An adventurous opportunity.
In Frederick Forsyth's 1974 novel The Dogs of War, mining tycoon Sir James Manson sends a team of mercenaries to stage a coup d'état in the fictional African country of Zangara, so as to get cheap access to mineral deposits.
Rather less colourfully and decidedly more ethically, armchair investors can now get their hands on cheap gold reserves, thanks to a coup in the West African state of Mali. That's because Randgold Resources (LSE: RRS), the £5bn FTSE 100 gold miner, has substantial operations in the country, which experienced a coup at the end of last month.
Its shares have since fallen 20%. That creates a buying opportunity for brave investors – but with the political outcome possibly no more predictable than the ending of a Frederick Forsyth novel, it's a highly speculative one.
The company
Randgold operates in the gold belt of west and central Africa. It has three operating mines in Mali and one in the Ivory Coast. A fifth mine in the Democratic Republic of Congo is scheduled to commence operations in 2013.
The company has enjoyed rapid growth. In 2011, a 60% rise in production to nearly 700,000 ounces of gold powered a doubling of revenues (helped by stronger gold prices) and a tripling of pre-tax profit to $485m.
Next year the company is estimating production of between 825,000 and 865,000 ounces. It is targeting a reduction on cash costs of production from $716/oz in 2011 to $650/oz in 2012 and $500-$550/oz over the next five years.
It has aggressive expansion plans with $660m capex spend planned for 2012, and it has nearly $500m net cash in the bank.
The coup
About two thirds of Randgold's production comes from Mali. It is landlocked country which has enjoyed democratic government for the last twenty years and is seen by Western agencies as a model for economic development in Africa.
The economy depends on cotton, which represents 80% of its exports. Most of that goes to China, and Chinese companies have invested into the sector.
In the north of the country – remote from Randgold's mines in western and southern Mali – the army has been fighting a low level insurgency by nomadic Tuareg tribesmen who want a separate state. The Tuaregs acted as mercenaries for Colonel Gaddafi in neighbouring Libya, and his demise has left them in control of heavy weapons.
The bloodless coup was ostensibly by junior officers frustrated by having insufficient arms to fight the rebels. They deposed the president and have said they will manage a transition back to democracy.
Unfortunately the coup has backfired, as the Tuaregs took advantage of the disarray to seize the strategic and ancient city of Timbuktu, which gives them effective control over the north. And Mali's neighbours have acted swiftly to impose sanctions on the country, calling for the coup leaders to step down. This week they closed its borders and froze its account at the regional Central Bank.
Panicked Malians have been queuing at petrol pumps, as the country depends on imports for all its fuel. They probably dream of living in a developed economy where such things are unheard of....
Randgold's most recent announcement said that its operations were unaffected, but that was before the sanctions which must surely bring the country to its knees. A benign interpretation would be that sanctions swiftly lead to restoration of a democratically elected government acceptable to the country's neighbours.
The catch
I'm quite keen on gold miners. When it comes to the metal itself, I can't judge between the bulls and the bears. But I buy into the long-term prospects, and see miners as a relatively safe long-term play.
So the opportunity to buy a FTSE 100 miner at a 20% discount is appealing. Sure, Randgold's production in Mali could be hit this year. That would knock back its earning and valuation for a time. But the long-term economics of miners is based on their reserves, the price of the commodity, and the cost of extraction.
So where's the catch? Firstly, Randgold's valuation was somewhat toppy before the coup. At 5,213p it's now on a historic P/E of 20, but that's well below the range it has traded on, and drops to 13 on prospective earnings.
Secondly, to borrow Donald Rumsfeld's phrase, there are unknown unknowns. When Tesco's (LSE: TSCO) price drops 20% we can mostly take a view about what its prospects are, though we might disagree. But few UK investors – me included – have much of a handle on how African politics might play out. So this is definitely not an investment for widows and orphans.
Ideally in this situation I'd like to see directors hoovering up share. So far a couple of non-execs have bought £121,000s worth, which doesn't say much.
So I've made a little speculative investment, and I'm watching closely.
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> Tony has shares in Randgold Resources and Tesco. The Motley Fool owns shares in Tesco.
