Gold Mining in Africa offers "high geological prospectivity"...
A MINING analyst with GMP Securities Europe, Brock Salier sees plenty of gold coming out of Africa in the coming months and years. In this interview with The Gold Report, Brock Salier explains why he believes increasing political stability, good geological prospects and governmental recognition of the benefits of mining operations are reasons to look there for growth.
The Gold Report: Brock, you cover many companies based in Africa. What do African countries offer that other jurisdictions do not?
Brock Salier: I would have to say geological prospectivity. African countries are relatively underexplored and underdeveloped. That means African exploration and mining companies have far greater likelihood of discovering new ounces and of expanding production at existing mines.
The other key is sovereign risk, which is relatively good in Africa. We define sovereign risk as the number of assets that have been nationalized or taken away from mining companies. When I compare Africa to Southeast Asia and the former Soviet Union, Africa scores much higher.
TGR: Are brokerages like GMP being forced to look at countries operating in Africa for growth?
Brock Salier: Quite the opposite. We have a choice of jurisdictions and we've chosen Africa as one of our focus areas. For us, the African asset base is attractive. We see more listed companies operating there and a lot more success stories relative to elsewhere.
TGR: Are there any traditional gold mining countries that you might take a flier on, perhaps Ivory Coast?
Brock Salier: Absolutely. We're actively working in Côte d'Ivoire. Despite recent civil unrest, the country has transitioned to a new democratically elected head of state. The geological prospectivity is so high that mining companies are flooding in. The asset quality is stunning. I would target the Ivory Coast as a favorite investment location.
Liberia and Sierra Leone are relatively underexplored compared to Ghana and Burkina Faso, both of which have democratically elected heads of state. Despite very recent civil unrest, Liberia and Sierra Leone are now stable, open for investing and have some really exciting targets.
Neighboring Ghana is much better known for its gold, yet it's also much more explored and the explorers have smaller licenses; the producing assets are more mature. The Democratic Republic of Congo (DRC), which has had an up-and-down history, is one of our favorite investment destinations because of the geological prospectivity.
TGR: What accounts for the increased stability in West Africa and what are your preferred jurisdictions there?
Brock Salier: Wealth generation has played a role in the region's stability. The wealth generated in Ghana in the last 20 years has made many of that country's neighbors want to emulate its success. To have ongoing, direct foreign investment, you need a sustained, peaceful state. There is an incentive for them to push toward stability.
From a geological perspective, my preferred destinations are Mali, the Kénieba inlier in Senegal and Burkina Faso. The Ivory Coast is another exciting destination, given its geological proximity to the highly mineralized Ghanaian gold belts and historic underinvestment. In the last 12 months, Liberia has seen a huge influx of gold juniors. I wouldn't be surprised to see exploration success increasing there.
TGR: In some regions, we are seeing project nationalization in various forms. Will that find its way into the African countries?
Brock Salier: I genuinely believe nationalization is not a major issue in Africa. Looking at the historic incidence of nationalization, it's not common in Africa. In the DRC's case, there is such a strong desire to create an environment suitable for foreign investment, it genuinely does not want to send a message of nationalization to the foreign community.
TGR: In your company models, you typically value gold companies using a Gold Price of $1,575/ounce (oz) of production and $80/oz in the ground. The gold spot price has been volatile lately, and your price per ounce of production might be considered high by some analysts. Do you plan to make any adjustments?
Brock Salier: It's important to point out that we use a Gold Price assumption rather than a forecast. We typically choose $1,575/oz as a stable price and then look at the sensitivity. We suggest that investors take their own view on the Gold Price.
Having spent a lot of time on new development projects in Africa, I see a lot of support at $1,100–1,200/oz because of supply constraints. The assets are maturing. The grades are falling. The diesel price is escalating, along with taxes and royalties in some places. Costs are higher.
TGR: Brokerages in Toronto typically use a 5% discount rate for companies operating in Canada. You use a discount rate of 6% for companies operating in Africa. Does that extra 1% account for the additional risk in Africa?
Brock Salier: Ironically, most European brokerages use a 10% discount rate for African gold projects. We use 10% for base metal projects, but 6% for gold projects because gold companies are far more scalable than other commodities. There are more deposits to be found. It's easy to develop gold deposits.
In response to the 5% vs. 6% question, we capture that difference in net asset value (NAV) multiples. When we value African gold companies, we use a variety of NAV multiples. While we use a higher discount rate, we account for that by using a different NAV multiple.
The key thing for any investor looking at a gold analyst's research is to make sure the discount rate and the Gold Price are consistent. We use the same discount rate and Gold Price across the firm. Then we look at our valuations relative to our coverage universe.
TGR: Would you consider your model aggressive?
Brock Salier: I would say not, because of the huge support in the Gold Price and the huge demand for gold mining companies. Gold equities are outperforming other mining equities because there is a lot of investment support and gold companies are the easiest to understand and take into production. They're the most scalable. On that basis, gold equities definitely trade at a premium to many base metal and bulk commodity producers.
TGR: Is there a good spot on the Internet where people can go to see new resource stories coming to market?
Brock Salier: It's very difficult to track. Probably the best source for people in North America is the Producers and Developers of Canada International Convention Trade Show & Investors Exchange, which is a huge attraction for these stories.
TGR: Brock, thank you for your time and insights.
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