Invest in Africa Now: Nana Sangmuah
Source: Brian Sylvester of
The Gold Report
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?
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.
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
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 that demand.
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
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 regimes around.
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.
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?
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.
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?
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 is
Perseus 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.
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?
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.
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?
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. (
), 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.
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 takeover target?
Most of these junior companies that have solid resource growth
potential are likely targets.
Any others in Ghana?
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
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.
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
Abzu's sizeable land package stretches across four different gold
belts in Ghana. What sort of exploration success has Abzu had to
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
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.
You also cover companies with gold projects or mines in Burkina
Faso, Liberia and even the Democratic Republic of the Congo (
). Please tell us about some of those companies.
In Burkina Faso one of my top picks is
. It's seen quite a significant pullback in recent times. It has
a very solid balance sheet, $170 million (
) 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.
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 on that?
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.
Tell us about Liberia.
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
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
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?
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.
Do you have some parting thoughts on African gold plays?
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 levels.
Thanks for your insights today.
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
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The Gold Report:
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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
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