TORONTO (miningweekly.com) – The industry is constantly reducing the quality of its asset base and the only way to reverse the trend is to restart the “exploration engine”, Randgold Resources CEO Mark Bristow said in Toronto this week.

“It is misguided to think that cutting back on exploration is a good idea, because it creates the most value,” he asserted during a keynote session at the Prospectors and Developers Association of Canada’s yearly convention.

He advised miners not to cut back on essentials such as geologists and exploration capital allocation, especially during a downturn.

Randgold still has 90 geologists on its payroll and had not retrenched any geologists during the extended economic downturn.

Bristow said only four gold majors are at or above their 2005 stock prices.

Very few majors have so far ventured into Africa, quickly retreating to their business comfort zones.

“If you want to hunt elephants, you have to go to elephant country," he avers, adding that West, Central and East Africa are prospective for significant discoveries.

Companies chasing mergers and acquisitions should ensure that the proposed deals add significant value through organic exploration on the acquired assets to leverage organic growth.

One of Africa’s biggest gold miners, one of Randgold Resources' investment criteria that has maintained and grown its 15-million-ounce reserve base, is a 20% internal rate of return hurdle, at a base case price of $1 000/oz gold, using spot input costs.

A remarkable feature of Randgold’s success is its ability to build mines in Africa that usually reach profitability in the first quarter after commissioning. Today, Randgold can produce gold for a decade at a conservative portfolio-wide base price assumption, giving it significant flexibility in a market of normalised volatility.

GRASSROOTS
“True value is found at the drill bit,” Bristow said.

The 30-year mining veteran looked back at 2005 as the start of a world-changing sequence of events that saw China join the world economy, creating the unprecedented commodity supercycle.

“Most companies squandered funds and once-in-a-lifetime opportunities during the boom times. They snatched at short-term gains,” he explained.

For Bristow, how companies’ share prices fared during the significant market changes is the true measure of success. He said investors should ask whether stocks are more valuable now, than when bought and if dividends are paid.

Bristow further pointed to a calamitous effect of the supercycle being a significant industry debt – "the debt-to-Ebitda ratio has become worrying". The perception that noncash impairments do not matter is “nonsense”, he said.

“In essence, they destroy value. The reserves-per-1 000-shares metric is in decline.”

PARTNERSHIPS
Bristow said Randgold's decentralised structure heightens accountability at the operations level. He noted that hiring local professionals makes business sense, since they are often the ones able to tough it out in difficult prospecting conditions.

The company had considered more than 1 500 projects in Africa to found five world-class projects. He conceded that they might have missed out on two projects in Burkina Faso, which did not fit the company’s investment criteria, despite being legitimate projects in their own right. These were the Bissa deposit (owned by Nordgold) and Kiaka (owned by B2Gold).

Bristow endorsed the African regions it operates in as being predictable in terms of geopolitical stability. He said management risk is a bigger concern than geopolitical risk.

Randgold has built, financed and operates five gold mines in Africa – Loulo, Gounkoto and Morila, in Mali, Tongon, in Côte d’Ivoire, and Kibali, in the Democratic Republic of Congo. The company also has a major project at Massawa, in Senegal, and a portfolio of exploration projects in the most prospective gold belts of West and Central Africa.