Gold has been produced in Africa for thousands of years in places like Ghana and neighboring countries whose names have changed over the centuries. One thing that has not changed is that there’s still a huge amount of gold to be found and mined in West Africa. That’s what Mark Lackey likes about the area and in this interview with The Gold Report, he talks about companies that are or will be producing significant amounts of the world’s prized metal.

The Gold Report: When you last spoke with The Gold Report this past March, gold had just dropped from its first peak of the year, from $1,781/ounce (oz) at the end of February to $1,660/oz in a matter of three weeks. Now it’s looking for support at $1,700/oz. The trading range you predicted for 2012 looks good in retrospect. What are you projecting from here?

Mark Lackey: I’m looking at a range from $1,680/oz to $1,850/oz, and moving up over the year so that by December I am expecting to see the gold price at $1,850/oz.

TGR: But you don’t see a big breakout past $2,000/oz that some people are predicting?

ML: It’s possible, but for the gold price to go much higher than $1,850/oz there needs to be a good reason, such as a big decline in the value of the U.S. dollar or major gold buying by central banks. While I expect the dollar will weaken somewhat in 2013, I don’t expect a huge decline. Over the next few years we’ll get above $2,000/oz, but probably not in 2013.

TGR: What do you see as the market drivers for gold at this time?

ML: Significant trade and fiscal deficits remain in the United States and the country is continuing to use quantitative easing, which tends to lower the value of the U.S. dollar. Investors are going to look at the U.S. dollar and the euro and decide that there are other financial options they would rather own. Some investors will buy gold as an investment alternative to paper currencies.

“I believe that jewelry demand will continue to increase as a result of the growing middle class in Indonesia, China and India.”

In addition, I believe that jewelry demand will continue to increase as a result of the growing middle class in Indonesia, China and India. Those are the demand factors that will move the price of gold higher in the short run. We also anticipate that some of the gold projects that are expected to begin production in 2013 will be delayed due to regulatory and permitting issues and this will lower the supply of gold on the world market and therefore push up the price of gold.

TGR: What’s the next concern that might become the focus for precious metals investors?

ML: I don’t think Europe’s problems have gone away after allocating over $300 billion to Greece. We cannot count on Europe to have the kind of economic growth it once did, but as long as it doesn’t crater dramatically, there’s still going to be demand for gold and other commodities. I’m looking at a modest recession in Europe in 2013. I do think the Spanish banking system will be bailed out but as long as Spain’s sovereign debt doesn’t have to be bailed out, Europe will muddle through.

TGR: Despite the relative strength of gold over the past year, the performance of gold stocks has been pretty disappointing. When and how is the turnaround coming?

ML: If you look at the performance of the gold markets, the one area where we’ve actually made some good returns was in the mid-cap gold producers and near-term producers that did rally with the price of gold. The problem for many of the larger producers was that they didn’t reach the production numbers that they had forecast and their production costs were also above what they had planned. Thus their earnings and cash flows were below expectations and this resulted in share prices that did not follow the rising gold price.

“We expect that with gold prices going higher in 2013, investors will be buying the well-run junior companies.”

There are a number of smaller gold companies that do not have much cash left on the balance sheet and found it difficult to raise money in this past year so this prevents these companies from moving their projects forward. The Toronto Venture market has declined from a level of 2,450 in April 2011 to 1,200 at end of 2012, so it is not surprising that many junior mining companies have had a difficult time trying to attract new financing. Many of those companies saw significant declines in their share prices especially at the end of 2012 as they were hit by tax-loss selling.

We believe that there will be share price appreciation in 2013 for those junior gold companies that still have money (or can raise it) and have good projects. We expect that with gold prices going higher in 2013, investors will be buying the well-run junior companies, especially those that may have declined or lagged behind in 2012 due to the overall market conditions.

TGR: Where do you see the best opportunities for investors in gold stocks these days?

ML: We look at three or four factors when we try to make a decision on a gold company. We like to see an experienced management team with a project or projects in a jurisdiction that does not have significant political risk. We also look for companies that have a mining-friendly terrain and have access to transportation, power and water. We prefer the companies to be producers or near-term gold producers. We are concentrating, as we mentioned earlier, on mid-cap and junior companies that have cash in the treasury and are also looking for those companies that are potential takeover candidates. My company, CHF Investor Relations, has several clients in gold.

TGR: Last time you talked mainly about companies active in Africa. We know there is lots of potential there, but it seems that there’s also been some unrest lately that might cause concerns for some investors. How does the current picture look to you?

ML: The gold opportunities tend to concentrate in West Africa, where three of the four countries, Senegal, Ghana and Burkina Faso, are quite stable by anybody’s standards and have had no problems with political unrest or indigenization of resources. In Mali, the problem is with the Tuareg rebels and Islamists in northern Mali. The mining companies are in southern Mali, hundreds of miles away.

“West Africa has a lot of advantages compared to some of the more traditional mining areas.”

