Top African Gold Prospects: Brock Salier
Source: Brian Sylvester of
Brock Salier, a mining analyst with GMP Securities Europe,
sees plenty of gold coming out of Africa in the coming months and
years. In this exclusive
interview, he says increasing political stability, good
geological prospects and governmental recognition of the benefits
of mining operations are reasons to look there for growth.
The Gold Report:
Brock, you cover many companies based in Africa. What do African
countries offer that other jurisdictions do not?
I would have to say geological prospectivity. African countries
are relatively underexplored and underdeveloped. That means
African exploration and mining companies have far greater
likelihood of discovering new ounces and of expanding production
at existing mines.
The other key is sovereign risk, which is relatively good in
Africa. We define sovereign risk as the number of assets that
have been nationalized or taken away from mining companies. When
I compare Africa to Southeast Asia and the former Soviet Union,
Africa scores much higher.
Are brokerages like GMP being forced to look at countries
operating in Africa for growth?
Quite the opposite. We have a choice of jurisdictions and we've
chosen Africa as one of our focus areas. For us, the African
asset base is attractive. We see more listed companies operating
there and a lot more success stories relative to elsewhere.
Are there any traditional gold mining countries that you might
take a flier on, perhaps Ivory Coast?
Absolutely. We're actively working in Côte d'Ivoire. Despite
recent civil unrest, the country has transitioned to a new
democratically elected head of state. The geological
prospectivity is so high that mining companies are flooding in.
The asset quality is stunning. I would target the Ivory Coast as
a favorite investment location.
Liberia and Sierra Leone are relatively underexplored compared
to Ghana and Burkina Faso, both of which have democratically
elected heads of state. Despite very recent civil unrest, Liberia
and Sierra Leone are now stable, open for investing and have some
really exciting targets.
Neighboring Ghana is much better known for its gold, yet it's
also much more explored and the explorers have smaller licenses;
the producing assets are more mature. The Democratic Republic of
), which has had an up-and-down history, is one of our favorite
investment destinations because of the geological
What accounts for the increased stability in West Africa and what
are your preferred jurisdictions there?
Wealth generation has played a role in the region's stability.
The wealth generated in Ghana in the last 20 years has made many
of that country's neighbors want to emulate its success. To have
ongoing, direct foreign investment, you need a sustained,
peaceful state. There is an incentive for them to push toward
From a geological perspective, my preferred destinations are
Mali, the Kénieba inlier in Senegal and Burkina Faso. The Ivory
Coast is another exciting destination, given its geological
proximity to the highly mineralized Ghanaian gold belts and
historic underinvestment. In the last 12 months, Liberia has seen
a huge influx of gold juniors. I wouldn't be surprised to see
exploration success increasing there.
In some regions, we are seeing project nationalization in various
forms. Will that find its way into the African countries?
I genuinely believe nationalization is not a major issue in
Africa. Looking at the historic incidence of nationalization,
it's not common in Africa. It did happen in the DRC with First
Quantum Minerals Ltd. (FM:TSX). In the DRC's case, there is such
a strong desire to create an environment suitable for foreign
investment, it genuinely does not want to send a message of
nationalization to the foreign community.
In your company models, you typically value gold companies using
a gold price of $1,575/ounce (oz) of production and $80/oz in the
ground. The gold spot price has been volatile lately, and your
price per ounce of production might be considered high by some
analysts. Do you plan to make any adjustments?
It's important to point out that we use a gold price assumption
rather than a forecast. We typically choose $1,575/oz as a stable
price and then look at the sensitivity. We suggest that investors
take their own view on the gold price.
Having spent a lot of time on new development projects in
Africa, I see a lot of support at $1,100-1,200/oz because of
supply constraints. The assets are maturing. The grades are
falling. The diesel price is escalating, along with taxes and
royalties in some places. Costs are higher.
Brokerages in Toronto typically use a 5% discount rate for
companies operating in Canada. You use a discount rate of 6% for
companies operating in Africa. Does that extra 1% account for the
additional risk in Africa?
