Last year, Africa was
the region that witnessed the strongest growth in gold-mining operations. In
an exclusive interview with The Gold Report, Nana Sangmuah, managing director of research with
Toronto-based Clarus Securities, expects that trend
to continue and suggests some immediate smart investments in Ghana, Mali,
Liberia and the Democratic Republic of the Congo.
The Gold Report: Gold
consultancy GFMS, which is now owned by Thomson Reuters, recently published
its 2012 Gold Survey. GFMS predicts that before the end of 2012, the yellow
metal will likely reach above its all-time nominal high of $1,920/ounce (oz) in September 2011. The catalysts include inflation
concerns and sovereign debt problems in Europe, especially Spain. What are
your thoughts on these predictions and conclusions?
Nana Sangmuah: I agree with those
predictions and the drivers. One thing that has been missing from the gold
rally is inflation hedge demand. With the significant monetary easing that
has occurred to drive a global recovery, inflation is definitely going to be
an issue at some point. We haven't seen inflation trade come into gold
throughout these 10+ years. That's the strong headwind that is going to move
gold to another level.
TGR: The survey reported that mine production hit a record high in
2011, rising 2.8% year over year to reach 2,818 metric tons (mt). That marks the second straight year that gold
production reached a new all-time high. Does that mean the theory of peak
gold is dead?
NS: Not exactly. If you peel back the data over the past two years,
the greater part of this growth has come from mines digging into their
stockpiles and people revisiting old resources that previously were thought
not to be economic but at these price levels look economic. There have been
very few discoveries despite the fact that there's been quite a lot of money
spent on the exploration front. That rate of increase is not sustainable
going forward. And the bigger picture still looks grim because the last big
discovery of 5+ million ounces (Moz) is the
Aurelian discovery—the Fruta del Norte
deposit in Ecuador, which now belongs to Kinross Gold Corp. (K:TSX;
KGC:NYSE)—from early in the 2000s. It takes on average at least five
years to move from discovery into production, so we're looking at a situation
where the supply is not going to grow that much. If the investment demand is
sustainable going forward, basically there won't be enough ounces to feed
TGR: The GFMS survey also reported that new gold-mining operations
contributed 47 mt of new gold supply, while Africa
was the region that witnessed the strongest growth, increasing production by
51 tons (t) despite a 5 t drop in output from South Africa. Do you believe
Africa will continue to lead the way in worldwide gold production?
NS: Certainly. The ground is very favorable, and there are a lot of
projects that have only scratched the surface. Even in the more prolific
zones, which have seen a lot of dollars thrown at them, the concentration has
just been on open-pit, near-surface mining. In some of these greenstone
belts, you can trace mineralization down to more than 2.5 kilometers (km) at
depth. As people get more comfortable with the region's politics, more
dollars are going to move in, and certain grounds will be tested. The key is
political stability. As commodity prices go up, countries move their fiscal
But I think a lot of countries will smarten up and realize they can attract
more investments, which will ultimately generate more revenues to the
government if their current regimes are seen to be stable. The Asankrangwa Belt in Ghana is one example. This belt is as
old as the Ashanti Belt, but we have just recently seen action on it. So far,
within a period of less than three years, 10 Moz
have been delineated. Some people would think that certain districts are mature
and cannot be coming up with even more discoveries, but that is not true.
TGR: Mali's interim president said that he wouldn't hesitate to wage
"total relentless war" against the Tuareg
rebels who have seized much of northern Mali. Do his words make you less
bullish on all West African gold producers?
NS: He's trying to send a strong signal that he's all for maintaining
stability in the region. And the regional force, ECOWAS—Economic
Community of West African States—acted quickly to prevent this from blowing
up. A stabilizing force has made its dominance known in West Africa, which I
think is going to foster more stability and get people to be more comfortable
investing more dollars in the region. Access in general has not really been
impaired. The borders are open. People can focus on the day-to-day running of
businesses and mines. There's the potential for a few situations here and
there as they try to push the Tuaregs away. But the
Tuaregs' links with al-Qaeda are definitely going
to unify the international community against any issues. That means that this
is not going to drag on for long, and very soon we should see this issue
behind us. We've seen similar events before and people have hit the panic
button and sold off, but as the situations stabilize, valuations come back
strongly. So, I see this as a buying opportunity, and I'll be focusing on
assets. If these assets have not been impaired in any way fundamentally, they
should be bought at these levels.