Last month the UN Security Council voted to have 3,300 African troops sent to Mali to remove the rebels from the northern part of the country. The mining employees who we have talked to in Mali have told us that their mining operations have not been impacted, either in production or exploration, by the problems in the north. There have been problems in other parts of Africa, but we have been watching West African projects closely. CHF has no clients in West Africa, by the way.

TGR: So what are some of the most interesting stories you’re looking at now?

ML: One we like is Teranga Gold Corp. (TGZ:TSX; TGZ:ASX), which is in Senegal. Teranga says it will exit 2012 with production between 210,000 oz and 225,000 oz for the year and in the third quarter cash costs were down to $594/oz. The company has its own mill, which is the only one in Senegal, and Teranga also has the largest land position in the country. It has a strong balance sheet having cash equivalents of $31.2 million (M) at Nov. 1, 2012, and reported a record high third quarter profit of $21.3M. The company says it will eliminate its hedge book by August and will have increasing gold production along with lowering costs of production. Teranga will focus on producing the gold ounces that will provide the best returns.

TGR: What else do you like in West Africa?

ML: Another one we’ve been looking at is Orezone Gold Corporation (ORE:TSX), which is developing the Bomboré project, the largest undeveloped gold mine in Burkina Faso. It has a strong development team and large near-surface tonnage, so it’s going to be a relatively low-cost producer. It has 2 million ounces (Moz) in oxide resources in the top 50 meters, and 80% of its resources are within the top 80 meters from surface. The property is close to the national highway and has nearby water, power and a large labor force, which should translate into reduced development and operating costs.

TGR: Those are some pretty world-class resources.

ML: Orezone’s recent NI 43-101 released in October 2012 contained 4.1 Moz of Indicated and 1 Moz of Inferred resources. This will be a significant gold producer in the next few years.

TGR: Or possibly get taken out.

ML: That’s certainly possible. Given the increasing drilling activity and the increase in gold reserves in Burkina Faso, Senegal, Mali and Ghana, many major and mid-size gold producers will be looking to acquire some of these companies. Orezone is one of the companies that could be taken over.

TGR: What’s been going on with some of the companies you talked about last March?

ML: Riverstone Resources Inc. (RVS:TSX.V) announced on Dec. 19 that it had completed its takeover of Blue Gold Mining. This will add some very strong talent to an already very good management team working to advance the Karma project, its flagship play in Burkina Faso. Riverstone also has three additional properties. Recent drilling activity has been very good. This is another miner that we think will have production in the next few years.

TGR: Was this a strategic merger?

ML: Yes. I think the idea here was that if these two teams got together, they could make a much stronger company. Combining the management teams and their financial resources will, in our view, lower the execution risk of their projects and significantly improve the company’s ability to finance itself in the future.

TGR: What else do you have here?

ML: We talked about Channel Resources Ltd. (CHU:TSX.V), which has the Tanlouka property in Burkina Faso. We like Channel as it could become a mid-term producer of approximately 100,000 oz by 2018. The present Indicated and Inferred estimate at Mankarga 5 is 1.2 Moz. Channel has some other excellent exploration targets and we believe that the projects at Manesse and Tanwaka have the potential to host gold deposits similar to Mankarga 5. The additional exploration could eventually define a resource above the 2 Moz level. This exploration team has done an excellent job as it has been successful in defining a major gold resource. We like these oxide deposits for their metallurgical properties, since it usually means that the deposits can be mined at a low strip ratio.

TGR: What else looks interesting?

ML: The next one is African Gold Group Inc. (AGG:TSX.V); the company is developing the Kobada property in southwest Mali. We think African Gold can begin production in 2015, and by 2017 we are projecting annual production of 125,000 oz of gold. One of the big advantages in this part of the world is the highly oxidized rock, which is relatively cheap to mine and mill and also lies close to the surface. It has other exploration opportunities with the large sulfide resources below the oxide layers, which can significantly increase reserves.

In addition to the Kobada property, the company has other promising exploration targets at Gossokorodji, Diaban and Foroko North. African Gold has been in Mali for years and has personnel who have developed other gold mines in Mali.

TGR: What’s next on your list?

ML: Volta Resources Inc. (VTR:TSX) is a company that has really moved forward, having nine exploration projects. It is currently transitioning itself from explorer to producer in Burkina Faso, at present to converting its flagship asset, the Kiaka gold project, into a producing gold mine. The present NI 43-101 contains 4.1 Moz in the Measured and Indicated categories, and 1 Moz in the Inferred category. Given the size of the resource, I would think that, down the road, Volta could be a potential takeover candidate. Given its excellent resources and $21M in cash and no debt, Volta will have no concerns about having to raise money anytime soon. That’s a significant plus in this market.

TGR: What else do you have?