Ironically, most European brokerages use a 10% discount rate for
African gold projects. We use 10% for base metal projects, but 6%
for gold projects because gold companies are far more scalable
than other commodities. There are more deposits to be found. It's
easy to develop gold deposits.
In response to the 5% vs. 6% question, we capture that
difference in net asset value (
) multiples. When we value African gold companies, we use a
variety of NAV multiples. While we use a higher discount rate, we
account for that by using a different NAV multiple.
The key thing for any investor looking at a gold analyst's
research is to make sure the discount rate and the gold price are
consistent. We use the same discount rate and gold price across
the firm. Then we look at our valuations relative to our coverage
Would you consider your model aggressive?
I would say not, because of the huge support in the gold price
and the huge demand for gold mining companies. Gold equities are
outperforming other mining equities because there is a lot of
investment support and gold companies are the easiest to
understand and take into production. They're the most scalable.
On that basis, gold equities definitely trade at a premium to
many base metal and bulk commodity producers.
Let's get into your coverage sector. You cover African Barrick
Gold Plc (
), which operates the Bulyanhulu gold mine in Tanzania. In your
Oct. 20 research report, you basically said that African Barrick
is seeking a takeover target. What sort of catalyst would that be
for the company's shares?
The key catalyst to any gold producer is increased production on
an accretive basis, meaning increased production on a per-share
basis. African Barrick struggled to increase production in
Tanzania with mature assets. Given its strong cash balance, I
believe the company will be able to buy production without
issuing new shares. That could prove to be a tremendous, positive
catalyst for the stock.
Which juniors would be likely targets?
We believe a company like African Barrick will look for juniors
in a stable country, with numerous future growth opportunities,
existing production and growth projects. As outlined in our
initiation report the two that stand out are Teranga Gold Corp.
(TGZ:TSX; TGZ:ASX) and Avocet Mining Plc (
). Both have existing production in the 120-250 thousand ounces
per year (Koz/year) range, lots of exploration upside and, most
importantly, would be affordable with capitalizations well under
$1 billion (
Will African Barrick ever get to the large-cap producer status of
some of African players like IAMGOLD Corp. (IMG:TSX; IAG:NYSE) or
Gold Fields Ltd. (GFI:NYSE)?
If it did acquire a junior producing 200 Koz/year, production
could very quickly lift over 1 million ounces per year
(Moz/year). That immediately takes it to production well above a
company like Randgold Resources Ltd. (GOLD:NASDAQ), a far
higher-rated peer in London.
Looking to the future, it would be all about additional
acquisitions and exploration. We'll have to wait and see what
acquisition strategy it executes.
Let's move on to Banro Corporation (BAA:TSX; BAA:NYSE), another
Canada-domiciled company. Banro reported its first gold at
Twangiza in early October. Banro is a preferred stock you cover.
What are the catalysts for Banro?
Banro is an extremely lucky developer and producer in that, in
addition to the Twangiza mine, it has two large, undeveloped gold
assets that, geologically, should become mines: Namoya and
In our recent initiation we noted that the key catalysts for
Banro are taking its second and third projects, Namoya and
Lugushwa, into production. In the short term, the milestones are
those that enable progress toward production. We expect the final
engineering study for Namoya around year-end, with construction
to start early next year. Lugushwa is expected to release a
revised resource around year-end and we expect a preliminary
economic assessment shortly thereafter. That means analysts will
be able to value Lugushwa on a discounted cash flow (DCF) basis
for the first time.
It will take about $120 million (
) in capital expenditures (capex) to bring Namoya into
development. When is production slated to start?
We expect the company will start construction around March 2012.
There will be a 12-month build, so it can get a targeted first
gold pour around March 2013.
Does Banro have enough money to fund that capex for 12
Namoya's capex estimate is around $120M. We recently published a
report in which we estimate that Twangiza should generate $140M
of free cash flow to fund Namoya. Obviously, the budgets are
difficult to tie down. But broadly speaking, Banro should be able
to cover the capex at Namoya.
