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Semafo (OTCPK:SEMFF) is a Canadian based gold mining company with three operating mines in West Africa. The company's shares broke through key resistance on September 7; however, that progress has been reversed since.

The company reported its third quarter results on November 7 and those can be summarized in one word--disappointing.

The company reported that revenue declined to $79.4M, a 22 percent drop from the same period last year. The decrease can be attributed to a 20 percent decline in gold ounces sold and a 3 percent decline in the gold price on a year-over-year basis.

In addition, cash costs per ounce increased by a whopping 31 percent from $637 per ounce in Q3-2011 to $836 per ounce in Q3-2012. The increase pressured margins which resulted in a year-over-year cash margin decline of 26 percent.

The increase in cash costs can be largely attributed to lower grade material mined and processed at all of the company's mines, with the most adverse impact coming from the Mana operation.

Head Grade per Tone Processed (g/t):

Operating Cash Costs per Ounce Produced:

Production declined in the quarter to 52,300 ounces, down 15 percent from 61,500 ounces produced in the same period last year. The decrease in production was primarily the result of the decline in grades and gold recoveries to lesser extent.

The company's flagship property, Mana, experienced delays in pre-stripping activities combined with a strong rainy season, which prevented the company from accessing the high grade zone to improve the mill feed mixture. That resulted in lower grade material dominating processing activities, which in turn reduced the amount of ounces produced and increased the cost of production per ounce.

Production in Thousands of Ounces:

Production at the Samira Hill operation also suffered from a declining head grade as well as lower recoveries. Gold recoveries declined 12 percent from 60 percent in Q3-2011 to 53 percent in Q3-2012, which reflected the dependency of this operation on oxide ore. The lower grades and recoveries also managed to push costs, in what is an already pricey operation, to over $1000 per ounce.

Recovery Rates:

The company has a 2012 production target range of 235,000-260,000 ounces, which it could easily fail to meet. To date, the company produced 173,700 ounces, which means it must produce at least 61,900 ounces just to meet the lower end of this range. Indeed, now that the phase four plant expansion at the Mana operation has been commissioned, the company might be able to do so; however, every element ranging from grade to electricity supply must meet a certain level to achieve that rate of production--flexibility is essentially non-existent.

Given the uncertainty and ease in which the company can miss its 2012 production guidance, investors should pass on Semafo as an investment for the time being. Investors should postpone taking a position in the company until fourth quarter results can shed some light on 2012 production and more importantly, the improvement in grade.

Production Up to, and Including the Third Quarter:

Source: This West African Gold Producer Might Miss Production Guidance