ML: A lot of people know Pelangio Exploration Inc. (PX:TSX.V) because, going back in its history, it developed the Detour Lake Gold Mine in northern Ontario and that ended up becoming a big winner for shareholders. It now has two properties in Ghana where it has completed some drilling that has recently started to show some interesting results. Its Manfo property lies between the Ahafo mine, which is operated by Newmont Mining Corporation (NEM:NYSE), and Kinross Gold Corp.’s (K:TSX; KGC:NYSE) Chirano mine. You would think Pelangio has a good chance of being on strike with the producers on either side. If it can continue to do more drilling and produce more similar results, we might see some pretty interesting resource estimates come about for this project.

Pelangio also has another very good property, the Obuasi property in Ghana, located adjacent to AngloGold Ashanti Ltd.’s (AU:NYSE; ANG:JSE; AGG:ASX) Obuasi mine, which has already produced 30 Moz of gold. This is an interesting play because of management’s extremely successful track record and because it has added a number of individuals to the management team who have significant experience with mining operations in Ghana. We’ll have to follow and see how the drilling results go, but certainly it is a very interesting play with major upside potential.

TGR: That’s another one to keep an eye on.

ML: The last one I’ve got in Africa is Roxgold Inc. (ROG:TSX.V), which had a proxy battle last summer. Ultimately a deal was completed and I give credit to Oliver Lennox-King and Rick Mazur. Mazur was the executive handling the restructuring and then left when it was done. They put together a strong board and a good management team. This is important because I’ve seen these sorts of proxy battles in the past that ended up destroying some companies.

Roxgold is presently developing three mining properties in Burkina Faso. The company is advancing a high-grade gold discovery at its flagship property at Yaramoko. At the 55 Zone there is an initial resource estimate of 354,000 oz of gold, that graded 17.8 grams/ton (g/t) in the Indicated category and 306,000 oz of gold that graded 7.7 g/t in the Inferred category. These grade are not typical in Burkina Faso where most projects are big volume but low grade. The company has raised $65M to date, so it’s well capitalized for its 2013 drilling program. If the company can continue to increase its high-grade tonnage, it will certainly be a takeover candidate.

TGR: Do you have any wildcard plays anywhere that people might be interested in, either in precious metals or otherwise?

ML: We’ve been looking at a number of zinc plays and probably our favorite right now is Chieftain Metals Inc. (CFB.TSX), which has properties in northern British Columbia. We like this one because, first of all, it has a very experienced management team, which is critical to understanding the metallurgy and the mining in northwestern B.C. Second, with all the zinc mines that are going to close in the next few years, taking millions of pounds out of production, we believe there’s going to be an upward move in the price for zinc, certainly by 2014–2015. Chieftain has recently completed a financing and it should be publishing its feasibility study later this month.

Within a couple of years we think that the zinc price will increase up to $1.40 a pound. That makes a number of zinc plays attractive, especially Chieftain, given its potential to become a zinc producer.

TGR: Where do we go from here, and how should our readers be positioning themselves for what lies ahead in 2013?

ML: As I said, CHF has a number of clients in gold, some low-cost producers, too, but generally speaking, in the gold sector, we would concentrate primarily on jurisdictions we like. West Africa has a lot of advantages compared to some of the more traditional mining areas. One factor is that it is easier to get mining permits compared to some of the jurisdictions in North and South America. West Africa is also flat and dry, has water, power, transportation and a good labor force. In addition, we want experienced management teams that have experience in the jurisdictions where they are exploring.

TGR: Thanks for the ideas and updates, Mark, and we’ll stay tuned and hope for the best in 2013.

ML: Thanks for the opportunity.

Mark Lackey, executive vice president of CHF Investor Relations (Cavalcanti Hume Funfer Inc.), has 30 years of experience in energy, mining, banking and investment research sectors. At CHF, Lackey involves himself with business development, client positioning, staff team coaching and education, market analysis and special projects to benefit client companies. He has worked as chief investment strategist at Pope & Company Ltd. and at the Bank of Canada, where he was responsible for U.S. economic forecasting. He was a senior manager of commodities at the Bank of Montreal. He also spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada.

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Last year, Africa was the region that witnessed the strongest growth in gold-mining operations. In an exclusive interview with The Gold Report, Nana Sangmuah, managing director of research with Toronto-based Clarus Securities, expects that trend to continue and suggests some immediate smart investments in Ghana, Mali, Liberia and the Democratic Republic of the Congo.

The Gold Report: Gold consultancy GFMS, which is now owned by Thomson Reuters, recently published its 2012 Gold Survey. GFMS predicts that before the end of 2012, the yellow metal will likely reach above its all-time nominal high of $1,920/ounce (oz) in September 2011. The catalysts include inflation concerns and sovereign debt problems in Europe, especially Spain. What are your thoughts on these predictions and conclusions?

Nana Sangmuah: I agree with those predictions and the drivers. One thing that has been missing from the gold rally is inflation hedge demand. With the significant monetary easing that has occurred to drive a global recovery, inflation is definitely going to be an issue at some point. We haven’t seen inflation trade come into gold throughout these 10+ years. That’s the strong headwind that is going to move gold to another level.