How is production going at Twangiza?
The company has only just announced its first pour; we'll have to
wait and see. When I visited, I was impressed with the
engineering team and the design and build, which was being done
extremely quickly in an arduous environment. No doubt there will
be teething issues, but I'm confident that ramp up should happen
in line with target at year-end.
You mentioned that the DRC nationalized some of First Quantum's
assets, and Banro had its exploration concessions seized back in
the early part of the last decade. What kind of relationship does
Banro have with the DRC government?
Banro works extremely closely with the government. The government
is very happy to see new mines in the eastern part of the country
for the first time in modern history and the first modern gold
mine to be commissioned as well. The DRC is seeing a big influx
of skills, as well as taxes and royalties being paid. In the long
term, driven by the copper industry, the DRC sees how well it can
do from mining and how it can help the country. My view is that
the government intends to maintain a peaceful outlook and to keep
the mining industry going.
GMP follows exploration companies like Loncor Resources Inc.
(LN:TSX.V; LON:NYSE.A), Roxgold Inc. (ROG:TSX.V) and Orezone Gold
Corporation (ORE:TSX), plays that are not getting support in the
Valuation is very difficult. As a geologist by training, I pick
producers where I think the resource is, or has potential to be,
big enough to be mined and where the geological conditions
support additional discoveries.
Loncor, Roxgold and Orezone have already drilled what will
eventually be delineated as mineable projects. All have a very
good likelihood of finding new projects, although that is always
It is difficult to value an exploration company on a DCF
basis, so we use the enterprise-value-per-ounces-delineated
method and compare that to the peer group. Most listed African
pre-producers trade at an average of $80/oz. Then we put a higher
valuation on those deposits that have more readily mineable
ore-such as higher grades or open pit mineable-and a lower
valuation on those with lower grades or more difficult
jurisdictions or mining conditions.
Loncor is a preferred stock you cover; its Makapela project in
the eastern DRC doesn't have a resource yet. How big do you think
that resource could get?
I think Makapela will define more than 1 Moz. The company still
has a lot of drilling to do and we should see results in
The beauty of Makapela is that there are almost certainly
subparallel zones there. Thinking about the next one to three
years, I'm convinced it will find more zones and grow over time.
From what we've seen so far, the potential for more than 1 Moz is
there. And, the grades at Makapela are stunning.
We often use the adage that grade is king, and certainly at 9
grams per ton (g/t) even over the narrowest 4-5 meter (m) width,
Makapela is very easily mineable mechanically and economically.
That should give good returns.
How does Makapela compare to projects belonging to Roxgold and
It's very similar to Roxgold's resources. Roxgold recently found
slightly narrower veins, but extremely high grade. It's very
different from the resources you typically find in Africa, which
are more likely to be around the 2 g/t range, open pit mining and
much larger deposits.
One of Loncor's advantages is its joint venture with Newmont
Mining Corp. (NEM:NYSE). That agreement targets a 5 Moz,
lower-grade, perhaps 2-3 g/t, open pit deposit. Between Makapela
and the joint agreement, Loncor has a strong twofold
Orezone fits in a new breed of deposits we're seeing in Burkina
Faso, alongside Volta Resources Inc. (VTR:TSX). Those companies
have relatively lower grades at 1 g/t, but huge size. All of them
have potential for 3-5 Moz. The attraction of those deposits is
not the grades, but the sheer scale.
Very few people know much about Burkina Faso. Can you give us a
brief overview of its stability?
I was in Burkina Faso last week. It had issues earlier in the
year, when civil unrest in Côte d'Ivoire interrupted the supply
chains for staples such as fuel and food into Burkina Faso. As a
consequence, food prices went up, and the local populace grew
uneasy. Now, the supply lines have been re-established and the
populace is very supportive of the long-term head of state,
Blaise Compaoré. The mining industry is flying ahead. Burkina
Faso is one of the best destinations in Africa to invest in from
stability and geological prospectivity bases.
