Banro Corporation, the Toronto-based gold miner is a very compelling investment opportunity at its current market valuation. Banro (BAA
), is a mining company that is currently focusing its efforts on extracting gold from its holdings in the Democratic Republic of the Congo, or DRC.
According to CIBC World Markets Institutional Equity Research:
Banro is strategically developing one of the largest gold belts in Africa. It has delineated 11.2 million oz. of gold resources (including inferred) in four deposits along the Twangiza-Namoya gold belt, which spans over 210 km. We believe this large land package makes Banro an attractive M&A target.
Banro has four open-pit gold production projects that it is currently working on in the DRC, claimed Tomas Sipos at the NYSSA Mining and Metals Industry Conference last month. Mr. Sipos is the Vice President of Corporate Development for Banro Corporation:
These include our flagship project in Twangiza, which will begin production in Q4 of this year, and three others which are the Namoya, Kamituga, and Lugushwa projects.
What makes Banro Corporation an interesting investment opportunity in my view are two distinct points. First, the company is planning on going into production in Q4 of this year; this will enable shareholders to see free cash flow dramatically increase in the short term.
Second, Banro holds a staggering amount of gold on its properties – over 11 million ounces. The cash cost to extract this gold per ounce is $356 net net, and if gold stays around its current price, that equates to a tremendous amount of free cash flow for Banro Corporation going forward.
The annual target production will be 150, 250, 300, 430, and 480 thousand ounces of gold extracted and processed from 2012 to 2016. Banro’s relative valuation, which is quantified as price over NAV, is just a tad over 0.5x, according to CIBC World Markets.
Using this metric, Banro’s valuation is relatively cheap compared to almost every other industry competitor. Moreover, its enterprise value per ounce is also undervalued compared to the industry with a value of $48 in enterprise value per ounce.
In fact, according to a May 10th report from Toronto-based Cormark Securities;
What excites us about Banro is the size/scale of its flagship mine, the excellent future growth of its project pipeline, the strategic MOU with China Gold International, the tremendous exploration upside, and rock bottom valuation.
The only objection to not owning Banro at these levels before it starts production would be if investors are hesitant to take on the political risk associated with the DRC. However, according to Michael Cooper, CFA, President of Toronto-based Cooper Financial Research:
The political risk in the DRC has been steadily decreasing over the past few years, with major reforms that have been implemented by the pro-business government benefiting international private companies operating in the DRC.
Furthermore, a June 21st report issued by Cooper Financial Research on CFMonitor.com, which has coverage on 19 emerging mining companies with operations in Africa whose total market capitalization is around $75 billion, stated the following about the economy of the DRC:
According to the World Trade Organization, a 1% increase in mobile phone penetration results in approximately a 0.5% increase in real GDP in Africa. So when TeleGeography announced on June 21, 2011 that Airtel DRC has grown its cellular subscriber base by 40% in 18 months from 3.5 million subscribers to 5 million in June ‘11, we viewed this as a strong leading indicator of the continued progress for the economy of the Democratic Republic of the Congo.
Another important fact to note about the economy of DRC is that it has North of $24 trillion in untapped deposits of gold, copper, cobalt and diamonds within its borders. As a result of this huge mineral wealth, there are myriad international mining companies with operations in the country. These companies include the Australian mining giant BHP Billiton (BHP
), the Brazilian miner Vale (VALE
), and the American mining conglomerate Freeport McMoran (FCX
Additionally, the staggering amount of natural resources situated on Banro Corporation’s properties make the company a very compelling acquisition target. This argument is strengthened by the fact that there are a plethora of international mining companies already in the DRC that are sitting on a lot of cash, which can swiftly incorporate Banro’s operations into their own.
Therefore, based on Banro’s huge gold holdings of 11 million ounces, no debt on the balance sheet, $94 million in the bank as of April 1st 2011, mining production that will be underway in a few months, the possibility of being an acquisition target, and limited political risk in the DRC, Banro Corporation is a very attractive investment opportunity at its current market price and valuation.