Charles
Gibson, from his vantage point in London, has a unique view of mining
companies in Africa. Gibson is the head of mining for Edison Investment
Research, which writes unbundled investment research on a range of companies
from its offices across Europe, New Zealand and Australia. In this exclusive
interview with The
Gold Report, Gibson talks about some hidden mining gems in Africa.
The Gold Report:
We have a scenario where the price of gold has held up and is trading at
about $1,775/ounce (oz), but the share prices of large caps aren't
comparable. What is the reason behind that?
Charles Gibson: Typically, large companies are
valued in relation to their margin, the difference between the price they
sell gold and the cost at which they mine it. There was a
period of margin expansion from about 2009 to 2011 where, by and large, the
share prices of big producers did very well. The gold price was rising and
costs were under control.
In late 2011, however, this dynamic reversed and the gold
price started to tail off at the same time as costs began to pick up. Then
there was a period of margin contraction. That's what's caused the share
prices of the majors to fall.
TGR: Would you factor in the general
malaise in the stock market?
CG: Commodities can dance to a very
different tune than the broader economy as a whole and the broader stock
market. There's been margin expansion and margin contraction. It won't go on
forever. There is a very close correlation between revenue per ton and costs
per ton for mining companies and there are lots of different ways to explain
that. But if the commodity price moves, the likelihood is that the cost base
will move at some point. That works both downward as well as upward. Commodity
price and cost base don't work exactly in time with each other, but by and
large the broad direction is similar. That tends to temper the upside, but it
also saves a little bit on the downside as well.
TGR: Given the unremarkable
performance in some of the large caps, should investors be looking at small
to mid caps for value and growth?
CG: It's not a question of being
small, mid or large cap necessarily. The key question for investors at the
moment is: Which companies have costs under control? Perhaps that is due to
the jurisdiction they're in or because of a particular cost basis. If
companies have access to hydroelectric power, for example, that often acts as
a buffer against rising prices. When costs are under control, margins are
under control and companies can benefit from rising commodity prices.
TGR: What's your view on precious
metals prices going forward?
CG: There's a very strong correlation
since 1959 between the U.S. monetary base and the price of gold for
fundamental reasons. After the first two rounds of quantitative easing (QE),
the implied gold price from that correlation was $1,350/oz. That's where we
were until about a fortnight ago when Ben Bernanke announced QE3, which at
the moment is open-ended. Our long-term gold price of $1,657/oz goes through
2013. If QE3 continues to 2014, you're looking at $1,887/oz and by 2015 it's
more than $2,000/oz.
I stress that this is not a day-to-day trading price. It
is the fundamental long-term price. To paraphrase John Maynard Keynes,
"Markets can stay irrational longer than you can stay solvent."
TGR: It'll be interesting to see what
happens in November with relation to QE3. Let's talk about some names that
you're following in Africa.
CG: Pan African
Resources Plc (PAF:AIM; PAN:JSE) is a stock worth looking at with an
asset in Barberton, South Africa. However, this is greenstone gold—not
conventional South African Witwatersrand gold—in this case, with a
10-year life. It has had a 10-year life for the last 100 years, roughly
speaking. It's a very tight little management structure. It produces about
100,000 oz (100 Koz) every year and has done that for as long as anyone can
remember.
Pan African announced its full-year results last week
showing earnings nearly doubling compared to the prior year and more than
doubling compared to the half-year stage. That is strongly suggestive of a cost base that is well under control.
It also just made a major acquisition of Evander Gold
Mines Ltd., which it is buying from Harmony Gold Mining Co. (HMY:NYSE), this
time in the Witwatersrand Basin. Pan African's management has good prior
knowledge of operations of Evander. A lot of the board has worked there. Pan
African has been able to buy it at a low price. It will be very accretive.
The mining plan indicates that it could double Pan African's earnings in the
short term.
TGR: I'm looking at Pan African's
stock chart right now. It's trading near its 52-week high. There aren't many
North American-based gold producers that could say that.
CG: Pan African's share price is a
testament to the tightness of the management structure and the fact that the
company has been able to deliver on its promises half year in, half year out.
It has supportive shareholders. There are few substitutes for a good track
record in mining circles and Pan African has a very good track record.
I'd like to talk about Aurizon Mines Ltd.
(ARZ:TSX; AZK:NYSE.MKT), too.
Casa Berardi on the Cadillac Fault in Québec is the
major asset. Its management has an exceptional track record of delivery. It
has roughly 160 Koz/year of production and, with very few exceptions, it hits
that. It usually hits its quarterly guidance as well.
