It's a long one but well worth the read.
gold-eagle.com
SOUTH AFRICAN MINING COMPANY
RANDGOLD EXPLORATION (RANGY)
Company review by "POLARBEAR"
Symbol - U.S. Nasdaq: RANGY and JSE: RANGOLD
Float: 41 million shares
Recent Price: US$ 1.25
Current Market Capitalization: U.S. $51 million
Current Asset Valuation: Over U.S. $200 million
For many investors, thoughts of South African gold mining companies conjure up images of aging mines with depleted ore reserves, rigid management, and high production costs. Nothing could be further from the truth for the "new" Randgold & Exploration. The shareholder takeover three years ago has produced rapidly expanding reserves, flexible and innovative management, a diverse portfolio of highly valuable assets, and rapidly falling production costs.
The number one problem with South African deep-level mining is that of cost. When crews must travel as deep as 8,200 feet to reach the rock faces, they actually end up working as little as 3 hours in an 8 1/2-hour shift. Its not hard to see that this type of mining will have a difficult time competing with low cost surface mining, where production costs may approach half that of deep mining. Randgold has addressed this problem head-on by successfully transforming itself from a manager of old, deep-level mines into a modern surface gold mining company. As you will see below, the new Randgold and Exploration that has been created over the past three years is an exciting company, grossly undervalued, with an amazing collection of assets.
Before taking an in-depth look at Randgold and Exploration's two cornerstone holdings, RANDGOLD RESOURCES, and CROWN CONSOLIDATED, lets first have a look at the highlights. These assets would all be great to own individually, however, keep in mind the total package of assets owned by RANGY has a current total market capitalization of only $51 million!
THE RANDGOLD AND EXPLORATION PORTFOLIO
(Author Note: Mr. John Disney, longtime S.A. resident and fellow Randgold shareholder, has graciously written the following two sections, overviewing Durban Deep and Harmony Gold Mining. My thanks to John for all the assistance.)
1) 12% ownership of DURBAN DEEP (DROOY)
First, Randgold retains approximately 12% of Durban Roodeport Deep's ordinary shares. If you are convinced the price of gold is about to rocket, then you definitely want some exposure to this super-leveraged play. With roughly 40 million shares outstanding, and at least 20 million ounces of attributable ounces, Durban is really set to move if the price of gold improves.
Durban Roodeport Deep is now an independent mining company. It had been under the management of Randgold from 1994 to 1997, during which time it acquired some neighboring properties. In 1997, a much more ambitious expansion was implemented via acquisition of the total share capital of both Buffelsfontein and Blyvooruitzicht (Buffles and Blyvoor). Service agreements with Randgold and all three mines ceased in 1997, and Durban Deep is now an independent company whose subsidiaries include Blyvoor, Buffels, Doornfontein, Rand Lease, Roodepoort, and West Witwatersrand. The group has also acquired mineral rights to the south of Johannesburg that could form the basis for a new deep level mine. Blyvoor had already increased its own resource base by merging with Doornfontein in 1995 and buying the Western deep tribute area in 1996. The group made progress in 1997 as cash costs were reduced and gold production was increased.
The future of the group will depend on its ability to cut costs to enable profitability at low gold prices and generate cash to fund the investments needed to open up the substantial gold reserves that it has available.
Market Valuation of Durban Deep's Gold Reserves -
Here is a classic-case of gross under-valuation by the markets. Unbelievably, Durban Deep has only 39 million shares outstanding, but gold reserves and resources of 20 million oz. That's about 1/2 oz per share. To put this into proper perspective, let's compare Durban Deep's market valuation of gold reserves to that of the recognized leader of North-American gold producers.
Barrick Gold (ABX) is considered by many as the bellwether, or proxy for the entire North-American gold industry. Consequently, Barrick Gold will serve objectively as the 'yardstick.' Barrick Gold has 75 million oz of gold reserve resources - with a gargantuan 373 million shares outstanding. This is equivalent to a skimpy 1/5th gold oz per share. Thus, a case can EASILY be made that one share of Durban Deep SHOULD be worth 2.5 times as much as a Barrick Gold share - which most recently traded at $20.
Therefore, it logically follows that Durban Deep SHOULD BE A $50 STOCK (2.5 times $20). However, the uninformed market is affording Durban Deep an unreasonable under-valuation of a paltry $2 and change per share. Talk about MARKET IMBALANCES.
