Canaccord sees upside at Randgold despite cutting earnings forecasts

Canaccord upgraded its rating on Randgold to 'buy' but cut its target price to 8,590p from 9,075p after being disappointed by recent second-quarter results and increased cost assumptions.

Not only were production and sales below expectations, but earnings disappointed after cash costs were higher than forecast.

In the company's defence, the poor performance reflected a 46-day downtime at the Tongon mill that knocked 30,000oz from full-year guidance plus the impact of ore complexity at Kibali.

Randgold said production was likely to be at the lower end of guided range of 1.25-1.30m oz of gold and total cash costs (TCC) after royalties also towards the top of the US$590-630-per-oz range.

Nevertheless, Canaccord said "it may be a challenge" to even meet the bottom of the production guidance range and the top of the cost range.

Canaccord analyst Nick Hatch calculated that production of 1.27m oz for the full year was most likely and increased his TCC estimate to $654/oz from US$621/oz.

As a result of the increased cost profile, he downgraded 2016's earnings per share estimate to 329c from 355c and for 2017 to 387c from 421c, but left dividend forecasts unchanged at 72c and 80c respectively.

"We note that the company did close Q2 with net cash of $270m and is generating healthy cashflow at the moment, so there may be the potential for higher dividend payouts."

Noting that Randgold shares peaked at an all-time high of 9,715p in July, after the Brexit vote, but have since fallen back by over 26% as the gold price has given up some of its post-Brexit gains, the analyst sees potential upside of around 20% to his target price.