TGR: The survey reported that mine production hit a record high in 2011, rising 2.8% year over year to reach 2,818 metric tons (mt). That marks the second straight year that gold production reached a new all-time high. Does that mean the theory of peak gold is dead?

NS: Not exactly. If you peel back the data over the past two years, the greater part of this growth has come from mines digging into their stockpiles and people revisiting old resources that previously were thought not to be economic but at these price levels look economic. There have been very few discoveries despite the fact that there’s been quite a lot of money spent on the exploration front. That rate of increase is not sustainable going forward. And the bigger picture still looks grim because the last big discovery of 5+ million ounces (Moz) is the Aurelian discovery—the Fruta del Norte deposit in Ecuador, which now belongs to Kinross Gold Corp. (K:TSX; KGC:NYSE)—from early in the 2000s. It takes on average at least five years to move from discovery into production, so we’re looking at a situation where the supply is not going to grow that much. If the investment demand is sustainable going forward, basically there won’t be enough ounces to feed that demand.

TGR: The GFMS survey also reported that new gold-mining operations contributed 47 mt of new gold supply, while Africa was the region that witnessed the strongest growth, increasing production by 51 tons (t) despite a 5 t drop in output from South Africa. Do you believe Africa will continue to lead the way in worldwide gold production?

NS: Certainly. The ground is very favorable, and there are a lot of projects that have only scratched the surface. Even in the more prolific zones, which have seen a lot of dollars thrown at them, the concentration has just been on open-pit, near-surface mining. In some of these greenstone belts, you can trace mineralization down to more than 2.5 kilometers (km) at depth. As people get more comfortable with the region’s politics, more dollars are going to move in, and certain grounds will be tested. The key is political stability. As commodity prices go up, countries move their fiscal regimes around.

But I think a lot of countries will smarten up and realize they can attract more investments, which will ultimately generate more revenues to the government if their current regimes are seen to be stable. The Asankrangwa Belt in Ghana is one example. This belt is as old as the Ashanti Belt, but we have just recently seen action on it. So far, within a period of less than three years, 10 Moz have been delineated. Some people would think that certain districts are mature and cannot be coming up with even more discoveries, but that is not true.

TGR: Mali’s interim president said that he wouldn’t hesitate to wage “total relentless war” against the Tuareg rebels who have seized much of northern Mali. Do his words make you less bullish on all West African gold producers?

NS: He’s trying to send a strong signal that he’s all for maintaining stability in the region. And the regional force, ECOWAS—Economic Community of West African States—acted quickly to prevent this from blowing up. A stabilizing force has made its dominance known in West Africa, which I think is going to foster more stability and get people to be more comfortable investing more dollars in the region. Access in general has not really been impaired. The borders are open. People can focus on the day-to-day running of businesses and mines. There’s the potential for a few situations here and there as they try to push the Tuaregs away. But the Tuaregs’ links with al-Qaeda are definitely going to unify the international community against any issues. That means that this is not going to drag on for long, and very soon we should see this issue behind us. We’ve seen similar events before and people have hit the panic button and sold off, but as the situations stabilize, valuations come back strongly. So, I see this as a buying opportunity, and I’ll be focusing on assets. If these assets have not been impaired in any way fundamentally, they should be bought at these levels.

TGR: Ghana is second only to South Africa in African gold production. What are some of the companies operating in Ghana that are well positioned to grow their gold production and see it translate to their share price?

NS: In this current environment, we should be watching the balance sheets of companies to see whether they have enough capital to maintain their growth strategies. One company that I think has a very strong balance sheet is Perseus Mining Ltd. (PRU:TSX; PRU:ASX), which has finished up building a mine in Ghana and announced very strong Q112 results showing good cost containment. Commissioning has gone well and it’s in a ramp-up phase. I think most of the risk is behind it. Perseus is on the cusp of generating a lot of cash flow. That is going to help it bring its second asset, which is not in Ghana, into production. Cast your eyes two years out and Perseus will be producing around 450,000 oz, generating a lot of cash flow that could be channeled into further growth opportunities or shareholder dividends. Currently the resource is 9 Moz and Perseus is spending quite a lot on exploration; about 200,000 meters (m) are being drilled in West Africa. The likelihood of growing 9 Moz into 12 Moz is high. And Perseus has had a very good success rate converting these ounces into reserves, so we should see the production profiles also tip up along the way. At these levels, with no finance hurdles ahead of it, being in a fully funded position and just on the cusp of generating strong cash flows, Perseus is one that investors should be watching.

TGR: Perseus boosted the resource at the Edikan by 1.03 Moz in December 2011. Is it reasonable to think that it could do that again by December 2012?

