Clarus Securities Analyst Nana Sangmuah was born in Ghana, West
Africa-a growing hot spot for gold exploration. He believes several
gold juniors operating in West Africa are prime takeover targets
and expects merger and acquisition (M&A) activity to heat up as
the major gold producers seek to replenish their diminishing
project pipelines. In this exclusive interview with
The Gold Report,
Nana reveals a few juniors on both sides of the Atlantic that
could fall prey to larger predators.
The Gold Report:
Nana, tell us about your coverage sector.
My coverage universe consists mainly of the junior golds with
market caps under $500 million, but some of those are creeping up
in size. An example is
Semafo Inc. (TSX:SMF)
, which is currently worth about $3 billion. Obviously, the idea is
to pick up names with a growth trajectory that could give upside to
Currently, my universe includes some of the little ones like
Azumah Resources Ltd. (ASX:AZM)
, which has a good growth trajectory, a $175 million market cap,
significant exploration upside and a good management team to move
it along the path. Other names in our coverage universe include
Cluff Gold PLC (TSX:CFG;LSE:CFG)
, which is significantly undervalued and poised for a rerating in
the near term and developers like
Keegan Resources Inc. (TSX:KGN; NYSE.A:KGN)
Perseus Mining Ltd. (TSX:PRU; ASX:PRU)
. They are prime takeover candidates in West Africa, which is
heating up. We also cover very seasoned, disciplined players in the
Randgold Resources Ltd. (
, which probably has the best growth trajectory in the universe,
and all of that can be fully funded internally with operating cash
So, you're looking for companies that are on a growth trajectory.
How do you arrive at that decision? What's your methodology for
finding companies that fit that thesis?
Obviously, you need a sizeable resource. Geology is key, and that
plays into the size of the land packages because bigger land
packages, potentially, hold bigger resources. And the land package
should be on a greenstone belt because that is where we've seen
most of the world's recent significant gold discoveries. Once the
location and the geology check out, then you ask questions about
the management team behind the asset. Does it have the know-how?
Has it developed other deposits? Does it have people working with
it that could unlock value on the asset? And then you have to make
sure the company has the cash to execute the strategy. You can have
the best asset but if the balance sheet is not strong enough, there
will be a lack of news flow and investors will probably turn their
attention to other projects.
You're from Ghana and West Africa in general has received a lot of
attention lately due to
Kinross Gold Corp. (TSX:K; NYSE:KGC)
acquiring the assets of Red Back Mining. One of these was the
Chirano gold mine in Ghana, and the other was the Tasiast Gold Mine
in Mauritania. This has people talking about some other companies
that could be takeover targets in West Africa. What are majors
looking for in takeover targets?
In the takeover category, most majors look for production
visibility and exploration upside. One of the guys in my coverage
universe fits the bill quite well: Perseus Mining, which is totally
cashed up and on track to launch production at the rate of about
220 (Koz.) per year, starting in Q311.
Aside from the fact that Perseus will be graduating into the
producer category, it has enormous exploration potential. The
company is doing just about the most aggressive drilling in the
region on its Central Ashanti Gold Project (formerly the Ayanfuri).
Perseus is drilling 30,000 meters a month companywide, which is
definitely going to provide a lot of news flow to sustain investor
attention during development.
The project was owned by
AngloGold Ashanti Ltd. (NYSE:AU; JSE:ANG; ASX:AGG;
before it was abandoned and Perseus took over. Perseus has since
delineated about 5.3 million ounces (Moz.) of gold at Ayanfuri
alone. With a companywide global resource of 7.3 Moz., Anglo is one
of the largest resource holders in West Africa that's not owned by
a major mining company; that makes it a prime takeover candidate.
There is going to be a site visit trip for analysts in November to
showcase the progress of development, which seems to be going
Aside from that, it also has assets in Cote d'Ivoire-mainly the
Tengrela Gold Project (1.3 Moz.), which is also on track with a
definitive feasibility study in November. That project could
sustain head grades of about 3-4 grams per ton (g/t) for the first
four years of production at cash costs in the low $300s. The market
is not assigning a lot of value to this asset at this stage.