TGR: Ghana is second only to South Africa in African gold production.
What are some of the companies operating in Ghana that are well positioned to
grow their gold production and see it translate to their share price?
NS: In this current environment, we should be watching the balance
sheets of companies to see whether they have enough capital to maintain their
growth strategies. One company that I think has a very strong balance sheet
Mining Ltd. (PRU:TSX; PRU:ASX), which has finished up
building a mine in Ghana and announced very strong Q112 results showing good
cost containment. Commissioning has gone well and it's in a ramp-up phase. I
think most of the risk is behind it. Perseus is on the cusp of generating a
lot of cash flow. That is going to help it bring its second asset, which is
not in Ghana, into production. Cast your eyes two years out and Perseus will
be producing around 450,000 oz, generating a lot of
cash flow that could be channeled into further growth opportunities or
shareholder dividends. Currently the resource is 9 Moz
and Perseus is spending quite a lot on exploration; about 200,000 meters (m)
are being drilled in West Africa. The likelihood of growing 9 Moz into 12 Moz is high. And
Perseus has had a very good success rate converting these ounces into
reserves, so we should see the production profiles also tip up along the way.
At these levels, with no finance hurdles ahead of it, being in a fully funded
position and just on the cusp of generating strong cash flows, Perseus is one
that investors should be watching.
TGR: Perseus boosted the resource at the Edikan
by 1.03 Moz in December 2011. Is it reasonable to
think that it could do that again by December 2012?
NS: It's doing about 200,000m of drilling this year; last year it
drilled about 250,000m split between both assets. The rate of resource growth
should be more significant because now it's switching focus from infill
drilling to regional targeted. That's where you see a lot more growth in the
resource. I'm quite optimistic that we should be seeing a lot of wider swings
in the resource growth going forward. And the company's picking up new
targets in and around the existing mine.
TGR: Ghana also has a number of smaller companies exploring for gold
deposits, some of which have had early success. Could you introduce our
readers to some of those companies?
NS: There are a lot of junior companies prospecting for gold in Ghana.
One of the more successful ones in recent times has been PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE). It is advancing a brownfield operation previously operated by Resolute
Mining Ltd. (RSG:ASX), which mined about a million
ounces at 2.2 grams per ton (g/t). PMI came in and has been able to delineate
about 5 Moz on the flagship asset. What is most
exciting about the company is it has more ground toward the south on the Asankrangwa Belt, on the Asanko
project and the Obotan project. This is the first
time that ground has been developed by one single company. This points to the
potential to grow the ounces profile well north of the current 5 Moz. PMI
also has ground—the Kubi project—next
to one of the world's most prolific mines, the Obuasi
mine, which has produced and delineated about 60 Moz. And it actively drills Kubi, which is just 15km south of Obuasi.
For the first half of the year, it's drilling about 100,000m on all these
targets. And we just saw eight new anomalies discovered last week, signaling
the potential to add to the current resource envelope.
TGR: The Obuasi gold mine is operated by
AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX;
AGD:LSE), which is a major gold producer. Would that make PMI a potential
NS: Most of these junior companies that have solid resource growth
potential are likely targets.
TGR: Any others in Ghana?
NS: There are quite a few, but we can talk about some other
early-stage companies, like Abzu Gold Ltd. (ABS:TSX.V;
ABZUF:OTCQX). It's about to come out with a maiden resource on the
ground in northern Ghana in a district that is known for gold-bearing
TGR: On Jan. 19, 2012, you wrote, "Abzu's
vast tenement package with a plethora of targets diversifies exploration risk
well for shareholders and its proven management team reduces execution
risk." Tell us more about the management team there.