NS: It’s doing about 200,000m of drilling this year; last year it drilled about 250,000m split between both assets. The rate of resource growth should be more significant because now it’s switching focus from infill drilling to regional targeted. That’s where you see a lot more growth in the resource. I’m quite optimistic that we should be seeing a lot of wider swings in the resource growth going forward. And the company’s picking up new targets in and around the existing mine.

TGR: Ghana also has a number of smaller companies exploring for gold deposits, some of which have had early success. Could you introduce our readers to some of those companies?

NS: There are a lot of junior companies prospecting for gold in Ghana. One of the more successful ones in recent times has been PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE). It is advancing a brownfield operation previously operated by Resolute Mining Ltd. (RSG:ASX), which mined about a million ounces at 2.2 grams per ton (g/t). PMI came in and has been able to delineate about 5 Moz on the flagship asset. What is most exciting about the company is it has more ground toward the south on the Asankrangwa Belt, on the Asanko project and the Obotan project. This is the first time that ground has been developed by one single company. This points to the potential to grow the ounces profile well north of the current 5 Moz. PMI also has ground—the Kubi project—next to one of the world’s most prolific mines, the Obuasi mine, which has produced and delineated about 60 Moz. And it actively drills Kubi, which is just 15km south of Obuasi. For the first half of the year, it’s drilling about 100,000m on all these targets. And we just saw eight new anomalies discovered last week, signaling the potential to add to the current resource envelope.

TGR: The Obuasi gold mine is operated by AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), which is a major gold producer. Would that make PMI a potential takeover target?

NS: Most of these junior companies that have solid resource growth potential are likely targets.

TGR: Any others in Ghana?

NS: There are quite a few, but we can talk about some other early-stage companies, like Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX). It’s about to come out with a maiden resource on the ground in northern Ghana in a district that is known for gold-bearing structures.

TGR: On Jan. 19, 2012, you wrote, “Abzu’s vast tenement package with a plethora of targets diversifies exploration risk well for shareholders and its proven management team reduces execution risk.” Tell us more about the management team there.

NS: Abzu’s CEO Allan Serwa is a Canadian who’s been in Ghana for quite some time and has built up a lot of relationships there. He brings to the table the ability to manage community relationships very well—better than seamless. You find a lot of companies with good projects but a lot of problems dealing with communities. So Serwa really gives Abzu a solid platform from which to take off. Paul Klipfel has been a geologist with some of the more senior mines, including Placer Dome Inc. [now Barrick Gold Corp. (ABX:TSX; ABX:NYSE)], and has had some decent experience in Ghana as well. Quite a few other accomplished geologists and company CEOs who will provide necessary direction are on Abzu’s board of directors.

TGR: Abzu’s sizeable land package stretches across four different gold belts in Ghana. What sort of exploration success has Abzu had to date?

NS: Abzu has delineated a mineralization trend of 1.5km in one. I have visited that structure and have seen that it extends well to the north and to the south. On the Asafo Belt right on the Kibi Belt in the south, Abzu has been coming up with some very decent grade intersections of 4+ g/t material. It’s still early but indications point to, with additional drilling, sizeable results.

The concessions are in close proximity to prolific mines. Abzu has properties near Newmont Mining Corp.’s (NEM:NYSE) Ahafo and Akyem projects. It’s got property that is close to Keegan Resources Inc.’s (KGN:TSX; KGN:NYSE.A) Esaase mine. So, these are spanning all the belts coming through to the south. And Abzu is on the Kibi Belt as well—that is also close to a past-producing mine. There is the adage that the best place to find gold is within the shadows of a headframe. I think that is the strategy that guided Abzu in staking all these concessions.

TGR: You also cover companies with gold projects or mines in Burkina Faso, Liberia and even the Democratic Republic of the Congo (DRC). Please tell us about some of those companies.

NS: In Burkina Faso one of my top picks is SEMAFO (SMF:TSX). It’s seen quite a significant pullback in recent times. It has a very solid balance sheet, $170 million (M) in cash, no debt, and it’s generating an operating cash flow of about $130M per year. This company is in a position to fund all its organic growth without coming back to the market. Any value from additional expansions flow to the shareholder. SEMAFO has been able to demonstrate the ability to bring that production on for the past three years. There are a few catalysts coming down the pipeline, including a resource update. And as management continues to show to the market that its large Mana project has resource growth potential with several exploration updates expected, not only in June but after, we should begin to see that attention back into the stock. We will probably see it recover earlier than most of its peers because there’s nothing fundamentally wrong with the company.

TGR: You’ve got a $12 target price on that and a Buy rating. SEMAFO has a promising project in Niger called Samira Hill. What are your thoughts on that?

NS: It is a mine that sits on a mineralized trend that stretches for a good distance. Only about 15% has been tested and developed as pits. So there’s a lot of potential along the strike. In the past, very little capital was reinvested in the mine because ownership was split between Etruscan Resources Inc. (EET:TSX) and SEMAFO, and Etruscan never had enough money to put into expansion activity. The mine has not been performing at its optimum level for some time. That’s changing with SEMAFO now taking full control of the mine and investing a lot more into exploration and capital projects. It’s smaller and we need to see a much, much larger expansion to get more stability in the operation. But I think it’s still a worthy asset to have in the company.