The exploration results from Tengrela show that the whole
project is growing with recent new discoveries. There is further
exploration upside in Cote d'Ivoire as the company has ground right
next to Rangold's Tongon Project (4.6 Moz.), which is starting
production in Q4 at the rate of 250,000 oz/year. This is yet to be
drilled by the company.
How much value do you put on ounces in the ground? For instance, if
it's an inferred resource, do you ascribe a different value to it
than actual reserves?
If it's an actual reserve that could easily make its way into the
discounted cash flow (DCF) profile, you would have a discounted
cash flow valuation on the reserves. The inferred resources would
be valued based on a peer market average for an ounce in the
ground, and that is currently creeping up. It's around $100 per
ounce now based on my peer comparable tables.
You recently attended the Denver Gold Forum in September, and
apparently there was quite a fierce debate there between Martin
Murenbeeld, who's the chief economist with DundeeWealth Inc., and
Paul Walker, the CEO of precious metals consulting firm GFMS.
Murenbeeld was bullish on gold and Walker was bearish. What side is
Well, we're obviously on the bullish side for the next couple of
years and we raised our forecast to $1,300 for 2011 and 2012. But
we're reverting it back to $1,000 by 2013.
Now, the reason is that there's no sign of real recovery out
there yet. This is probably one of the rare occasions where we've
seen a lot of countries fall into recession at the same time, and
everybody is mirroring each other in the ways they're trying to get
themselves out of this equation. This will likely go on for a
while, and I think people will continue to look for alternative
places for investment. This will prompt further increases in gold
investment demand and physical demand, which traditionally gets
stronger in the fourth quarter.
Frankly, the supply side of the equation has not really improved
as the number of new discoveries over the last 10 years has kept
diminishing. For the next while, I think we can solidly bank on
having some strength in the gold price going forward, based on pure
On the other side, if there's a recovery, we will probably have
to start rotating out of gold investment and looking elsewhere.
Before that happens, I think inflation is definitely going to be
the gatekeeper. If a real recovery comes through, inflation should
hit hard, and that would drive gold prices to a higher level before
we roll over. I think the logical time frame to get that happening
would probably be around the 2013 mark.
At that point, you think enough gold supply will have come
onstream, the global economy will have recovered and that those two
things will conspire to lower the gold price. Is that what you're
Supply in itself might not necessarily increase drastically, but as
interest rates creep up, I think people will start looking
elsewhere for investment alternatives and gold will no longer be
the "go-to" choice. People might even start to sell off
There is a theory that suggests the geology in West Africa is very
similar to the geology on the east coast of Brazil because these
continents were attached millions of years ago. Do you believe that
It's logical if you look at the plate tectonics that have been in
existence for a long period of time. I would highlight, though,
that the mineralogy and the grade profile on those zones are quite
different. Even within West Africa, you find different grade
profiles along different belts.
The prospectivity of eastern Brazil, though, is impressive.
Based on my statistics, so far around 90 Moz. has been delineated
in that region, with grade profiles of about 2-3 g/t, and there's
still more drilling to be done.
Some of the companies that are active in this space will
probably be adding to the tally in the next little while, like
Rio Novo Gold Inc. (TSX:RN)
. It's currently returning about 3-4 g/t rates on the Almas Gold
Project, and Rio is about to tap into the Guarantã Gold Project, as
One of those Rio Novo projects is in a greenstone belt that is
similar to the greenstone belts of West Africa. Do you see
potential for Rio Novo to continue to expand its resources
Well, based on the NI 43-101-compliant resources, it would probably
be under 1 Moz.; but historical, non 43-101-compliant resources
come in about 1.5x higher. And the company's doing a lot of infill
drilling. The prospectivity remains. I think it could easily meet
and exceed 1 Moz. based on additional targets yet to be chased on
I will be seeing the project in a few weeks to do some level of
due diligence. But it's not wholly a matter of growing the
resource, which oftentimes becomes the focus for a lot of people.
