With the global economy plagued with uncertainty and real interest rates remaining negative throughout the Western world and Japan, expect gold prices to continue rise. With gold now at $1,700 per ounce, many African gold mining stocks provide excellent opportunities to buy gold at a bargain. As of June 2011, Toronto-based Banro Corporation (BAA) provides the cheapest investor cost per ounce of gold at $422.
Banro currently has four gold properties comprised of thirteen exploitation permits in the South Kivu and Maniema Provinces of the DRC. These properties, totaling 2,616 square kilometers, are located along the 210 km, northeast to southwest trending Twangiza-Namoya gold belt. The company is climbing out of the development phase with the Twangiza mine slated for production in the fourth quarter of 2011 along with the other mines expecting to be ready by 2013.
Based on a conservative estimated value of gold at $1,200 per ounce, Banro’s mines hold $18 billion dollars worth of gold, which is far above the company’s current market cap. Nearly half of that production is in the Twangiza mine that will be ready the earliest for production. Banro also has a low cost basis of only $350 per ounce to extract its gold, which makes the Twangiza mine sustainable during a bear market.
My biggest concern with Banro is the geopolitical risk of 100% exposure in the Democratic Republic of the Congo. The country has been going through a severe Civil War since 1994 (tensions have calmed down since the peak and the UN has declared peace, but the violence is ongoing) that has claimed more lives than any conflict since World War II. The DRC is also one of the world’s most corrupt countries in the world ranking seventh on the Transparency International survey for most corrupt countries.
Since its independence from Belgium, the country also has a history of nationalizing profitable mines. Some reforms have been enacted to make the country more transparent and business friendly over the past ten years. However, I am not quite sure that the government has reformed enough to maintain the safety of Banro’s assets, but most of this risk is already priced into the company.
Financially, Banro is well positioned to capitalize off its mines. The company has no debt and is trading at value with a P/E ratio of 5.88. They also hold cash that exceeds 10% ($92 million) of the firm’s market cap and are not tied to hedging contracts that restrict earnings in a gold bull market.
Although I feel that investors are better off buying gold directly, for those who want to take some risk in African gold mining companies, Banro provides the best value in the sector. With geopolitical risk holding down the price below its intrinsic value, Banro should skyrocket if the DRC can ever achieve moderate stability. Gold bugs who want to add a small speculative play (5% or less of assets allocated to gold), should buy some Banro.
Due to the instability of the DRC and the fact that its mines are still in the development phase, I give a neutral rating to the stock. I will keep on my watch list, as it may be a buy in later stages of production.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.