TGR: Tell us about Liberia.

NS: Often people shy away from countries that have had issues. But Aureus Mining Inc. (AUE:TSX; AUE:LSE), which will likely be the first company to commence production in Liberia, is making good strides. Infrastructure-wise Aureus’ New Liberty project is very close to the port, and most of the access to the ground is via a paved highway. That makes it relatively easy to access, compared to other projects in the country. The capital required to kick-start the mine is around $120M—that’s not so huge that it will make this project’s financing risk insurmountable. I see Aureus coming up with its first production sometime in 2014. At this level, it’s one of the highest grade projects in the whole of West Africa near surface. And that’s just the beginning. About 40km north is its main asset, New Liberty, which in itself has a lot of potential to grow in surrounding anomalies that have been delineated. Northwest of the structure is a new 13km anomaly that has been picked up. The grades that Aureus has been picking up from initial intersections on this system are quite encouraging. So, there’s definitely a gold district there and the grades are quite compelling. That would definitely have a good impact on cost.

And we like the DRC. That country has had its issues in the past, but as with any other such situation, there’s always a time when it stabilizes. The fact that the election was conducted is a good thing. There were a lot of irregularities, but post-election issues have not been too severe, and that’s a good sign that the DRC is maturing and stabilizing. You see a huge discount in companies operating in the DRC, which in my opinion is not warranted, because it has one of the most prospective mineral belts in the world.

We just saw the first commercial gold production coming with Banro Corporation (BAA:TSX; BAA:NYSE) picking up the march. And we’re going to be seeing Kibali from Randgold Resources Ltd. (GOLD:NASDAQ) come through. I just visited the Kibali project and was very impressed by the progress made for relocation, which is probably the most challenging part of construction. With a solid technical and mine-building team in place Randgold expects to bring Kibali into production by 2014 without a lot of challenges. As these two continue to do well, people will change their perception of gold mining in the country.

Another that I would highlight as very cheap at these levels is Kilo Goldmines Ltd. (KGL:TSX.V), which is on the Ngayu greenstone belt and will be commencing drilling very shortly. David Netherway and Alex van Hoeken have taken over, and they are seasoned mining personnel who focus on the exploration growth potential of their large land package. One similar ground to the Kilo ground is Geita, which in the 1990s started as a small resource from old mine workings and has grown to north of 10 Moz. It’s a similar story for Kilo. It has an old mine at Adumbi, which is currently around 1.8 Moz, and there are a whole slew of prospects around it. This is one of the few times that a company has enough drill rigs to chase some of these targets. It’s very early, but there’s a lot of growth ahead of Kilo—including the fact that Kilo also has an iron ore exposure that the market is not paying anything for. So, you rarely get something for free, but Kilo could be an example of where that really works.

TGR: An iron-ore sweetener, as you’ve called it. In a March 30, 2012, report, you said you expected a rerating of the stock. When?

NS: Rigs are on-site and drilling has commenced. It has its own sample prep lot, so turnaround times are not going to be that long. As news starts to flow, which could be as early as midyear right through the end of the year, and people begin to appreciate the size potential of this asset land package and also the grade profiles, that’s when everyone will start waking up to the opportunity and drive the re-rating.

TGR: Do you have some parting thoughts on African gold plays?

NS: People should continue to focus on the fundamentals. Take advantage of the situation, which will turn around and stabilize, to pick up on names that you missed out on and wait for the disconnect between the commodities and the equities to correct. I see very little downside risk at these levels.

TGR: Thanks for your insights today.

Nana Sangmuah is managing director of research at Toronto-based Clarus Securities. His previous industry experience includes the Prestea underground mine, AngloGold Ashanti’s Obuasi and Iduapriem mines, and Gold Fields’ Damang gold mine. He has over eight years of global mining equity research experience that covers more than 60 mining companies worldwide in the gold, base metals and diamond sectors and has in-depth knowledge of mining projects in West Africa. Sangmuah completed a Master of Business Administration in finance at the University of Toronto’s Rotman School of Management in 2004 and obtained his Bachelor of Science in engineering from the University of Mines and Technology, Ghana, in 1999.

Brock Salier, a mining analyst with GMP Securities Europe, sees plenty of gold coming out of Africa in the coming months and years. In this exclusive Gold Report interview, he says 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?

BS: 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?

BS: 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?

BS: 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?

BS: I genuinely believe nationalization is not a major issue in Africa. Looking at the historic incidence of nationalization, it’s not common in Africa. It did happen in the DRC with First Quantum Minerals Ltd. (FM:TSX). 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?

BS: 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?

BS: 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?

