in 2013) by the end of next year.
Morila (Mali) – the original company maker keeps giving A joint venture between Randgold (40%), AngloGold Ashanti (40%) and the Government of Mali, Morila
was discovered, developed and part-funded by Randgold, and was the company’s first operating mine
with its commissioning in October 2000. Since that time it has produced over 6Moz (generating over
US$2bn of cash for its stakeholders), and though originally scheduled to close in 2013 (following its
conversion from open-pit to stockpile treatment operation in 2009) a pit pushback and planned tailings
re-treatment project could see it continue producing gold (albeit at much reduced levels) for another two
to three years, depending on the prevailing gold price.
Production upside opportunities Randgold’s five-year production plan (upon which our own forecasts are based) envisages steady-state
gold output of around 1.3Moz pa (on a partially consolidated basis) by the end of this year, based on
existing reserves and installed or in-development mining and processing facilities only. However, with
the exception of Morila, all the group’s existing operations have longer-term production upside on
conversion of resources not currently included in reserves and/or on the drilling and development of
known extensions/satellites to current resources. The company expects that some of these
opportunities (in addition to the development of a new stand-alone operation, a role it currently
envisages being fulfilled by the Massawa project in Senegal) will enable it to at least maintain current
production levels over the longer term (~10 years). We consider the following areas of production
upside potential have the greatest visibility at this stage, and include them in our modelled longer-term
production and cost estimates:
Gounkoto underground: Gounkoto has long been considered to have considerable potential at depth,
where mineralisation was not closed off when the initial open-pit resource was drilled. Drilling last year
confirmed the potential for a 1Moz underground reserve at an average grade of >5g/t, and we expect
this to underpin an imminent feasibility study of an underground mining operation. Randgold is targeting
2018 for the start of decline development, with the aim of getting Gounkoto underground up to full
production rates by the time the current open-pit reserves are exhausted around 2020, enabling the
wider Loulo-Gounkoto complex to maintain a >600koz pa production rate beyond that date. No formal
capex guidance has been provided for the underground project, but given the project largely comprises
a simple decline from the south of the existing open pit, the required investment should be relatively
modest (we estimate US$100m over 2-3 years).
Kibali will benefit
from higher-grade
underground ore
from next year
Plant upgrades to
bear fruit
Resource upside
opportunities could
see existing
operations sustain
1.3Moz pa rate for the
next ten years
43
Mining
Loulo underground extensions: Mineralisation at both the Yalea and Gara deposits is considered to
be open at depth below the current underground mining block models, and specific high-grade targets
are now the focus of further planned optimisation drilling with the aim of extending the overall life of the
operations but also bringing forward higher-grade ore in the mining schedule. Randgold does not
formally include any reserve upside at Yalea and Gara in its ten-year forecasts, but given its track-
record of reserve replenishment we feel comfortable modelling in some additions – we conservatively
assume 30% additional ounces to the current 5Moz reserve, at the same average grade of 5g/t.
Kibali further resource to reserve conversion: Randgold’s track-record of resource growth and
resource-to-reserve conversion at Kibali is impressive, the group having increased resources by 25% to
22Moz in the six years since acquiring the project and grown reserves from 4.5Moz to 12Moz during the
same period. Current in-fill drilling is focused on Gorumbwa, an area of inferred resources on the
southern flank of the current US$1,000/oz pit shell that was a centre of historical mining. The company
currently estimates that Gorumbwa has the potential to add >300koz to current open-pitable reserves.
Tongon in-fill and satellites to add reserves: Reserves at the Southern Zone pit, the predominant
source of production at Tongon, are sufficient to facilitate gold output at the ~300koz pa level until
around 2019-20. However, recent in-fill drilling has added 450koz to the resource inventory, a significant
portion of which we would expect to be converted to reserve (replenishing 2014 depletions from mining),
while further opportunity exists below the current grade-control drilling and immediately beneath the
base of the US$1,000/oz pit shell. Together with the potential for developing satellite discoveries
adjacent to the current open-pit operations, these areas of additional reserve potential give Randgold
confidence that Tongon’s projected life-of-mine could be extended by at least two years.
Massawa still under review: The Massawa project in Senegal has a substantial drill-defined resource
of 4.6Moz at 2.4g/t and has already been the subject of economic studies. However, a large proportion
of the ore is refractory, and given this added layer of complexity (Randgold is not experienced in
processing refractory ore), the project does not currently form part of the group’s five-year plan. But
Randgold is in the midst of reinterpreting the project geology and remains sufficiently optimistic on
development potential to include Massawa in its ten-year production plan, with current feasibility and
resource-modelling work focussed on the potential for discrete higher-grade zones of mineralisation
amenable to gravity gold recovery, which could materially improve the project economics. Better
understanding the detailed metallurgy of the refractory gold is also a key objective. We currently include
Massawa in our long-term estimates (assuming first production in 2020), but caution that the operational
and cost parameters that we model (which are based largely on the 2009/10 prefeasibility study) are
subject to (potentially significant) change with completion of the current optimisation work.