There are also relatively few shocks on the cost side.
Costs have suffered recently as the mine has moved to lower levels. The costs
per ton are moving up, but that's really a one-off effect. Even after that,
it's still producing gold at about $640/oz. At the moment Casa Berardi has a
mine life to 2020, but it's looking to expand that.
In particular, there have been some remarkable
intersections made by underground exploration drilling at Zone 123. If
confirmed and continuous, it may be that not only will Casa Berardi's
underground mine life be extended, but it may turn out to be one of those
Canadian mines where the grade gets higher as you get deeper. Also, because
this zone is off the main Cadillac break, it will require less ground support
and therefore the additional costs of being further from the shaft will be
offset both by higher grades and lower costs.
TGR: The gift that keeps on giving. It
also has exploration potential beyond Berardi with Joanna and other assets.
CG: Joanna is split into the Hosco
and Heva sectors. Hosco has a prefeasibility study that came out all right.
It is refractory ore, which means there were a lot of additional capital
expenditures related to autoclaves etc. Management stuck it on the
backburner. The area is very prospective, but it's clear that the
mineralization changes to non-refractory moving west, which means that it
should be much less costly to develop.
It pleases me the way that management tackled this. Rather
than chasing that very obvious goal of getting Joanna into production, the
company said, "Let's just wait a minute. Let's see if we can improve
this." It went from a feasibility study back to exploration. But now
there is the potential for a much bigger dividend at the end than might otherwise
have been the case.
TGR: David Hall is not the chief
executive officer (CEO) anymore, but he's probably the man behind a lot of
those decisions.
CG: The new CEO is George Paspalas,
who is an Australian with a very long pedigree in underground mining. He
managed the South Deep extension of the Western Areas gold mine in South
Africa for Placer Dome [now Barrick Gold Corp. (ABX:TSX; ABX:NYSE)]. He's
also a chemical engineer with extremely good experience with refractory ore
so, in short, he knows about the two things that he really needs to know
about at Aurizon.
TGR: I'm interested in hearing a
little bit about Cluff Gold Plc (CFG:TSX; CFG:LSE). I just met the
management group of this company at the Denver Gold Forum. They seem very
keen to introduce this company in a more proactive way to the market.
CG: Cluff Gold has also literally
just changed its name to Amara Mining! That aside, its assets, which are in
Sierra Leone, Burkina Faso, and Côte d’Ivoire, run the gamut from
exploration to production.
The Burkina Faso asset is Kalsaka, which is a nice,
relatively small-scale mining operation that produces about 70 Koz/year at
about $900/oz. It is providing the cash flow and the profitability to fund
the rest of the company's operations.
The flagship asset is Baomahun in Sierra Leone. I'm
expecting a resource upgrade to be announced this quarter followed by a full
feasibility study. It will have 130 Koz or more of production from 2015
onward.
Its exploration asset is Yaoure in Côte
d’Ivoire. Now, this is an interesting asset in that it has been mined
in the past. It has been known to be very prospective. Cluff has done a lot
of drilling there. Our best estimate of the resource is roughly 2 Moz. It
could turn out to a very significant asset indeed.
Kalsaka generates the money and some of that is used in
exploration in Baomahun and Yaoure. Cluff assumed until recently that it
would need an equity raising to fund the capital expenditures of Baomahun.
However, management has recently said that, given where its equity price is,
it's not happy with the level of dilution. The company is looking at
non-traditional forms of finance. Reading between the lines, what we're
probably looking at is some sort of debt instrument with a coupon that's
connected to the gold price. That route is a much more efficient way of
funding as far as existing equity shareholders are concerned.
I think that's part of the reason that the share price has
performed very well over the last couple of months. Nonetheless, it is not
valued at much more than the implied value of Baomahun. Investors are getting
Kalsaka and Yaoure for free. And the company is already generating profits
and cash flow.
TGR: It's interesting. Its small
producing mine is funding the exploration. Sega, Cluff's add-on acquisition
to Kalsaka, should have a preliminary economic assessment soon and then there
is the blue sky of Yaoure. Cluff announced a strategic alliance with Samsung.
Tell me about that.
CG: It is part of its non-traditional
funding. Samsung made a $20M credit facility available to Cluff. That is more
than enough for the company in the short to medium term. It is looking in the
longer term toward a cornerstone funding arrangement to bring the Baomahun
project into production.
