Contractor woes for Randgold

Bad news struck the Randgold Resources (GOLD-Q, RRS-L) camp in Mali, as it was forced to dump an important contractor, putting the completion date of a hard-rock crusher at its Loulo mine in doubt.

In a press release issued on Friday, Jan. 6, Randgold says the company contracted to construct the crusher, MDM Ferroman, has defaulted on its contract, and that operations will be taken over by Randgold’s capital projects team.

MDM owes Randgold’s 80%-owned subsidiary, Societe des Mines des Loulo (Somilo) an undisclosed amount of money, and while it says it will try to retrieve the funds, it warns that an increase in costs could ensue.

Victor Flores, an analyst with HSBC Securities in New York, says that while the news isn’t good, he doesn’t expect it to have a damaging effect on Randgold’s operations or share price.

In New York on Friday, Jan. 6, the company’s shares were relatively stable at US$17.57 – off 0.4% or 7 on volume of roughly 500,000 shares.

Flores estimates the ordeal will cost Randgold somewhere in the ballpark of US$10 million – a number he says the company has the financial resources to handle.

On the production side – the Loulo mine is currently producing gold from soft rock and had planned to have the hard-rock crusher completed by Dec. 16 – Flores says the company has enough soft rock stockpiled to carry production through into April. He says that should give the company enough of a cushion to complete the crusher.

“It isn’t good news, but at the same time it’s not a disaster either,” Flores says. “The company has the technical skills and the financial resources to complete the crusher and in the meantime the plant is producing gold.”

Flores doesn’t hold shares in Randgold, but HSBC has had an investment banking relationship with Randgold in the last 12 months.

Vancouver-based Nevsun Resources (NSU-T, NSU-X) is another company operating in Mali that is subcontracting out to MDM. While not the only factor, MDM’s financial woes and problems with suppliers have fed delays at Nevsun’s Tabakoto mine. The company now says full commercial production is slated for the first quarter 2006 – instead of the original guidance of October 2005 – and that capital expenditure is up to US$63 million from the original US$40.

Judy Baker, vice-president of business development and investor relations at Nevsun says the company has been paying suppliers directly for the last year, and has been decreasing the scope of MDM’s work for Nevsun since September 2005.

Randgold’s press release says Somilo knew since the middle of 2005 that MDM was in financial trouble, and may not be able to complete the Loulo project.

Somilo provided additional financing for MDM and negotiated with its creditors on its behalf. But Somilo then learned that the delivery of crushers had been cancelled by the supplier because of non-payment by MDM. Somilo stepped in, took over the contract and paid the supplier directly.

The crushers are currently being shipped to the site in the hope of preventing further delays.

Randgold says MDM is still working on-site and is obliged under its contract to co-operate and assist with an orderly hand-over. Somilo has called in all of MDM’s various securities.

Randgold Resources chief executive Mark Bristow said in the release he would update the market on new schedules and new completion dates over the next few weeks.

“At this stage we do not believe that this development should materially impact on our operational plans for 2006, but there will probably be additional costs if MDM are unable to repay their debt,” Bristow said. “In the meantime, should it become necessary, Somilo has made contingency plans to continue running the plant on soft and semi-soft ore until the hard rock circuit has been completed.”