- West African Resources completed construction of its Sanbrado Gold Mine ahead of schedule and under budget, and is expecting to reach commercial production by the end of Q2.
- The company will become one of the lowest-cost gold producers in the world based on projected costs at Sanbrado, and the lowest-cost gold producer in Africa by a wide margin.
- West African's recent acquisition of Toega is quite accretive, completed for $45 million, and this should extend the mine life at Sanbrado with a 25% bump in global gold resources.
- I believe West African Resources to be one of the 5 most attractive African gold producers, and I believe any 17% plus pullbacks should provide buying opportunities.
It's been a busy year for M&A in the gold (GLD) sector in Africa, with Endeavour Mining (OTCQX:EDVMF) making a run at Centamin Egypt (OTCPK:CELTF) earlier this year before deciding on Semafo Gold (OTCPK:SEMFF), and West African Resources (OTCPK:WFRSF) snapping up B2Gold's (BTG) Toega deposit last month. Both deals were extremely accretive for the suitor, with Endeavour Mining's acquisition of Semafo pushing the company towards becoming a 1 million ounce gold producer, and West African's purchase adding mine life with an extra million ounces of gold resources next door to its new mine.
In this article, we'll focus on West African Resources', which has managed to complete its Sanbrado Mine construction under budget and ahead of schedule. While West African might not seem to stand out much vs. peers with a roughly 250,000-ounce annual production profile, it's the costs that are the meat behind the story, with all-in sustaining costs expected to come in below $600/oz in the first five years. Based on West African's potential for industry-leading margins and a recent acquisition that just beefed up the mine life, I believe West African to be one of the top 3 African gold producers. Therefore, I would view any 17% pullbacks in the stock as buying opportunities.
West African Resources has had a busy start to FY-2020 thus far, with the company announcing that it had completed the build of its Sanbrado Gold Mine $20 million under budget, and an incredible ten weeks ahead of schedule. The company poured its first gold at Sanbrado in mid-March and expects to begin commercial production by the end of this month.
Based on the most recent Feasibility Study, West African expects to produce over 300,000 ounces of gold in its first 12 months of production at all-in sustaining costs [AISC] below $500/oz, translating to margins of roughly 70% assuming a $1,650/oz gold price. Assuming West African can accomplish this incredible feat, this would make West African the lowest-cost gold producer worldwide in FY-2020, edging out Polyus Gold (OTC:OPYGY) whose costs are anticipated to come in slightly above $600/oz in FY-2020. If we use estimates for the first five years of production, the company is projected to produce over 1.35 million ounces of gold at all-in sustaining costs below $600/oz. As we can see from the chart below, this would give West African Resources a rank of #4 based on the life of mine AISC, and a position of #1 in the sector from a cost standpoint, based on its first 12 months of production.
If we compare West African Resources to other African producers, we can see a massive margin differential here as well, with West African Resources' costs in its first year expected to come in $220/oz below the cost-leader in FY-2019. In FY-2019, Semafo Gold was the cost leader, with AISC of $724/oz, and nearly $300/oz lower than Endeavour Mining post-Semafo, following the takeover by Endeavour Mining in Q1. Therefore, West African Resources is clearly the new leader from a margin standpoint in the sector for the time being, as long as things go according to plan from a mining standpoint. Based on how robust the company's resource is with over 800,000 ounces of gold at an average grade above 19 grams per tonne gold and an expected average head grade of 4.8 grams per tonne gold in Year 1, I would argue that these costs are indeed achievable.
However, even if the company does miss the mark and costs come in $50/oz higher than expected, these costs are still more than 40% below the industry average of $980/oz, leaving West African in a world of its own, and with tons of room of wiggle room, given the current gold price of $1,700/oz.
After quarter-end, West African Resources acquired the 1.1 million-ounce Toega deposit from B2Gold (BTG) for $45 million, a strategic move given that this adds existing resources within trucking distance to Sanbrado. The Toega deposit is just 14 kilometers southwest of Sanbrado in Burkina Faso, has a current high-grade resource of 1.1 million ounces at 2.01 grams per tonne gold, and this deal bumps West African's global gold resource up to 4.2 million ounces.
Given that West African Resources snapped up this deposit for just US$45 million, this is an extremely accretive move by the company. This is because the acquisition has the potential to add to the latter years of the mine life with a higher-grade resource than the current open-pit resource at Sanbrado, which is 2.3 million ounces at 1.3 grams per tonne gold. At the time of the Toega deal, West African Resources' enterprise value was roughly US$475~ million; so the company increased its resources by one-third by using just 1/10th of its enterprise value. Meanwhile, from a price paid per ounce standpoint, the deal came in at US$40.90/oz, 30% below the average paid for ounces in the past five acquisitions in the gold sector.
While the Toega deal may not look like much, it is a huge deal for West African Resources as it increases the likelihood that the company can maintain a 185,000 plus ounce per year production profile for nearly 10 years. This is, of course, assuming the company can convert at least two-thirds of Toega's resources to reserves. Also, if the company can bring forward Toega ore into an early portion of the mine life, this would increase the company's average head grades at Sanbrado, given that open-pit ore at Sanbrado is lower grade than Toega ore, as noted above.
Finally, there is additional potential for resource expansion at Toega. Given that the deposit remains open along strike to the northeast and down-dip, we should get a better idea of if this resource can grow even further with West African planning to drill the deposit later this year. Let's take a look and see if the technical picture is confirming what looks to be a solid investment thesis here.
If we take a look at the technical chart above, we can see that the stock is confirming the robust fundamental picture, as West African Resources broke out of a massive 9-year base earlier this year to new all-time highs. It's important to note that a pullback or consolidation would not be surprising, as the stock has had an incredible run since January, up over 100% year-to-date.
However, as long as the bulls can defend the A$0.70 level where the stock broke out from, I would consider any corrections to be noise. Therefore, for investors looking to get into the name, I believe any 17% plus corrections towards the A$0.74 level would be low-risk buying opportunities. Ultimately, I would not be surprised to see West African Resources trade as high as A$1.10 before March next year.
(Source: Company Presentation)
For investors who are comfortable investing in Tier-3 jurisdictions, West African Resources offers industry-leading margins, and the valuation would become very interesting if we see a pullback below A$0.75. There are substantial risks present when investing in Burkina Faso, though, and the horrific attack on Semafo workers last year was a reminder of this. However, for those looking for 70% margins in the sector, these margins are challenging to find in Tier-1 jurisdictions, with the lowest-cost gold producers currently being Polyus Gold in Russia, Lundin Gold (FTMNF) in Ecuador, and now West African Resources, in Burkina Faso.
Given that the company's ultra-low costs offset some of the jurisdictional risks, I see West African Resources as a speculative buy below A$0.75. While pullbacks are possible as the stock has had a nice run year-to-date, I would consider them to be noise as long as A$0.70 is defended on a monthly close.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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