BS: 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: Let’s get into your coverage sector. You cover African Barrick Gold Plc (ABG:LSE), which operates the Bulyanhulu gold mine in Tanzania. In your Oct. 20 research report, you basically said that African Barrick is seeking a takeover target. What sort of catalyst would that be for the company’s shares?

BS: The key catalyst to any gold producer is increased production on an accretive basis, meaning increased production on a per-share basis. African Barrick struggled to increase production in Tanzania with mature assets. Given its strong cash balance, I believe the company will be able to buy production without issuing new shares. That could prove to be a tremendous, positive catalyst for the stock.

TGR: Which juniors would be likely targets?

BS: We believe a company like African Barrick will look for juniors in a stable country, with numerous future growth opportunities, existing production and growth projects. As outlined in our initiation report the two that stand out are Teranga Gold Corp. (TGZ:TSX; TGZ:ASX) and Avocet Mining Plc (AVM:LSE). Both have existing production in the 120–250 thousand ounces per year (Koz/year) range, lots of exploration upside and, most importantly, would be affordable with capitalizations well under $1 billion (B).

TGR: Will African Barrick ever get to the large-cap producer status of some of African players like IAMGOLD Corp. (IMG:TSX; IAG:NYSE) or Gold Fields Ltd. (GFI:NYSE)?

BS: If it did acquire a junior producing 200 Koz/year, production could very quickly lift over 1 million ounces per year (Moz/year). That immediately takes it to production well above a company like Randgold Resources Ltd. (GOLD:NASDAQ), a far higher-rated peer in London.

Looking to the future, it would be all about additional acquisitions and exploration. We’ll have to wait and see what acquisition strategy it executes.

TGR: Let’s move on to Banro Corporation (BAA:TSX; BAA:NYSE), another Canada-domiciled company. Banro reported its first gold at Twangiza in early October. Banro is a preferred stock you cover. What are the catalysts for Banro?

BS: Banro is an extremely lucky developer and producer in that, in addition to the Twangiza mine, it has two large, undeveloped gold assets that, geologically, should become mines: Namoya and Lugushwa.

In our recent initiation we noted that the key catalysts for Banro are taking its second and third projects, Namoya and Lugushwa, into production. In the short term, the milestones are those that enable progress toward production. We expect the final engineering study for Namoya around year-end, with construction to start early next year. Lugushwa is expected to release a revised resource around year-end and we expect a preliminary economic assessment shortly thereafter. That means analysts will be able to value Lugushwa on a discounted cash flow (DCF) basis for the first time.

TGR: It will take about $120 million (M) in capital expenditures (capex) to bring Namoya into development. When is production slated to start?

BS: We expect the company will start construction around March 2012. There will be a 12-month build, so it can get a targeted first gold pour around March 2013.

TGR: Does Banro have enough money to fund that capex for 12 months?

BS: Namoya’s capex estimate is around $120M. We recently published a report in which we estimate that Twangiza should generate $140M of free cash flow to fund Namoya. Obviously, the budgets are difficult to tie down. But broadly speaking, Banro should be able to cover the capex at Namoya.

TGR: How is production going at Twangiza?

BS: The company has only just announced its first pour; we’ll have to wait and see. When I visited, I was impressed with the engineering team and the design and build, which was being done extremely quickly in an arduous environment. No doubt there will be teething issues, but I’m confident that ramp up should happen in line with target at year-end.

TGR: You mentioned that the DRC nationalized some of First Quantum’s assets, and Banro had its exploration concessions seized back in the early part of the last decade. What kind of relationship does Banro have with the DRC government?

BS: Banro works extremely closely with the government. The government is very happy to see new mines in the eastern part of the country for the first time in modern history and the first modern gold mine to be commissioned as well. The DRC is seeing a big influx of skills, as well as taxes and royalties being paid. In the long term, driven by the copper industry, the DRC sees how well it can do from mining and how it can help the country. My view is that the government intends to maintain a peaceful outlook and to keep the mining industry going.

TGR: GMP follows exploration companies like Loncor Resources Inc. (LN:TSX.V; LON:NYSE.A), Roxgold Inc. (ROG:TSX.V) and Orezone Gold Corporation (ORE:TSX), plays that are not getting support in the market.

BS: Valuation is very difficult. As a geologist by training, I pick producers where I think the resource is, or has potential to be, big enough to be mined and where the geological conditions support additional discoveries.

Loncor, Roxgold and Orezone have already drilled what will eventually be delineated as mineable projects. All have a very good likelihood of finding new projects, although that is always more speculative.

It is difficult to value an exploration company on a DCF basis, so we use the enterprise-value-per-ounces-delineated method and compare that to the peer group. Most listed African pre-producers trade at an average of $80/oz. Then we put a higher valuation on those deposits that have more readily mineable ore—such as higher grades or open pit mineable—and a lower valuation on those with lower grades or more difficult jurisdictions or mining conditions.