NS: Abzu's CEO Allan Serwa
is a Canadian who's been in Ghana for quite some time and has built up a lot
of relationships there. He brings to the table the ability to manage
community relationships very well—better than seamless. You find a lot
of companies with good projects but a lot of problems dealing with
communities. So Serwa really gives Abzu a solid platform from which to take off. Paul Klipfel has been a geologist with some of the more senior
mines, including Placer Dome Inc. [now Barrick Gold
Corp. (ABX:TSX; ABX:NYSE)], and has had some decent
experience in Ghana as well. Quite a few other accomplished geologists and
company CEOs who will provide necessary direction are on Abzu's
board of directors.
TGR: Abzu's sizeable land package stretches
across four different gold belts in Ghana. What sort of exploration success
has Abzu had to date?
NS: Abzu has delineated a mineralization
trend of 1.5km in one. I have visited that structure and have seen that it
extends well to the north and to the south. On the Asafo
Belt right on the Kibi Belt in the south, Abzu has been coming up with some very decent grade
intersections of 4+ g/t material. It's still early but indications point to,
with additional drilling, sizeable results.
The concessions are in close proximity to prolific mines. Abzu
has properties near Newmont Mining Corp.'s (NEM:NYSE)
Ahafo and Akyem projects.
It's got property that is close to Keegan Resources Inc.'s (KGN:TSX; KGN:NYSE.A) Esaase mine.
So, these are spanning all the belts coming through to the south. And Abzu is on the Kibi Belt as
well—that is also close to a past-producing mine. There is the adage
that the best place to find gold is within the shadows of a headframe. I think that is the strategy that guided Abzu in staking all these concessions.
TGR: You also cover companies with gold projects or mines in Burkina
Faso, Liberia and even the Democratic Republic of the Congo (DRC). Please
tell us about some of those companies.
NS: In Burkina Faso one of my top picks is SEMAFO (SMF:TSX). It's seen quite a significant pullback in recent times. It has a very
solid balance sheet, $170 million (M) in cash, no debt, and it's generating
an operating cash flow of about $130M per year. This company is in a position
to fund all its organic growth without coming back to the market. Any value
from additional expansions flow to the shareholder. SEMAFO has been able to
demonstrate the ability to bring that production on for the past three years.
There are a few catalysts coming down the pipeline, including a resource update.
And as management continues to show to the market that its
large Mana project has resource growth potential
with several exploration updates expected, not only in June but after, we
should begin to see that attention back into the stock. We will probably see
it recover earlier than most of its peers because there's nothing
fundamentally wrong with the company.
TGR: You've got a $12 target price on that and a Buy rating. SEMAFO
has a promising project in Niger called Samira Hill. What are your thoughts
NS: It is a mine that sits on a mineralized trend that stretches for a
good distance. Only about 15% has been tested and developed as pits. So
there's a lot of potential along the strike. In the past, very little capital
was reinvested in the mine because ownership was split between Etruscan
Resources Inc. (EET:TSX) and SEMAFO, and Etruscan
never had enough money to put into expansion activity. The mine has not been
performing at its optimum level for some time. That's changing with SEMAFO
now taking full control of the mine and investing a lot more into exploration
and capital projects. It's smaller and we need to see a much, much larger
expansion to get more stability in the operation. But I think it's still a
worthy asset to have in the company.
TGR: Tell us about Liberia.
NS: Often people shy away from countries that have had issues. But Aureus Mining Inc. (AUE:TSX; AUE:LSE), which will likely be the
first company to commence production in Liberia, is making good strides.