TGR: I have not seen any mining
company entering into an agreement with Samsung. Are we talking about the
same Samsung that is the electronics manufacturer?
CG: It is. This is an example of the
increasing scenario where dollars are held in Asia and they're looking for a
home. One of the very obvious places to invest, if you're long dollars, is in
gold. In this particular instance, you're merely looking at the first
derivative of that investment strategy, i.e., gold equities. It's not wholly
unknown though for Asian industrial companies to get involved in mining. The
one that leaps to my mind is Mitsubishi.
TGR: We're also seeing a lot of that
in the minor metals and specialty metals space right now, too.
CG: I think that, in general, those
investments are aimed toward a guaranteed offtake—they have an
industrial logic—whereas I suspect that the Cluff deal is more of a
pure investment.
TGR: Cluff seems like a very ripe
cherry for a company that would want an African asset.
CG: It's difficult to comment about
where mergers and acquisition activity will fall. I think it's true to say
that there is a keen focus on West Africa and there is an assumption in the
market that there are more mergers and acquisitions to come in that
particular part of the world.
TGR: What can you tell me about Mwana Africa
Plc (MWA:LSE)?
CG: Mwana is an interesting company
to talk about because its assets are located in such an interesting part of
the world—Zimbabwe and the Democratic Republic of the Congo (DRC). It
has a very nice little gold mining operation, Freda Rebecca, which produces
about 70 Koz/year for about $850/oz. People hear Zimbabwe and think it sounds
like a difficult place to operate. Historically, it
has been. But I visited the mine recently and it is operating in good order.
The plant is pretty rugged. There are no concessions made to luxury at all
but in its own way it does work very well.
It's an amazing ore body. The mine has been open-pitted in
the past, but now it's moving underground. If you go underground, the size of
the voids, because of the competence of the rock, is absolutely unbelievable.
The voids are easily the size of a church. It is the perfect engineer's mine.
Freda Rebecca is funding Mwana. It has a majority interest
in another complex, Bindura Nickel Corp. (BNC:ZSE), a bulk massive nickel
sulfide ore body. It has been on care and maintenance for several years.
Mwana just got an agreement with creditors to raise money via a rights issue
in order to restart the operation.
Bindura Nickel is underground. Various assets actually
have been open-pitted in the past and could be open-pitted again in the
future. There are not many assets like this in the world when the rest of the
world is shifting from nickel sulfides to nickel laterites. And the entire
infrastructure is sitting there in very good order.
The first part of the restart is to get the Trojan
underground mine into operation and to produce a concentrate. In due course,
with material from other assets and potentially third-party material as well,
the idea will be to smelt and refine the concentrate to a pure nickel
product.
Bindura Nickel has a history going back to the 1950s when
it was developed by Anglo American Plc (AAL:LON). It ran very solidly and
profitably for most of its existence. It's an exciting time for Mwana.
TGR: I noticed that it had a fairly
dramatic jump in its share price this month. What was that about?
CG: That was the closure of the
Bindura rights issue. When the announcement came out that an agreement had
been reached, the money had been raised and that it was closed, it moved
Bindura from an asset that is on care and maintenance and costing the best
part of $1M a month currently, to one that should instead be cash-flow
positive situation within the space of a couple of years.
TGR: Mwana is a multi-commodity
company. What else is it mining?
CG: It has two other major assets in
the DRC—one copper and one gold.
The first is Zani-Kodo in northeast DRC. It is an
exploration asset with about 2 million ounces (Moz) gold proved up. It's
located between AngloGold Ashanti Ltd.'s (AU:NYSE) Mongbwalu and Randgold
Resources Ltd.'s (GOLD:NASDAQ) Kibali prospects. It's probably some of the
easiest exploration that I've ever seen. The company expects to be able to
increase its resource by 50% a year for the next
couple of years. At that point, it will be a very
significant resource on a global scale.
The other asset is SEMHKAT in the DRC's copper belt. It is
a vast area that has shown indications of copper mineralization. However, it
is almost an asset too far for Mwana. It gets the least attention. At any
other company, it would have probably been a lead asset, but in Mwana it has
had to queue up behind Freda Rebecca, Bindura Nickel and Zani-Kodo for
attention.
The company has done a couple of joint ventures at
SEMHKAT. It has an original joint venture with Anglo American and a joint venture with Chinese company Zhejiang Hailiang Co.