TGR: Loncor is a preferred stock you cover; its Makapela project in the eastern DRC doesn’t have a resource yet. How big do you think that resource could get?

BS: I think Makapela will define more than 1 Moz. The company still has a lot of drilling to do and we should see results in mid-2012.

The beauty of Makapela is that there are almost certainly subparallel zones there. Thinking about the next one to three years, I’m convinced it will find more zones and grow over time. From what we’ve seen so far, the potential for more than 1 Moz is there. And, the grades at Makapela are stunning.

We often use the adage that grade is king, and certainly at 9 grams per ton (g/t) even over the narrowest 4–5 meter (m) width, Makapela is very easily mineable mechanically and economically. That should give good returns.

TGR: How does Makapela compare to projects belonging to Roxgold and Orezone?

BS: It’s very similar to Roxgold’s resources. Roxgold recently found slightly narrower veins, but extremely high grade. It’s very different from the resources you typically find in Africa, which are more likely to be around the 2 g/t range, open pit mining and much larger deposits.

One of Loncor’s advantages is its joint venture with Newmont Mining Corp. (NEM:NYSE). That agreement targets a 5 Moz, lower-grade, perhaps 2–3 g/t, open pit deposit. Between Makapela and the joint agreement, Loncor has a strong twofold strategy.

TGR: And Orezone?

BS: Orezone fits in a new breed of deposits we’re seeing in Burkina Faso, alongside Volta Resources Inc. (VTR:TSX). Those companies have relatively lower grades at 1 g/t, but huge size. All of them have potential for 3–5 Moz. The attraction of those deposits is not the grades, but the sheer scale.

TGR: Very few people know much about Burkina Faso. Can you give us a brief overview of its stability?

BS: I was in Burkina Faso last week. It had issues earlier in the year, when civil unrest in Côte d’Ivoire interrupted the supply chains for staples such as fuel and food into Burkina Faso. As a consequence, food prices went up, and the local populace grew uneasy. Now, the supply lines have been re-established and the populace is very supportive of the long-term head of state, Blaise Compaoré. The mining industry is flying ahead. Burkina Faso is one of the best destinations in Africa to invest in from stability and geological prospectivity bases.

TGR: Some of our readers like base metals plays, and you follow a small copper play in the DRC called Tiger Resources Ltd. (TGS:TSX; TGS:ASX). What brought you to that name?

BS: In this economic climate, I believe it’s important to pick mining stocks that don’t have large, upfront capital requirements. That can often be an insurmountable hurdle if the share markets aren’t open for fundraisers.

We recently initiated coverage on Tiger Resources, which alongside all the copper producers in the DRC, has the advantage of a small, exceptionally high-grade starter resource. For less than $30M capex, the company built a plant producing 30,000 tons per annum of copper in concentrate. Similar to Banro’s expansion model, Tiger self-funds a large component of its expansions. We love the geology of the DRC. We think it’s far more prospective than the much-lower grade copper deposits in Botswana, and for Tiger that means there is a lot more opportunity for Tiger to pursue a merger or acquisition, now that it’s an established producer.

TGR: Do you have any other preferred stocks you would like to share with our readers?

BS: One of my preferred stocks is Sable Mining Africa Ltd. (SBLM:LSE). Its current market cap is $150M. It has a strong balance sheet, $110M back in March. As we outlined in our recent initiation report, it’s about to start drilling on what I think are the most exciting and largest iron ore exploration targets in West Africa. Looking at its two targets in Liberia, I see potential for some of the largest iron ore discoveries to be delineated in the last decade. They are both within 70 kilometers (km) of existing railway, so there is good infrastructure as well.

TGR: That is a significant distance. Will Sable be building rail?

BS: Absolutely. Many of the iron ore deposits being discovered in West Africa are 150km or more from the nearest port or existing rail project. So, while a 70-km railway sounds like a lot, compared to other West African projects, it is far closer than most. The attraction is the potential for in excess of 10 billion tons (Bt) of iron ore, which is a phenomenal amount and more than warrants building 70km of railway.

TGR: Sable also has some coal projects in its portfolio. What can you tell us about those?

BS: Its South African project is almost ready for a bankable feasibility study to fund construction. Its project in Zimbabwe is even more exciting. Its portfolio there has the potential for 4 Bt of thermal coal with coking coal. Although Zimbabwe is going through a period of reform, we believe the current investment climate is suitable for exploration, which enables Sable to undertake exploration and feasibility studies. As such, for Sable investors, the key value lies in the iron ore portfolio.

TGR: What is the upcoming news flow for Sable?

BS: The company has spent some 18 months acquiring projects, undertaking geophysics and establishing road infrastructure to drill the targets. This means there has been limited news flow, but with the drilling starting in January across the iron ore portfolio in Liberia, we expect the news flow will significantly pick up.

TGR: Is there a good spot on the Internet where people can go to see new resource stories coming to market?

BS: 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.

Brock Salier is a mining analyst with GMP Securities Europe.