IT’S the gold bull market of a generation, yet for West Perth’s crop of West African gold explorers, convincing the market to come along on the ride isn’t as easy as it used to be.
Despite an increase of more than 20 per cent in the gold price year on year, the share prices of almost all of the Perth-based companies looking for gold in West Africa have been on the wane.
After enjoying a surge of investor interest in late 2010 and early 2011 when they experienced flavour-of-the-month status, a period of unrest around the region followed by the recent market volatility has led to many of the stocks being sold down heavily.
Many West African explorers and developers – such as Ampella Mining, Azumah Resources, Castle Minerals and PMI Gold – have watched their share prices halve from their peaks.
For all their progress on the ground, and even though the gold price has continued its upward trend, most are worth no more than they were a year ago; some are worth substantially less.
Gold miners around the world have been lamenting the fact their shares have failed to appreciate in line with the gold price, but for the West African explorers the instability in the region earlier this year has exacerbated the issue.
A civil war-like situation in Cote D’Ivoire in particular has been damaging for a number of West African gold plays, while reports of instability in neighbouring Burkina Faso – a popular hunting ground for Western Australian interests – earlier this year temporarily spooked investors, who suddenly saw Burkina Faso as the next domino to fall.
That situation has since settled down, only for the deteriorating state of the global economy to prompt another round of selling.
Steve Parsons is the managing director of the Gryphon Minerals, the first Australian-listed company to work in Burkina Faso. He believes the nation – one of the world’s poorest – is determined to support the growth of its mining industry despite the recent turmoil.
“When we went in, we were the only Australian company there. Being an exploration company, we pretty much tried to fly under the radar as much as we could, and spent a bit of time trying to understand how the country works,” Mr Parsons told WA Business News.
“In the past few years the story has changed a huge amount. They’ve gone from no mines to six mines in the past three years, and the government’s been hugely supportive as it sees mining as the only way to pull the country out of poverty.”
Gryphon recently completed a scoping study on its Banfora gold project, with consultants Lycopodium suggesting the project could support production of around 180,000 ounces a year at a production cost of less than $US430 per ounce. Under the current plan, the mine could be pouring gold by 2014.
The project is advancing, but Gryphon shares are down more than 37 per cent from their high earlier this year, and back below where they were trading a year ago. Indeed, the ‘West African premium’ that many of the region’s explorers used to attract appears to have disappeared.
Among the Perth-based executives at the forefront of the rush into what is seen as one of the world’s last great under-explored gold regions, there is a hope that the difficulties of the past six months will be a blip on the region’s evolution into a major mining province.
A number of WA-based companies, such as Perseus Mining, Gryphon, Ampella Mining, Adamus Resources and Noble Mineral Resources, have already struck it rich in West Africa, finding the sorts of large-scale gold deposits that have become increasingly rare in their home state.
Beyond those companies is a multitude of smaller explorers at various stages of development, including Azumah, PMI, Burey Gold, Papillion Resources, Castle, Ausquest, Signature Metals and Canyon Resources.
“The Aussies who have cut their teeth looking for gold in Australia are generally pretty lean and mean,” Perseus managing director Mark Calderwood said.
“And if there’s anything to be found, they will find it quicker than most.”
The fruits of the exploration work are evident in statistics from the US Geological Survey.
West Africa’s gold reserves have grown by more than 50 per cent since 1997. In the same time frame Australian, Canadian and US gold reserves have fallen by more than 5 per cent, while South Africa’s have fallen by almost 20 per cent.
In the past five years, Mr Calderwood said, 15 new gold mines had come into production in the region. He expects to see another 15 come into production in the next five years.
Adamus brought its 100,000oz/year Nzema project into production in January, while Perseus’s Edikan gold mine in Ghana, up until recently known as the Central Ashanti gold project, became the first of those next 15 when it began pouring gold in August.
The exploration success of those companies has proven that West Africa is capable of hosting major gold deposits. The challenge now is proving that developing and operating those deposits isn’t a risky proposition, despite the region’s frequent political instability.
Not all countries in West Africa have been caught up in the recent unrest. Ghana, where Perseus’s Edikan mine is located, ranks as one of the world’s most highly rated mining jurisdictions and sailed through the recent issues of its neighbouring countries, as it has done for decades. Yet Perseus shares are back around their levels of a year ago, despite the company having delivered its mine on schedule.
Mr Calderwood acknowledges that Australia’s West African gold explorers have lost the premium they were afforded a year ago, but stresses that Australian investors do not have to look beyond their own shores to see examples of sovereign risk.
“It’s always a trade-off between geological attractiveness and political risk,” Mr Calderwood told WA Business News.
“But I would happily argue that if you compare Australia with Ghana, Ghana would be giving Australia a fair shake right now.”