Some of our readers like base metals plays, and you follow a
small copper play in the DRC called Tiger Resources Ltd.
(TGS:TSX; TGS:ASX). What brought you to that name?
In this economic climate, I believe it's important to pick mining
stocks that don't have large, upfront capital requirements. That
can often be an insurmountable hurdle if the share markets aren't
open for fundraisers.
We recently initiated coverage on Tiger Resources, which
alongside all the copper producers in the DRC, has the advantage
of a small, exceptionally high-grade starter resource. For less
than $30M capex, the company built a plant producing 30,000 tons
per annum of copper in concentrate. Similar to Banro's expansion
model, Tiger self-funds a large component of its expansions. We
love the geology of the DRC. We think it's far more prospective
than the much-lower grade copper deposits in Botswana, and for
Tiger that means there is a lot more opportunity for Tiger to
pursue a merger or acquisition, now that it's an established
Do you have any other preferred stocks you would like to share
with our readers?
One of my preferred stocks is Sable Mining Africa Ltd. (
). Its current market cap is $150M. It has a strong balance
sheet, $110M back in March. As we outlined in our recent
initiation report, it's about to start drilling on what I think
are the most exciting and largest iron ore exploration targets in
West Africa. Looking at its two targets in Liberia, I see
potential for some of the largest iron ore discoveries to be
delineated in the last decade. They are both within 70 kilometers
(km) of existing railway, so there is good infrastructure as
That is a significant distance. Will Sable be building rail?
Absolutely. Many of the iron ore deposits being discovered in
West Africa are 150km or more from the nearest port or existing
rail project. So, while a 70-km railway sounds like a lot,
compared to other West African projects, it is far closer than
most. The attraction is the potential for in excess of 10 billion
tons (Bt) of iron ore, which is a phenomenal amount and more than
warrants building 70km of railway.
Sable also has some coal projects in its portfolio. What can you
tell us about those?
Its South African project is almost ready for a bankable
feasibility study to fund construction. Its project in Zimbabwe
is even more exciting. Its portfolio there has the potential for
4 Bt of thermal coal with coking coal. Although Zimbabwe is going
through a period of reform, we believe the current investment
climate is suitable for exploration, which enables Sable to
undertake exploration and feasibility studies. As such, for Sable
investors, the key value lies in the iron ore portfolio.
What is the upcoming news flow for Sable?
The company has spent some 18 months acquiring projects,
undertaking geophysics and establishing road infrastructure to
drill the targets. This means there has been limited news flow,
but with the drilling starting in January across the iron ore
portfolio in Liberia, we expect the news flow will significantly
Is there a good spot on the Internet where people can go to see
new resource stories coming to market?
It's very difficult to track. Probably the best source for people
in North America is the Producers and Developers of Canada
International Convention Trade Show & Investors Exchange,
which is a huge attraction for these stories.
Brock, thank you for your time and insights.
Brock Salier is a mining analyst with GMP Securities
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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:
2) The following companies mentioned in the interview are
The Gold Report:
Loncor Resources Inc., Roxgold Inc., Orezone Gold Corp., Banro
Corporation and Gold Fields Ltd. Streetwise Reports does not
accept stock in exchange for services.
3) Brock Salier: I personally and/or my family own shares of the
following companies mentioned in this interview: Sable Mining
Africa Ltd. I personally and/or my family am paid by the
following companies mentioned in this interview: None. Brock
Salier was not paid by Streetwise for participating in this
4) GMP Securities Europe does not cover Gold Fields. Orezone and
Iamgold are covered by GMP but not by Brock Salier.
5) Brock Salier has seen material operations of the following
companies he covers mentioned in this interview: Avocet Mining,
Banro Corporation, Loncor Resources, Sable Mining Africa and
6) GMP Securities Europe LLP and/or any of its group affiliated
companies has, within the previous 12 months, provided paid
investment banking services or acted as underwriter to the
following issuers mentioned in this interview: Banro Corporation,
Loncor Resources Inc. and Sable Mining Africa.
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