2) 6% ownership of HARMONY GOLD MINING (HGMCY)
Harmony was first formed in 1950. When it was acquired by Randgold in 1995, it had suffered 6 years of declining production. It was then reorganized. First it bought the Unisel mine in 1997. Then it bought the Lydenberg Exploration (Lydex.). Next it bought all of Vermuelenskrall Noord with its mineral rights...a crazy name, but eminently significant because of its significant resource base, and the contiguity it demonstrates between Harmony and Unisel. Later came the purchase of Saiiplaas No.3 shaft from Freegold. Finally in late 1997 it added Consolidated Modderfontein and Grootvlei.
These mergers and acquisitions increased Harmony's gold reserves from 20 million oz two years ago to 70 million oz today. Its gold production rate has increased from 680,000 oz in 1997 to an expected 850,000 oz this year -- and is targeted for one million oz in the year 2000. Gentlemen, that's world-class gold production.
Harmony plans to reduce cash costs from their old level of about $330/oz to 280$/oz and are almost there now. The acquisition of Lydex Exploration has also given Harmony added mineral rights inside and out side the Republic of South Africa - with exploration permits at Ajuman in Ghana, and Kisoro in Uganda. Moreover, Harmony has obtained permission from the SARB to market 1/3 of its own gold production directly. It has also commissioned its own independent gold refinery. It plans to commence a jewelry factory.
Harmony has 49.04 million shares outstanding. And in light of its gold reserves/resources of 70 million oz., this makes every share worth 70/49.04... or equivalent to 1.4 oz of gold per share. In sharp contrast Barrick Gold has ONLY 76 million oz of gold reserves and resources vis-a-vis 373 million shares outstanding, producing a ratio of 76/373, or A MISERELY 0.2 oz. of gold per share. Now consider the market's inequity in valuating the shares of the two companies. Barrick Gold sells for roughly $20 a share, while Harmony with about SEVEN TIMES as much gold reserves per share is only afforded a market price of $3.50. Based upon gold reserves per share, and using Barrick Gold's market valuation as the 'yardstick,' Harmony should command a market price of $140 per share ($20X7).
Consequently, it might be logically and reasonably be stated that Harmony shares are SELLING AT A DISCOUNT OF 97.5% --- based upon gold reserves per share, and using Barrick Gold as the 'yardstick.'
3) $85 MILLION MINERAL RIGHTS PACKAGE, (100% RANGY)
Three years ago when shareholders wrestled control of Randgold & Exploration (RANGY) from an unpopular management, the market capitalization of RANGY was less than the cash of the business. When the new RANGY leadership assumed control, they took over the management of four marginal mines- Durban Deep, Harmony, Blyvooruitzicht and East Rand Proprietary, AND A HIGHLY VALUABLE PORTFOLIO OF MINERAL RIGHTS IN AFRICA. As the Parent Manager, Randgold & Exploration has overseen an amazing amount of restructuring during the past three years. In essence, all of the gold mining companies previously managed by RANGY have been either spun-off into independent companies, merged, or sold. RANGY still owns, as mentioned above, 12% of Durban and 6% of Harmony, but no longer has any direct involvement in the management of these companies. In addition to the brilliant execution of all these mergers, acquisitions, buyouts, and sell-offs, which have no doubt saved most from extinction, RANGY is left with a very valuable package of mineral rights, which ALONE is valued at over $2 per share. RANGY recently sold off a portion of its unlisted mineral rights, raising $12 million in cash. However, those assets were NON-gold. They were mineral rights for granite, iron ore and sea diamonds.
RANGY plans to retain the more lucrative mineral rights at South Wits, but intends to sell the remaining rights to a listed company in exchange for shares. According to independent advisors, the remaining mineral rights are valued at approximately $85 million. This estimate does NOT include the South Wits rights nor the M-1 Diamond rights. Whether this remaining package of mineral rights is sold or spun-off for shares in another listed company, the bottom-line will be an added value-bonus to shareholders of RANGY - WHICH IS NOT TODAY REFLECTED IN THE MARKET PRICE OF RANGY SHARES.
4) MARSFONTEIN FARM: IN SITU VALUE OF $107 MILLION
Randgold & Exploration is involved in a joint venture with SouthernEra on the Marsfontein Farm - which is a DIAMOND RESOURCE PROPERTY. Randgold holds a 35% interest in this project. However, SouthernEra is funding ALL expenses for performing feasibility studies to be shared with Randgold. Advanced bulk sampling and delineation drilling, as well as site development and feasibility work continue on the M-1 pipe.
