By Ted Black*
In this article, the first of two, we link the ancient Greek storyteller Aesop with Randgold Resources and South Africa. The aim is to see what it tells us about doing business in volatile Third World countries often run by governments bent on wealth re-distribution, not wealth creation. Rather like ours.
One of Aesop’s stories was about a dying farmer and his sons. Concerned they were more interested in wine, women, song, and dance than work, he called them to his deathbed to focus their minds. He did it by telling them there was hidden treasure buried on the farm.
They thought he was talking of gold and set to work as soon as he slipped his moorings. They duly dug up the whole estate. Finding nothing, they cursed him loudly thinking he had tricked them. Then crops suddenly sprung to life giving them a rich harvest. That’s when they understood what the old man had meant.
Randgold Resources led by Mark Bristow thinks a similar way. Exploration drives it because there are two types of gold that build the value of the firm (VOF). The one type is above ground and a more important one is below. It is the future “opportunity” waiting to be maximised.
RRL’s market cap is investors’ response to it and it arises from a CEO and his team asking themselves two questions:
- “What do we want people to think and say about us?”
- “For what results do we want to be most highly valued?”
Bristow’s team focuses on one, big, bold idea. It is to build a “Gold Medal”, world-class gold mining business in Africa. Judging by some of Bristow’s media quotes, they haven’t won it yet but seem well on the way.
Let’s see why he might think that and then what South Africa (Pty) Ltd. can learn from the way his team does things. First, using a ROAM lens, we compare RRL’s performance with a number of other gold producers. Some of whom are far bigger.
The first chart is a snapshot of average performance since 2011. It compares the first measure in the ROAM equation – the sales productivity of the asset base (Asset Turnover – ATO) with Cash EBIT return on assets managed (ROAM).
The gold mining industry, with high capital intensity, has very low ATOs and RRL has one of the lowest even though it has third highest ROAM. Anglogold Ashanti leads the pack and the next chart compares it with the rest.
While this sample group shows an upward trend in 2015, RRL’s is still falling to below average.
The “Average-Best” gap (A-B Gap) is a measure of potential. Without exception, it exists in abundance everywhere you look in every institution and firm. There is no exception to the rule. In this example, the A-B Gap is 71%, and between “Best” and “Worst” gold miners it is 200%.
In the world of professional sport, the gap between “average” and “best” performance is tiny. Look at the Olympic Games results for proof of that. In the world of work though, it is huge. It can run into hundreds of percent when you compare firms, similar business units within them, right down to managers, teams and individuals.
The next most important measure of management for creating a “Buffett Moat” is Cost of Goods Sold (COGS). Never measure costs in isolation. Always look at a trended result. This chart compares COGS as a percent of sales.
Though its costs have trended up, RRL has consistently led the field but not always with the next ROAM measure driven by COGS – the Cash EBIT Return on Sales (ROS%).
On average over the five years, Barrick comes out tops with RRL close behind. However, with after tax Cash ROS% they led every year as the next chart shows.
There is a strong emphasis on profitability in RRL, not just costs. So the next chart we look at is the after tax cash return on equity.
RRL comes out as almost worst of the bunch in 2015. Goldcorp still held onto that spot by a hair with AngloGold Ashanti leading by far and it takes us to the last profit measure – economic profit.
Also a cash measure, it is the profit after paying interest, tax and the shareholder’s “opportunity cost”. Mark Bristow talks of a “20%” hurdle when evaluating projects, so let’s apply that to equity and see what it tells us.
After deducting a 20% cost-of-equity charge over a five year period, only three of the firms generated a cumulative economic profit. RRL lost six hundred million US dollars and the other four companies combined lost more than twenty billion. Anglogold generated US$ 4 billion.
Yet, as you’ll see, RRL comes out tops in relative Market Cap value. Why?
We’ll look at factors that might explain it next time.
- Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at [email protected].