Africa loves risk-taking miners – in Mali they stuck around when the going got tough

“When you pay tax, you’re paying rent, and when you pay rent, the landlord doesn’t kick you out” - Randgold’s CEO.

WHEN rebel soldiers overthrew the Mali government in 2012, coup leader Amadou Konare closed the border to everyone except the employees of Randgold Resources Ltd.

It’s pretty clear why. The company’s Loulo-Gounkoto and Morila mines were producing about 700,000 ounces of gold annually, valued at almost $1.2 billion. Randgold’s tax bill made it the biggest contributor to Mali’s economy.

To keep the cash flowing, the new government quickly issued permits so workers could fly bullion out of the country to sell it on global markets.

“When you pay tax, you’re paying rent, and when you pay rent, the landlord doesn’t kick you out,” said Mark Bristow, Randgold’s chief executive officer, adding that his company delivers enough cash to Mali’s government to fund the entire civil-service payroll annually.

Africa has become the gold industry’s biggest growth story, despite the increased risks posed by political upheavals like a coup in Niger, Ivory Coast’s civil war or the Arab spring protests that spanned from Egypt to Morocco. 

Excluding South Africa, where reserves are shrinking after a century as the world’s top producer, the continent boosted output by 68% since 2008, more than any other region, according to researcher GFMS, a unit of Thomson Reuters Corp. That’s paid off for some investors, with Randgold outperforming rivals as gold prices dropped.

The expansion was fuelled by new mines in countries like Burkina Faso, Ivory Coast and Egypt, which all saw regimes change in the past five years. Many projects tapped rich gold deposits and used new technologies that unearth metal more cheaply than older mines forced to dig deeper or settle for lower-grade ore. The reduced costs allowed newer ventures to remain profitable even as bullion prices tumbled to a five-year low.

More risk

“Mines in Africa need to have better geologic endowments to offset the extra costs and risks” associated with investing in the region, said Stephen Land, who manages $1.4 billion at Franklin Templeton Companies LLC in San Mateo, California, including the Gold and Precious Metals Fund. “Luckily for Africa, the continent hosts some of the world’s best ore bodies.”

Some of the world’s biggest producers have shunned Africa to focus on safer places like the U.S., Canada and Australia. Vancouver-based Goldcorp Inc., the world’s fifth-largest producer, avoids politically risky areas to focus on eight operations in the Americas. Toronto-based Barrick Gold Corp., the world’s biggest producer, spun off its African mines as a new company in 2010. Since then, the former unit outperformed Barrick shares.

Rising output

Jersey, Channel Islands-based Randgold, which owns mines only in Africa, has boosted gold output by 159% since 2010 to 1.15 million ounces in 2014, weathering a civil war in Ivory Coast, a coup and al-Qaeda uprising in Mali, and more than a decade of regional rebellions in the Democratic Republic of Congo.

“We’ve lived through them all,” Bristow said by telephone from Randgold’s Kibali mine in northeast DRC. “We’ve never—touch wood—had to stop operations.”

Investors rewarded Randgold for its improving production profile. While the shares are down from a record reached in 2012, they are double what they were at the end of 2007, outperforming the 14 other companies in the Bloomberg Intelligence Senior Gold Valuation Peer Group, which tumbled 72% over the same period.

Mine expansion

Much of the African gold expansion was financed by mining companies during the decade-long bull market that sent prices to a record $1,921.17 an ounce in 2011. Even with bullion down 40% since then, most of those new, low-cost mines are still profitable.

Between 2006 and 2013, amid recurring conflicts in DRC, Randgold and AngloGold Ashanti Ltd. bought, developed and built Kibali, which has 11.6 million ounces of reserves. Today, the mine is a pillar of stability in the war-torn country, and produced 527,000 ounces in 2014 at an all-in cost of $588 an ounce. The industry average for big producers is about $954. Kibali’s owners expect the mine to remain productive for another 17 years.

For AngloGold Ashanti, the world’s No. 3 producer with mines from Argentina to Australia, its deposits in Africa generate more gold at lower cost than anywhere else. The company’s second-quarter output in Ghana, Guinea, Mali, Tanzania and DRC was 689,000 ounces at an average cost of $844 an ounce, 28 percent below the spot price. Centamin Plc has doubled output at its Sukari mine in Egypt over the past four years, even with the 2011 Arab Spring that led to the ouster of President Hosni Mubarak.

Faster growth

Annual production from the DRC and Burkina Faso jumped more than fivefold since 2008, while Ivory Coast output has tripled, GFMS data show. Egypt, which produced no gold as recently as 2009, mined 11.7 metric tons last year.

Excluding South Africa, output from the continent grew to 424.1 tons in 2014 from 252.4 in 2008. All of Africa now accounts for about 14% of global supply at 587.9 tons, more than Canada and the U.S. combined, according to the GFMS data. Bloomberg competes with Thomson Reuters in selling financial and legal information and trading systems.

The laggard remains South Africa, which went from the world’s top producer in 2007 and is now No. 6. Ore quality has eroded over decades, while labour costs more than doubled since 2001.

“The South African industry is where the problem is,” not the rest of the continent, said Jeremy Wrathall, head of global natural resources at Investec Plc, a Johannesburg-based bank. “Investors tend to categorise the two together. It’s been tarnished by the South African view, but that’s an incorrect view. Mining in Africa has lots of potential.”



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