The M-1 kimberlite has a drilled inferred resource of 685,000 tonnes to a depth of 100 meters. The average grade is 335 carats per hundred tonnes, and due to the very high number of large stones and exceptional color, the value per carat has averaged out to over $142 per carat. This stunning find gives the M-1 pipe one of the highest reported values per tonne of any known primary kimberlite in the world. The indicated in-situ value of the M-1 is over $450 per tonne. RANDGOLD'S 35% OF THIS DIAMOND DISCOVERY AMOUNTS TO AN IN-SITU VALUE OF OVER $107 MILLION. With Randgold's stock float of only 41 million shares, this asset alone makes RANGY extremely undervalued: THE VALUE OF THIS ASSET ALONE IS FAR GREATER THAN THE TOTAL CURRENT MARKET VALUE OF RANDGOLD. SouthernEra has already spent over $180 million on the Klipspringer project, of which the M-1 is the real gem.
5) NAVACHAB GOLD MINE IN NAIBIA (10% RANGY)
6) CROWN CONSOLIDATED GOLD RECOVERIES (50.6% RANGY)
Crown Consolidated is a newly listed (JSE) gold dump retreatment company in which RANGY owns 50.6%. Crown recently completed its maiden quarter with a strategy to combine the best practices out of the components Knights and RMP Properties. Crown is incorporating new technology for the pretreatment of dump material. This includes the use of spirals and cyclones that can concentrate 70% of the gold into 15% of the mass, which will dramatically reduce treatment costs. This year's average production cost is estimated at $275 an ounce, but, using the new preconcentration procedure, Crown is aiming for costs of $53 an ounce! Yes, fifty-three dollars an ounce. Crown's initial gold production is approximately 150,000 oz a year - with major increases forecasted for the future. Crown is also investigating opportunities for expanding the company's reserve base. It already has reserves of 126-million tons, containing 2.5-million ounces of gold, resources of a further 141-million tons with 1.5-million ounces of gold and tailings sites holding 1.4-million ounces.
Crown's opportunity for expansion is indeed promising. Firstly, it can develop uneconomic reserves within the compass of its current operations, located in the central Witwatersrand region. In addition, the company may decide to mine reserves in the West Rand, owned by Durban Roodepoort Deep. Further down the road, Crown is eyeing international expansion, firstly on the back of Randgold Resources which could provide an introduction to dump retreatment in gold-producing countries like Ghana or Mali, and later into India, South America, and the Commonwealth of Independent States. Also, reserves in Australia could be targeted where Continental Goldfields - which has a 17% stake in Crown - wields some influence.
With outrageously low production costs coming down the pike, substantial current production, $11 million in cash, 5 million ounces of gold, and a huge potential for growth, it is indeed insane that this company is selling for a total market capitalization of ONLY $12 million. Blame it on the unglamorous business of waste reclamation, blame it on a low gold price, but just like all the other assets of RANGY, this one will have a very positive impact on RANGY's bottom-line.
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Now if the combination of ALL these assets hasn't sparked your interest in doing your own due diligence on this company, wait until you see the final, and possibly the most lucrative asset in the entire RANGY portfolio -- the newly created offshore exploration arm of Randgold & Exploration: RANDGOLD RESOURCES (RR). Randgold & Exploration has continued to increase its position in RANDGOLD RESOURCES, by supplying additional cash to further exploration and existing mine upgrades. It's noteworthy to mention that this cash assistance will be repaid to RANGY with additional RR shares.
7) RANDGOLD RESOURCES (RR), 57.3% owned by RANGY
While other South African companies have allowed themselves to wither on the vine, RR's geologists have been scouring the African continent, continuing to make very impressive additions to the total gold reserves of this new exploration company. RR has nearly 200 exploration targets, spread throughout Africa. RR geologists working in 22 permit areas in 7 countries have already amassed over 8 million attributable gold ounces, of which 86% are measured and indicated. On-going discoveries indicate this figure will be significantly increased again this quarter. It is conservatively estimated within the next two years RR will be producing nearly 500,000 ounces of gold at a very low production cost. RANGY management estimates a positive cash flow of $50-million a year with gold at $320 an ounce.