Figure 8: Randgold recently outlined its longer-range (ten-year) production targets
Source: Randgold Resources
44
Mining
Exploration – still Randgold’s “engine” Since inception, Randgold’s business-development mantra has been value growth through exploration,
and to this day the group retains a substantial greenfield and brownfield exploration programme aimed
at delivering projects that can fulfil its development-decision minimum criteria of having reserve potential
of at least 3Moz and being capable of yielding an IRR of over 20% at US$1,000/oz gold. The exploration
team was recently restructured to reinvigorate and renew focus on this core value (we note it has been
five years’ since the group made its last major greenfield discovery, Gounkoto), and is now headed up
at group-level by Joel Holliday (who was West Africa exploration manager when Gounkoto was
discovered).
Under this new regime, the main exploration focus for 2015 is on the following areas:
Develop a more accurate geological model for Massawa to take the project up the value curve
Further explore targets on the Senegal-Mali shear zone, leveraging knowledge of the Loulo district
Refine knowledge of the existing exploration portfolio in Côte d’lvoire while continuing to build
overall ground-holding in the country (which management views as having one of the better mining
fiscal regimes in West Africa, but also considers to be relatively under-explored)
Continue resource expansion at Kibali while enlarging wider exploration footprint in Central Africa
Figure 9: Randgold has a substantial exploration footprint in both West (left-hand side) and Central (Right-hand side) Africa
Source: Randgold Resources
Exploration team
recently reorganised
45
Mining
Management
Mark Bristow – chief executive Mark Bristow has been chief executive of Randgold since its inception, which was founded on his
pioneering exploration work in West Africa. Mr Bristow has subsequently led the company’s growth
through the discovery and development of world-class assets into a major gold-mining business. He has
also played a significant part in promoting the emergence of a sustainable mining industry in Africa. A
geologist with a PhD from Natal University, Mr Bristow has held board positions at a number of global
mining companies and is non-executive chairman of Rockwell Resources International.
Christopher Coleman – non-executive chairman Christopher Coleman is head of banking and asset finance and a managing director of Rothschild
Group. Mr Coleman serves on a number of other boards and committees of the Rothschild Group,
which he joined in 1989. A graduate of the London School of Economics, he was a non-executive
director of the Merchant Bank of Central Africa from 2001 to 2008. Mr Coleman is also a non-executive
director of the US company Papa John’s International Inc.
Graham Shuttleworth – finance director and chief financial officer Graham Shuttleworth joined Randgold in 2007, but has been associated with the company since its
inception, initially as part of the management team involved in listing the company on the LSE in 1997,
and subsequently as an advisor. A chartered accountant, Mr Shuttleworth was previously a managing
director and head of metals and mining for the Americas for the global investment banking division of
HSBC. In that role he led, or was involved in, a wide range of major mining industry transactions,
including Randgold’s NASDAQ listing and subsequent equity offerings.
Joel Holliday – group exploration manager Joel Holliday is a geologist with 18 years’ experience in minerals exploration in projects in Europe,
South America and across Africa. He joined Randgold in 2004 and until recently was exploration
manager for West Africa following several years as exploration manager for the Loulo district, during
which time the Gounkoto and Loulo 3 deposits were discovered.
Rod Quick – group general manager, evaluation Rod Quick is a trained geologist with 20 years’ experience in the gold mining industry. He joined
Randgold in 1996, and has been involved in the exploration, evaluation and production phases of all the
group’s projects since Morila. Mr Quick was given overall responsibility for all of Randgold’s project
development and evaluation activities in 2009.
Ted de Villiers – group general manager, mining A qualified mining engineer, Ted de Villiers has extensive experience in mining operations, contracting
and consulting. Mr de Villiers joined Randgold in 2010, with executive responsibility for the group’s
rapidly expanding mining operations, tasked with ensuring a consistent production stream.
Paul Gillot – group metallurgist and deputy general manager, capital projects Paul Gillot has 24 years’ operational and management experience in the mining industry and moved into
the project-development area with the commissioning of the Tongon mine. He has overall responsibility
for the group’s metallurgical activities.
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Mining
Recommendation history
Amara Mining plc Centamin plc Randgold Resources Limited
Date Recommendation Date Recommendation Date Recommendation
Initiated today: BUY Initiated today: BUY Initiated today: HOLD
Disclosures on interests Oriel Securities is a market maker or liquidity provider in the securities of the following issuer(s): Amara Mining plc, Centamin plc and Randgold Resources Limited
CertificationsI, Nick Chalmers, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers, and I, Nick Chalmers,certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.
47
Mining
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