The key is whether a company can get those ounces in the ground
into meaningful production. And that's what excites me about the
Rio Novo group-the management is really proven. The technical team
has built mines operating at a capacity of 55,000 tons per day
(tpd), so putting these less-than-10,000 tpd operations into
production should prove less of a challenge. And the geological
team has actually proven a lot of discoveries in the belt.
Technically, I think these people are savvy, and I think the
company should probably rerate itself into producer in a very short
You mentioned that you have an upcoming site visit to see Perseus'
projects in Africa, and that you've got another Rio Novo project to
see in Brazil. You recently visited Colombia for a conference in
Medellin and conducted some site visits in the area. Tell us about
Continental Gold Ltd. (
is a company I visited, and I was very impressed by what I saw
walking in these adits at the Buriticá project. There's nothing to
make you disbelieve that there's gold in those veins. I think the
key here is how big the potential resource is going to be, because
the dimensions are not well established yet. We should know all
these dimensions soon with five drill rigs turning on the property,
as the company aims to complete an initial resource in 2011. With a
current market cap of around $570 million, the resource is being
counted at 5 Moz. Is that a stretch? I believe its strong portfolio
of assets covering 160,000 hectares in Colombia gives it huge,
untapped exploration potential.
Some of the other assets like Berlin, which has some drills
currently turning on it, look much more exciting. Historically,
Berlin has produced about 400 Koz. gold in a single lode with a
thickness of about 20 meters. That is just about 20% of the whole
strike length. The rest of the asset has yet to be tested, but
Continental currently has almost $100 million in cash to put into
all of these projects. The ability to delineate the resources to
back the valuation, and even exceed it, is told there.
Continental has a great management team; and good geologists
that have delineated significant resources at other projects are
working on this asset, so it's just a matter of time. I always
encourage investors to sit tight and watch for results to come out.
The results here are typically very high-grade zones that have not
really been closed off at depth. There's still huge potential in
the initial veins that we've seen at Buriticá. The company has come
up with some new samples and there are geophysical anomalies that
have yet to be tested, as well. The growth prospects are quite
Continental's an interesting story certainly in part due to its
management. You've got an Aurelian Resources reunion with Patrick
Anderson and Tim Warman on the board, and now Keith McKay as CFO.
These guys were all part of Aurelian, which was sold to Kinross for
about $1 billion in 2008.
Exactly, that's one of the key points I try to find in these early
stage companies. The assets should be prolific, which shakes out on
Continental, and management should know what it's doing because
it's done it before. Thirdly, it should have the cash to drill
these veins aggressively-and Continental has that, as well. It all
It sure does. What are some other companies you're following?
It's a broad list. It includes Cluff Gold and its West African
assets, which produce about 100 Koz. per year. But Cluff is grossly
undervalued because people are discounting the life of the current
operations-the Kalsaka mine in Burkina Faso and the Angovia project
in Cote d'Ivoire. Based on current drilling information, there
could be extensions to these resources that could extend the mine
life, but that is not the only key value driver of the stock. The
flagship asset is the Baomahun gold project in Sierra Leone; only
25% of a 12 km. strike length has been tested, and 2.5 Moz. has
been delineated. Cluff has picked up nine similar prospects along
the strike length that have yet to be tested. The company is
cash-flow positive and will be chasing some of these zones
Cluff is trading at roughly 7x cash flow-quite a huge discount
compared to its peers, which trade at around 18x. And even on an
in-situ valuation basis, which is often used for early stage junior
gold companies, it trades at $55/oz., which is still below
companies that have yet to show any production visibility that
average about $100/oz. New COO Peter Spivey will take the reins
officially in January, and he will continue to guide the turnaround
story. There's a lot of upside at these levels. Cluff is pouring
gold and is unhedged with great exposure to the gold price right
You mentioned that Cluff's flagship project is in Sierra Leone. I
think when a lot of people hear Sierra Leone, they think of
jurisdiction risk. What are your thoughts on that?