Infrastructure-wise Aureus' New Liberty project is
very close to the port, and most of the access to the ground is via a paved
highway. That makes it relatively easy to access, compared to other projects
in the country. The capital required to kick-start the mine is around
$120M—that's not so huge that it will make this project's financing
risk insurmountable. I see Aureus coming up with
its first production sometime in 2014. At this level, it's one of the highest
grade projects in the whole of West Africa near surface. And that's just the
beginning. About 40km north is its main asset, New Liberty, which in itself
has a lot of potential to grow in surrounding anomalies that have been
delineated. Northwest of the structure is a new 13km anomaly that has been
picked up. The grades that Aureus has been picking
up from initial intersections on this system are quite encouraging. So,
there's definitely a gold district there and the grades are quite compelling.
That would definitely have a good impact on cost.
And we like the DRC. That country has had its issues in the past, but as with
any other such situation, there's always a time when it stabilizes. The fact
that the election was conducted is a good thing. There were a lot of
irregularities, but post-election issues have not been too severe, and that's
a good sign that the DRC is maturing and stabilizing. You see a huge discount
in companies operating in the DRC, which in my opinion is not warranted,
because it has one of the most prospective mineral belts in the world.
We just saw the first commercial gold production coming with Banro Corporation (BAA:TSX; BAA:NYSE) picking up the march.
And we're going to be seeing Kibali from Randgold Resources Ltd. (GOLD:NASDAQ) come through. I just visited the Kibali
project and was very impressed by the progress made for relocation, which is
probably the most challenging part of construction. With a solid technical
and mine-building team in place Randgold expects to
bring Kibali into production by 2014 without a lot
of challenges. As these two continue to do well, people will change their
perception of gold mining in the country.
Another that I would highlight as very cheap at these levels is Kilo Goldmines Ltd. (KGL:TSX.V), which is on the Ngayu greenstone belt and will be commencing drilling
very shortly. David Netherway and Alex van Hoeken have taken over, and they are seasoned mining
personnel who focus on the exploration growth potential of their large land
package. One similar ground to the Kilo ground is Geita,
which in the 1990s started as a small resource from old mine workings and has
grown to north of 10 Moz. It's a similar story for Kilo. It has an old mine
at Adumbi, which is currently around 1.8 Moz, and there are a whole slew of prospects around it.
This is one of the few times that a company has enough drill rigs to chase
some of these targets. It's very early, but there's a lot of growth ahead of
Kilo—including the fact that Kilo also has an iron ore exposure that
the market is not paying anything for. So, you rarely get something for free,
but Kilo could be an example of where that really works.
TGR: An iron-ore sweetener, as you've called it. In a March 30, 2012,
report, you said you expected a rerating of the stock. When?
NS: Rigs are on-site and drilling has commenced. It has its own sample
prep lot, so turnaround times are not going to be that long. As news starts
to flow, which could be as early as midyear right through the end of the
year, and people begin to appreciate the size potential of this asset land
package and also the grade profiles, that's when everyone will start waking
up to the opportunity and drive the re-rating.
TGR: Do you have some parting thoughts on African gold plays?
NS: People should continue to focus on the fundamentals. Take
advantage of the situation, which will turn around and stabilize, to pick up
on names that you missed out on and wait for the disconnect between the
commodities and the equities to correct. I see very little downside risk at these
TGR: Thanks for your insights today.
Nana Sangmuah is managing director of research at Toronto-based Clarus Securities. His previous industry experience includes
the Prestea underground mine, AngloGold Ashanti's Obuasi and Iduapriem mines, and
Gold Fields' Damang gold mine. He has over eight
years of global mining equity research experience that covers more than 60
mining companies worldwide in the gold, base metals and diamond sectors and
has in-depth knowledge of mining projects in West Africa. Sangmuah
completed a Master of Business Administration in finance at the University of
Toronto's Rotman School of Management in 2004 and
obtained his Bachelor of Science in engineering from the University of Mines
and Technology, Ghana, in 1999.
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1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Abzu Gold Ltd. and Banro Corporation. Streetwise Reports does not accept
stock in exchange for services.
3) Nana Sangmuah: I personally and/or my family own
shares of the following companies mentioned in this interview: Kilo Goldmines
Ltd. I personally and/or my family am paid by the
following companies mentioned in this interview: None. I was not paid by
Streetwise Reports for participating in this story.