Ocean Equities analyst Christopher Welch believes the sell-down in West African gold stocks off their peaks earlier this year does not appear to distinguish between countries, with companies working in more stable nations such as Ghana being marked down alongside those in more volatile nations such as Cote D’Ivoire.
“In our view, this has left us with some interesting investment opportunities where companies have been tarred with the same brush as others in much worst situations or jurisdictions in the region,” Mr Welch said.
For those with a longer-term investment horizon, Mr Welch believes the political turmoil in some of the nations earlier this year could be the precursor to longer-term stability and economic growth in the region.
“The removal of the suppressive regimes should lead to increased social mobility, increased economic development and therefore increased consumption. Essentially there will be fewer private jets for the political elite and more disposable goods for the masses,” he said.
Ampella Mining managing director Paul Kitto said the best way for Ampella to turn around the soured sentiment towards it and its peers was to continue delivering results to the market – a task not made any easier by the ongoing drill rig shortages and laboratory delays experienced in parts of West Africa.
The surge in exploration activity in countries such as Burkina Faso has put a major strain on the infrastructure servicing the sector. According to the companies in the region, sourcing good quality drill rigs and having drill core analysed quickly is a persistent challenge.
“Our biggest problem is we just cannot get enough drill rigs,” Mr Kitto said.
“We were promised five to seven this year, and we’ve still only got the three rigs on site.”
Infrastructure is an ongoing challenge in the sector, although gold – which once produced can easily be flown out of mine – faces far fewer challenges than the rail-dependent iron ore and coal projects proposed elsewhere in Africa.
Beyond the availability of services and infrastructure, another key concern facing the sector in the wake of the current market lull is the availability of funding for the junior explorers.
Most junior explorers took advantage of last year’s surge of investor interest in West Africa and filled up their coffers. Mr Calderwood believes that, with some of the sizzle coming out of the market, there could be increased competition for funds when the juniors next look to tap investors for cash.
The number of companies building up strong project bases in West Africa has invariably led to talk of consolidation that would allow single-project companies to merge into multiple-mine players with broader investment appeal, and any tightness in capital markets could help speed up the consolidation process by driving project-rich, cash-poor companies into the arms of cashed up producers.
Adamus got the ball rolling in August, announcing a $550 million union with Toronto-listed Burkina Faso miner Endeavour Mining. The enlarged company will be producing 250,000oz of gold a year by 2013, with the group stating it intended to double that figure through more acquisitions.
As one of the largest companies in the region, Perseus is regularly tipped as a likely participant in any industry consolidation.
Mr Calderwood said mergers and acquisitions were going to be an increasingly common feature of the West African gold industry, although anyone expecting Perseus to act before production from its Edikan mine had been bedded down may be disappointed.
“We’re just too busy at the moment, but it is something we will look at possibly later this year,” he said.
Likewise, Ampella’s Mr Kitto and Gryphon’s Mr Parsons believe mergers and acquisitions will become an increasingly common part of the West African gold landscape in the next year.
“Consolidation in West Africa will happen. It hasn’t started at this stage, but the majors are certainly already looking around,” Mr Kitto said.
“Gold Fields, Barrick, Newmont, those sorts of guys are all sniffing around for the next big one.”
Mr Parsons, meanwhile, said consolidation would take place in the sector in the next six-12 months “without a doubt”.
“I just think that in order to go to the next level you need to be putting a couple of these companies together, otherwise the big companies will start coming in and gobbling us up,” he said.
While Gryphon’s planned Banfora mine will provide a start, the company needs to build a broader base of mines to diversify its project risk and increase its investment appeal.
“To really start moving up the ASX list of gold producers, we have got to start looking at other opportunities,” Mr Parsons said.
The WA pedigree of most of the region’s key emerging players means the CEOs interested in consolidation won’t have to look too far to find one another.
While the strong WA presence in West Africa shouldn’t be surprising given the region’s mineral riches and the entrepreneurial zeal and mining experience in WA, there is a practical reason why the region has proved so alluring to the juniors of West Perth.
Mr Kitto explains that the Birimium greenstone belt that hosts the West African gold deposits bears a remarkable geological resemblance to the greenstone belt that runs through WA’s gold fields, giving strong transferability to the skills of WA’s geologists.
“You’re on a different continent, and in the case of Burkina Faso you’re speaking French instead of English, but other than that it’s pretty much the same [as the Kalgoorlie gold fields],” Mr Kitto said. “The great thing is you’re picking the low-hanging fruit, whereas in Australia that low-hanging fruit was picked 100 years ago.”
Provided the region’s historically delicate political environment can stabilise – and assuming investors can see through the current market panic – the riches on offer in West Africa would seem to be enormous.