Well, I think the company's had a challenging past, but that's
probably where the opportunity lies. There's stability in the
region now. You probably have to add a little bit to your cost
estimates because the infrastructure is not great. But in talking
with peers and colleagues working in the country, there's little
perceived political risk. I mean we are seeing investment demand
increase with significant investment made in the country by China.
I think Sierra Leone is at ground level in terms of exploiting its
natural resources, and that's probably where you're going to get
the most upside.
One company that you mentioned earlier is also exploring in Ghana,
and that's Keegan. Tell us about that one.
Keegan has the Esaase gold project in Ghana; within 18 months, it's
been able to delineate 3.5 Moz. And I think this resource could
easily be pushed closer to 5 Moz. We're expecting an update in Q4,
but Keegan is another company that I think should be reaching the
radar screens of a lot of people looking to acquire gold assets in
West Africa. It's also shown production visibility by completing a
preliminary economic study that shows it's capable of reaching
production by 2013.
Keegan currently has about $30 million to continue derisking the
asset, and one good thing about the project is the underground
potential. Most people realize there's potential to dig deep in a
greenstone belt. Currently, the company's chasing rich veins to a
depth of 2.5 kilometers. A deep intersection on the Esaase project,
at about the 400- to 500-meter level, is coming up with grades of
about 10 g/t over 24 meters, suggesting this potential is
The other aspect to Keegan is its other Ghana asset, the Asumura
gold property. This property is close to Newmont's 16 Moz. Ahafo
gold operation, which has yet to be fully tested. Keegan has two
rigs turning on it, and no analyst on the Street has a valuation on
this asset yet. Decent exploration success is going to spike
another wave of growth in the stock.
Barrick Gold Corporation (NYSE:ABX; TSX:ABX)
spun out its African assets into
African Barrick Gold Plc. (
. Is that company looking to expand its project pipeline and
production profile in Africa?
Yes, and I think it's just about time because it had some level of
production from its mines in Tanzania, but that has not been
smooth. I think the company revised guidance downward on that twice
this year, and that's had an impact on the stock. People are
waiting for African Barrick to tell investors where the growth is
going to come from.
I see them as potential acquirers, and that adds to the list of
companies who are looking in West Africa. I don't see a significant
team of geologists in African Barrick that can start looking at the
grassroots projects and build upward. Obviously, if it had those
people, it would take a lot more time to get the growth that it is
Any parting thoughts on the junior gold sector?
Well, we've seen all kinds of M&A activity. But I think it's
going to accelerate because a lot of the majors still have a
decline in their production profiles, and few have had much success
with exploration. There's only one way to boost your production
profile and that is to acquire a junior. I think most of these
juniors, particularly those in my coverage universe, are well
cashed up. In the next 6-18 months, they will be attacking their
assets with a lot more vigor as part of an effort to grow their
resource profiles. That would definitely be enticing to a lot of
these majors looking to boost their resource and production
profiles in those regions.
Analyst Nana Sangmuah obtained his BSc (Honors) Engineering at
the University of Mines and Technology (Tarkwa, Ghana) in 1999.
His previous industry experience includes state-owned Prestea
Underground Mine in Ghana (currently owned by Golden Star);
AngloGold Ashanti's Obuasi and Iduapriem mines (Tarkwa, Ghana)
and Goldfields International's Damang gold mine (Tarkwa, Ghana).
Nana completed his postgraduate MBA finance degree at University
of Toronto, Rotman School of Management in 2004. He has roughly
seven 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.
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1.) Brian Sylvester of
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3.) Nana Sangmuah: I personally and/or my family own shares of the
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