How to make it as a gold miner in Africa

If you ask Mark Bristow what it takes to build a successful gold mining company in Africa, he’ll start by telling you what it doesn’t take.

“These days, many people start companies, particularly gold companies, because the market feels right. And that kind of company I believe will only flourish as long as the gold price keeps going – but no longer.”

As the chief executive officer of London-based Randgold Resources (RRS-L, GOLD-Q), Bristow has some authority on the matter. He has helped the company build four operating gold mines in two countries on the continent, making it the single best-performing FTSE 100 Index company over the past five and 10 years, with a 4,393% return since 2000.

“If you want to invest in a real business,” Bristow says, “you have to ask whether it has the strategy and the substance to stay the course, and therefore will be sustainably profitable regardless of market whims.”

Speaking at the Mines and Money conference here, Bristow explains it is more than possible to build a world-class business in a region that is regarded as risky. Even though Africa can be a tough place to do business in the best of times, so is any other emerging market, Bristow argues. And in recent times, probably the same goes for first-world countries.

The South African geologist notes that while Africa is extremely rich in mineral wealth, it remains poor in real businesses. Such commerce as it has known in the past has often been exploitative, run by less-than-scrupulous entrepreneurs in cahoots with despotic rulers.

“Poverty, and it’s something I’ll always underscore, remains Africa’s biggest problem. It is a post-colonial oppression almost as iniquitous as slavery, and anyone proposing a business there has to understand that the private sector must make a tangible contribution to its easing.”

A mining company has a responsibility not only to its owners, the shareholders, but to a wider group of interested parties as well, commonly referred to as stakeholders. Bristow stresses all interested parties need to benefit from the company’s value creation, as all of them, to one extent or another, share the risk.

At Randgold’s West African operations, he calculates that on average 52% of profits from a 3-million-oz. gold mine will go to the company, while 48% will go to various stakeholders and the host country’s government. “This is something that is not often presented properly to governments,” Bristow says, and can create a resentful and dangerous environment if not properly communicated. This is assuming that the business is profitable. If it is not, the host government will end up with nothing, or worse.

In a recent interview with the Guardian, a typically blunt Bristow sharply criticized those of his competitors he saw as only being in it for the short-term. “They do these presentations showing pictures of snotty-nosed African children, giving them clinics and schools. It’s a few hundred thousand dollars a year, maybe a million. But we’ve paid the Mali government eight hundred million dollars in taxes in seven years – you can buy a lot of schools and roads for that money.”

As in the past, citizens of African countries remain at risk from selfish speculators, foreign and domestic. The Democratic Republic of the Congo, for example, has suffered from a number of resource companies who represented themselves as long-term investors, Bristow objects. But they took windfall profits and sold their assets long before the host country could benefit from their development.

“It’s important to appreciate that a gold project only starts paying dividends and taxes once a substantial part of its capital has been repaid. Many highly talented projects never reach that stage, so it’s understandable that disappointed and disillusioned governments are tempted to change the rules so they can cash in earlier, or even take the asset back. This is a very real risk which the industry has created for itself through its frequently exploitative behaviour, forgetting that exploitation can work both ways.”

Operating in Africa, or indeed in any emerging region, according to Bristow, requires a real partnership between the company, the government and the community.

If you’re looking for gold deposits of significant size and quality in Africa, the team at Randgold has come to believe there are only three primary geological regions capable of delivering them. They are the Birimian belts of West Africa, the Congo craton in Central Africa – extending from Tanzania through to the Central African Republic – and the largely mature South African goldfields, in the form of the Witswatersrand.

Randgold has developed an internal rating system for African countries based on decades of experience there, taking into account geological prospectivity, political stability, economic and fiscal regimes and infrastructure. Topping the list with an “A” rating are Mali, Tanzania, Ivory Coast, Burkina Faso and Senegal.

No matter how carefully you have assessed the situation, however, a mining company committed to a long-term strategy is still assuming significant risk in developing and operating mines in Africa, Bristow warns. “We’re building businesses in remote areas which do not have sophisticated political or economic platforms. We have to reconcile the sometimes conflicting demands of our stakeholders and we need the resources and skills to ride the cycles and absorb the various stress points, while still remaining profitable.”

According to Bristow, Randgold manages its capital more conservatively than its rivals, working on an assumed price of US$800 per oz. This forces it to be ultra-efficient, and underpins the company’s extraordinary profitability through good times and bad. Size and asset quality are also key, enabling the company to provide adequate returns and meet the expectations of shareholders and stakeholders.

In addition, “you need the ability to manage in a foreign culture, which is why strong local partnerships and good relations with local and regional governments and communities are of paramount importance.”

Central to such relations are transparency and good communication, Bristow cautions.

Bristow also attributes Randgold’s success to its grassroots exploration. All four of its operating mines come from grassroots discoveries, including the 7.5-million-oz. Morila deposit in southern Mali; the 7-million-oz. Yalea deposit and the 5-million-oz. Gounkoto deposit, both in western Mali; the 4-million-oz. Tongon deposit in Côte d’Ivoire; and the 3-million-oz. Massawa deposit in eastern Senegal.

Randgold also has an extensive portfolio of organic growth prospects, which it says is replenished by intensive exploration programs in Burkina Faso, Côte d’Ivoire, the Democratic Republic of the Congo, Mali and Senegal.

“Exploration is at the heart of mining. I’ve always said exploration is to a gold company what research and development is to a pharmaceutical business. It is through exploration that we have found the deposits where we currently operate.”

Randgold expects to produce 700,000 oz. gold this year, up from 487,000 in 2010.