Opportunity in West Africa: High Grade Deposits at Low Prices

Prior to PDAC, there were two takeover bids in West Africa initiated by two separate mid-tier producers. On February 29, Australian miner Perseus (PRU.TO) announced a friendly takeover via a UK scheme of arrangement deal in an attempt to acquire Amara Mining PLC. Then, four days later, Endeavour Mining (EDV.TO) announced a court approved plan of arrangement to acquire True Gold (TGM.V).
 
As it becomes increasingly apparent that the bottom in the sector has been reached, this could be the beginning of a consolidation phase in West Africa. Upon speaking with the management of both major and mid-tier West African miners (at PDAC), I gathered that they realized that due to the bargain basement priced deposits in West Africa, rivals will be snapping them up posthaste.

Since last December, I have accumulated shares in five West African miners that I believe to have the least risk in what is perceived to be a high-risk jurisdiction.

Mid-tier Growth Oriented Producers (Most likely to acquire)

1. Endeavour Mining (EDV.TO): This company is currently my largest holding as I feel they are in the process of creating the next West African major. If the True Gold deal is finalized in April, Endeavour will have a market cap of roughly $1 billion with $300 million in cash, including La Mancha’s future $61.5 million investment and the $20 million from the sale of the Youga mine. The company’s debt (which has been paid down $25 million per quarter since Q3 2015) is now down to a very manageable $144 million. With the addition of Karma they will be producing over 700k oz. per year at an AISC of $900 per oz. Furthermore, if they build Hounde by 2018, it would add another 200k oz per year.
   Compare Endeavour to Randgold, who now produces 1.2 million oz per year at a similar cost base yet has an $8.6 billion market cap!
2. Semafo (SMF.TO): I was fortunate enough to ride this Burkina Faso-based company during the last cycle (from the 2008 bottom) for strong profits. Early last year they acquired Orbis Gold, who had a number of strong, high grade projects in Burkina Faso. One such project, Natougou, could be a game changer. The deposit boasts open pit reserves of 9.6 million tonnes at a grade of 4.15 g/t AU for 1,276,000 oz of gold. Moreover, this is a young property yet to be fully explored. Due to an average head grade of 5.72 g/pt, Natougou could add annual production of more than 226k ounces at an AISC of only $374/oz. The first gold pour is expected by Q2 2018 with full steady-state production by 2019.
   Natougou would double Semafo’s current production and lower their AISC from the already industry low of $645 per oz to a $500 per oz range. Its current market cap is $1.1 billion US.

Mid Tier Producers I Believe Could Be Acquired Soon

1. Golden Star Resources (GSR.TO):  This former high cost producer in Ghana with the largest land package in the Ashanti Gold Belt has become a great turnaround story. They have just completed a streaming deal with Royal Gold to fund the underground high-grade development of their Wassa and Prestea mines. The deal is a $130 million stream financing with RGLD and a $20 million term loan. Details of the loan are here.
   GSR’s just released Q4 is very impressive as the company has lowered its costs considerably to a five year low with production of over 221k oz. in 2015. An ASIC below $900/oz makes their long-term debt of $92 million quite manageable. GSR remains a very strong takeover candidate, as majors in the area (such as Newmont) need to replace mined ounces. Current market cap is $126 million US.
2. Teranga Gold (TGZ.TO): This company boasts a substantial land package with the only gold mine and mill in Senegal. In 2015, the 200Koz per year mine had a 13-year mine life with an open pit head grade of 1.79 g/pt. The AISC including taxes and a $73 per oz. Franco Nevada owned royalty is at $1000 per oz. Sustaining capex on the mine this year is $26 million, $9 million in 2017, and only $8 million in 2018.
   They have a pro forma cash balance of $57 million with current debt of only $15 million (drawn from a $30 million credit facility). Iamgold and Randgold have operations right next door and are searching for cheap replacement ounces. Current market cap is $190 million US.

The Optionality Play I Believe Will Be Acquired Within The Next Two Years.

Orezone Resources (ORE.V): This is a very attractive option on the gold price if you are of the opinion, as I am, that the gold price will rise to a solid $1350 floor   this year. CEO Ron Little and his team previously discovered and proved up a property . in Burkina Faso called Essakane and sold it to Iamgold in December of 2008.

They are attempting to repeat this feat with a very large staged development   play that has 4.56 Moz M&I + 0.72 Moz Inferred. That figure includes a +2 Moz oxide resource within 50m of surface that is heap leachable and boasts strong grade and recovery potential.

Little has a keen understanding of the optionality issue at play and has done an excellent job of keeping spending to a minimum while maintaining a very reasonable share float of under 127 million shares fully diluted. The mining permit is expected in early Q2. Market cap is $56 million US. Prominent mining CEO and financier Ross Beatty acquired a stake in 2015.

If you’re not risk averse with your entire precious metal miner portfolio, then I believe these companies should be considered and accumulated on weakness and held until they are either bought out by a major or to maturity at the top of the next cycle.

David Erfle; Contributor to Kitco News 
newsfeedback@kitco.com