Ltd., which it announced in August. Hailiang will put about $25–40M
into the ground and take a majority interest. Mwana will be left with a
non-dilutable 38% interest. As a result, SEMHKAT has moved from an asset that
was very difficult to value because it was just prospectivity in the ground,
to suddenly an asset that can be valued in pounds, shillings and pence.
TGR: It certainly has a lot for only
having a $100M market cap. I'm blown away at the possibilities there.
CG: This management team has a track
record of working in these sorts of jurisdictions. Look at Freda Rebecca in
Zimbabwe, where the company got a mine it rehabilitated back into profitable
production with 70 Koz/year.
TGR: Now they're doing it again.
CG: That's the idea. A track record
like that is worth a lot.
TGR: Let's leave Africa and talk about
Minera IRL
Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL).
CG: While developing and operating a
mine in Argentina does currently present some challenges, the Don Nicolas
project is in a very mine-friendly province and Minera is halfway through the
permitting process. The company also appears to have the support of local
communities by recently signing a 10-year surface rights agreement.
I don't believe there will be nationalization of junior
mining companies in Argentina. The government needs foreign investment and is
probably not interested in owning and operating mines. More likely, they will
do what governments do best and simply take its cut in the form of taxes and
royalties.
As for Minera as an investment vehicle, the company has an
excellent management team with a proven track record and some fantastic
assets within mine-friendly locations.
TGR: Do you have any wisdom for
investors on how to navigate the precious metal equity space?
CG: With commodities, you always have
a choice in which commodity you're going to invest. It's worth being aware of
the macroeconomic qualities and profile that those commodities have. There is
a spectrum. If you looked in the '90s, someone would probably think that all
commodities dance to the same tune. We're not in that macroeconomic
environment at the moment. The environment we're in at the moment is one of
stagflation, where the economy is struggling to grow and where there are
question marks over the value of paper currency. I would strongly recommend
that investors be weighted toward the precious end of that spectrum at the
current time. The other thing is to spread risk, particularly with the
juniors. Be aware of the risk profile of companies; there's no substitute for
research and don't buy just two or three stocks. That's fine if you're
investing in the majors, but you need to diversify more than that if you're
speculating in the junior space.
TGR: Well, Charlie, thank you so much.
We certainly gleaned a lot of intelligence.
Charles Gibson is the head of mining for Edison
Investment Research in London. A chemist by academic training, Gibson spent a
decade in the City as a mining analyst at Cazenove and a specialist mining
salesman at T Hoare Canaccord, before joining Edison. He has extensive media
experience, having written for MoneyWeek and The Business magazines
and The Evening Standard. Gibson is a leading authority on mining and
guest presents from time to time for LBC radio on financial and business
matters.
Want to read more exclusive Gold Report interviews
like this? Sign up for our free e-newsletter, and you'll learn when
new articles have been published. To see a list of recent interviews with
industry analysts and commentators, visit our Exclusive
Interviews page.
DISCLOSURE:
1) Sally Lowder of The Gold Report conducted this interview. She
personally and/or her family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Aurizon Mines Ltd. and Minera IRL Ltd. Streetwise Reports
does not accept stock in exchange for services. Interviews are edited for
clarity.
3) Charles Gibson: I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or my family am
paid by the following companies mentioned in this interview: None. I was not
paid by Streetwise Reports for participating in this interview.
4) The following companies mentioned in the interview are clients of Edison:
Pan African Resources Plc, Aurizon Mines Ltd., Cluff Gold Plc, Mwana Africa
Plc and Minera IRL Ltd. Edison does not accept stock in exchange for
services.
Streetwise - The
Gold Report is Copyright © 2012 by Streetwise Reports LLC. All
rights are reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only in whole
(and always including this disclaimer), but (ii) never in part.
The Gold Report does not render general or specific
investment advice and does not endorse or recommend the business, products,
services or securities of any industry or company mentioned in this report.
From time to
time, Streetwise Reports LLC and its directors, officers, employees or
members of their families, as well as persons interviewed for articles on the
site, may have a long or short position in securities mentioned and may make
purchases and/or sales of those securities in the open market or otherwise.
Streetwise
Reports LLC does not guarantee the accuracy or thoroughness of the information
reported.
Streetwise
Reports LLC receives a fee from companies that are listed on the home page in
the In This Issue section. Their sponsor pages may be considered advertising
for the purposes of 18 U.S.C. 1734.
Participating
companies provide the logos used in The
Gold Report. These logos are trademarks and are the property of the
individual companies.
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8999
Fax: (707) 981-8998
Email: jluther@streetwisereports.com
|