Here are some highlights of RANDGOLD RESOURCES:
* LOULO PROJECT, in Mali, is expected to produce 140,000 ounces per year at $225, commencing production towards the end of next year. The estimated life of the mine with current reserves is in excess of 10 years, and the Loulo board has committed exploration funds of US $1.2 million per year to discover additional resources.
GOLDEN RIDGE, Tanzania Randgold/Pangea JV. The feasibility study is progressing well and is on schedule to be completed in June 1998.
The previous resource calculation of 1.6 million ounces (all categories) will be updated following completion of the ongoing definition drilling as well as exploration drilling on the extensions of the known gold-bearing zones.
The current evaluation indicates that the development of the deposit is economically viable at current gold prices with production estimated at $200/oz. A type 2 pre-feasibility study for a 100,000-ounce a year opencast operation is well advanced.
*BURKINA FASO: 90 gold targets, with 3,500 square km concessions. Ten advanced targets are being evaluated as part of a rotary air blast drilling program.
*IVORY COAST: Three new concessions, with on-going trenching. At the Tongon project, trenching has confirmed the strike extent of the shear zone as well as the presence of multiple shears. Encouraging results have also been returned from three targets in the Odienne permit.
*GABON: Ongoing exploration at Ndojole, Knan, and Pintade.
*NYALIGONGO, MALI Type 2 pre-feasibility "well-advanced" for a 100,000 oz/year open cast operation.
*MORILA PROJECT in Mali: RANGY Chairman believes that this project could be the "real bonanza." Not only is it on a tar road readily serviced, it has yielded excellent results: wide rich strikes and easily extractable gold.
*SYAMA GOLD MINE (75% RR, 5% Mali Gov., 20% Intl. Finance Corp.) The Syama gold mine, which produced 194,000 oz in 1996, mostly under its previous owners, Broken Hill Proprietary Co. (BHP) of Australia, is currently producing at the rate of 135,000 oz/year while modifications are being made at the mine. RR is accelerating the phase-two expansion program to achieve a production rate of 270,000 oz/year, at a cash operating cost of not more than US$210/oz, by the December quarter of 1998. This will be some 6 months ahead of schedule and $5 million under budget.. RR is also preparing a bankable feasibility study for a heap leach project which will add 30,000 oz /year at only $110/oz. Syama gold resources are estimated at 5 million ounces and rising.
CONCLUSIONS
Traditionally, South African gold stocks have sold at lower market valuations than North-American and Australian gold mining stocks. However, low market values of the South African stocks mentioned above are outrageously ridiculous. Furthermore, based upon comparative fundamentals, these South African gold mining companies are very likely to become global gold players in the new millenium. In particular RANDGOLD & EXPLORATION is set to become a major global gold player within the next two years. Although there are many very appealing bargains among the battered and bloody gold stocks throughout the world, RANGY stands out as one of the finest. Its decimated share price mirrors that of other South African mining companies that are barely clinging to economic-life. This is clearly not the case with RANGY -- which strongly suggests the market does not know the facts and overwhelmingly good fundamentals behind RANGY.
Needless to say, a major increase in the price of gold - which may be just around the corner, would undoubtedly a very positive impact on the price if RANGY shares. But regardless of when this does indeed occur, RANGY is destined to grow:
IN RESERVES, IN PRODUCTION AND IN MARKET PRICE.
With significant gearing to the price of gold (leverage to you Americans) through Durban Deep and Harmony Gold Mining, on-going exploration and diversification throughout Africa, expanding gold reclamation through Crown Consolidated, rapidly growing reserves and production through Randgold Resources and falling production costs, RANDGOLD & EXPLORATION may be one of the best GOLD buys in the world.
All these assets, together with a massive discount to inherent value, including the unlisted mineral rights of $85 million, and in-situ diamonds valued at $107 million, make Randgold's current market price (total capitalization) of $51 million a screaming buy, and one that may not last for much longer at these ridiculously low levels.
In essence these are World-Class Gold Mining Producers
with elephant-sized reserves
selling for "pennies."
POLARBEAR
rangy@usa.net
March 16, 1998
As with all investments, do your own research, and make your own decisions. In the end it's your money on the line. I, not surprisingly, have a large stake in RANGY, as I believe in putting my money where my mouth is.
The following web sites should be of great help to you in researching whatever South African companies you find attractive. I consider all their great coverage of the South African mining industry invaluable.
Mr Metals
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