Gold News

African Politics Change, But Not Its Geology

No, things might not be so secure. But short-life gold mining may be profitable...
 
DUNCAN HUGHES has been head of research for RFC Ambrian Ltd. in Perth, Australia, since 2010. A geologist, he has more than 15 years of experience in the resources industry and managed the discovery and development of the Prospero, Tapinos and Alec Mairs ore bodies for Jubilee Mines/Xstrata.
 
Now, with gold prices hovering around $1300 an ounce, there's not much room for error, says Duncan Hughe. In this interview with The Gold Report, Hughes counsels that investors should seek high-grade, low-cost projects with exploration upside in stable jurisdictions...
 
The Gold Report: After hitting $1380 an ounce in March, gold fell below $1300 and has hovered around there since then. Do you expect the price to change much either way in the next few months?
 
Duncan Hughes: That's not easy to predict. I think $1300 per ounce seems a sensible assumption for 2014. If it were to fall much below that, most of the sector would be operating at a loss.
 
TGR: Assuming a gold price of $1300 per ounce, what are the qualities that will distinguish the junior gold companies that become successful?
 
DH: In the recent past, companies paid too much attention to the size of resources and potential scales of production. The focus now is profitable production scenarios. Low-cost producers and undervalued developers that look likely to become low-cost producers are the key for investors.
 
One way to achieve stronger profit margins is through higher-grade ore bodies. Grade has always been king but is now even more so. Low-cost producers are not only most likely to survive this difficult market; those making profits may also pay dividends. Given that share-price appreciation is more challenging than previously, dividends have become more attractive.
 
TGR: To what extent should investors restrict themselves to companies with management teams with winning track records?
 
DH: If I were an investor, I'd look for management with a track record. If management doesn't have that track record – not only finding mines but bringing them to production – then the asset is the overriding factor. If the asset is strong enough, I'd want board members with a nice mix of technical skills – a geologist, an engineer, perhaps even a metallurgist – complemented by members with financial skills and access to equity and debt finance.
 
TGR: Which type of company is most likely to be taken out?
 
DH: Because funding is much harder to secure than it once was, the main focus will be developers with strong projects that require significant initial capital expenditures.
 
TGR: How should investors balance potential reward and risk in West Africa, specifically with regard to the various gold-producing jurisdictions?
 
DH: Several years ago, gold companies in West Africa traded at a premium because of the excellent exploration opportunities engendered by the geology. Since then markets have changed, and investors have become risk averse. In Africa, we have seen the Arab Spring, a push for nationalization and the coup in Mali. These events remind investors that the African political landscape is not as secure as some other parts of the world.
 
But the geology of the Birimian Greenstone Belt hasn't changed. A number of countries, such as Côte d'Ivoire, Liberia and Burkina Faso, have vast fortunes in land that is still relatively underexplored. Ghana has a track record of political stability and stable gold production. Next door, in Côte d'Ivoire, which lacks this stability, there is the same geology but many fewer mines. Guinea is working through a new mining code, and I would say that it is still a risky place to consider.
 
Burkina Faso, on the other hand, is a great place. It has got seven gold mines coming into production there.
 
TGR: Liberia was considered a failed state for decades. How great has its recovery been?
 
DH: I see real opportunity there. It's like Burkina Faso, at an earlier stage of development, obviously. I visited after the 2011 election, which was peaceful. Ellen Johnson Sirleaf, who won the Nobel Peace Prize that year, was re-elected.
 
I met the minister of mining and came away with the feeling that the Liberian government is very supportive of mining. Before the political strife began in 1980, Liberia was a significant iron ore producer and retains that infrastructure.
 
TGR: What's the size of the resource at New Liberty?
 
DH: It is 924,000 ounces (Koz) at 3.4 grams per ton (g/t) and a quite high strip ratio. According to the definitive feasibility study, the mine is expected to produce 119 Koz annually for the first six years of production at $900 per ounce. This should be a profitable operation.
 
TGR: That's a short mine life. How much exploration potential do you see?
 
DH: A lot. Not necessarily at New Liberty itself. In that part of the world, that's probably a bit too far to truck to New Liberty, but what's exciting about Ndablama is that it is shaping up to be another standalone gold operation. New Liberty is the present, but Ndablama is probably the future.
 
TGR: We recently did an interview with analyst Richard Karn and he pointed out that 200 of the 700 ASX-listed mining and resource companies are effectively moribund.
 
DH: You could make a similar judgment about the TSX Venture Exchange.
 
TGR: Certainly. Karn argued that the culling of these "zombie" companies would be a positive step. Do you agree?
 
DH: Yes. Many companies on the Australian Stock Exchange, the TSX Venture Exchange and London's AIM exchange are not going to make it, and that consolidation will be a good thing. As I mentioned earlier, investors in the recent past just looked at the size of a resource and said, "Wow. There's 2 Moz there, and this stock looks cheap." But they weren't looking at the quality of those ounces. I think investors have since wised up. Too late, however, for many companies.
 
TGR: Some 12 months ago, when it seemed that gold might fall to $1000 per ounce, financing pretty much dried up. Now that gold seems to have stabilized around $1300 per ounce, has the funding picture improved?
 
DH: I don't think it has improved that much yet. You said that the gold price seems to have settled, but let's face it, this stability has only existed for a very short time. I think major financiers and the equity markets need to be persuaded that there is a floor of perhaps $1200-1,300 per ounce. When this occurs, funding will improve.
 
TGR: Duncan, thank you for your time and your insights.

The Gold Report is a unique, free site featuring summaries of articles from major publications, specific recommendations from top worldwide analysts and portfolio managers covering gold stocks, and a directory, with samples, of precious metals newsletters. 

See the full archive of Gold Report articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

 

Market Fundamentals