While most investors chase mid to large cap names in the Americas, Africa remains the final frontier for gold mining stocks based on a number of factors. Political risk in North Africa, rumblings about nationalization in South Africa, and the stability or lack thereof in Zimbabwe and Somalia can be enough to give many investors pause.
But for those who take a look closer they will find compelling stories and valuations in Central Africa and with one of those companies being Banro Corporation (NYSEMKT:BAA).
Banro has 13 Exploitation Permits along the Twangiza-Namoya gold belt in the Democratic Republic of the Congo which is similar in size and geology to the famous Ashanti Gold Belt in Ghana.
Within the 13 permits four deposits have been discovered. The first deposit, Twangiza, is on schedule for completion in the fourth quarter of 2011. The mill, located on top of a mountain, will process 1.7 million tonnes per year with an annual production of 120,000 ounces of gold for the first 5 years at cash cost of $356 per ounce. According to Michael Cooper at CFMonitor.com cash costs could rise to $450 per ounce with the effects of oil price increases, still at the low end of the cost spectrum.
The latest 43-101 for Twangiza shows Measured and Indicated Resources of 5.6 million ounces of gold of which will be upgraded to Proven and Probable in the third quarter to this year.
Cash flow from Twangiza will go towards the build-out of the Namoya project in the southwestern part of the gold belt. Namoya is expected to cost $118 million to build and produce an estimated 124,000 ounces of gold per year when completed at a total cash cost of $400 per ounce. Project capex would be paid back in one year’s time at current gold prices.
Upon completion of Namoya cash flows will be directed towards the creation of a hydroelectric plant 25 km from Twangiza which could be built without a dam and provide enough power to reduce production cash costs at Twangiza Phase 1 and 2 by $100 per ounce.
Twangiza Phase 2 will access the ore at the bottom of the mountain using a new processing facility with an estimated capex of less than $400 million.
The final two deposits, Lugushwa and Kamituga, are still in the exploration phase and show strong upside potential.
Once the first three projects are complete Banro will have an estimated annual gold production of almost 500,000 ounces by 2016.
Banro has been active in the local communities as well building schools through the Banro Foundation building two high schools, two primary schools, a health care center, and the rehabilitation of local infrastructure.
Investors have spent the final few years racing towards the low hanging fruit in the mining sector grabbing companies with properties in the Americas. While many have done well Africa has been largely ignored but that may be changing soon.
Despite swimming in cash from high gold prices mining companies are finding that excess cash gets eaten away by inflation for large scale projects.
Inflation is beginning to rear its ugly head in Brazil and Argentina where they are fighting inflationary forces for different reasons. Already we have seen capex numbers increase by more than 25% for projects like Cerro Casale or be scaled back as is the case with Galore Creek in Canada.
The threat of nationalization in Bolivia and higher taxes in Peru has been giving companies consternation as project costs rise and margins fall.
In the Congo, inflation risk is stabilizing as the inflation rate trends lower and economic growth moves forward.
In a sign of increasing faith in the long-term future of the Congo, Newmont Mining (NYSE:NEM) recently took a 16.8% stake in Loncor Resources (NYSEMKT:LON) which holds rights to more than 21,000 square kilometers in the Congo.
While Newmont’s production profile has been flat for the last few years Africa is the only area showing growth. The investment in Loncor is not just an investment in an exploration company with strong potential but a stamp of approval for the Congo.
While investors are rushing into gold and silver stocks located in the Americas Africa remains overlooked. Instead of chasing returns investors should look for value in African mining stocks like Banro who will enter into production later this year and rising to almost 500,000 ounces per year by 2015.
I am long BAA and NEM
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.