Value emerging in Africa-focused miners

Investing in African miners carries high risk and suits experienced investors and speculators. Photo: Jose More

Speculators are trampling all over African-focused exploration stocks in their rush to the exits. After soaring in 2009 and 2010, the share prices of many in the sector have more than halved from their peak. They ran too hard during the boom and some appear to have fallen too far during the bust. Contrarians should take note.

The median one-year loss for the top 50 largest Australian stock exchange-listed mining stocks with core African assets is 41 per cent, BRW analysis shows. Only six stocks have a positive return over one year and 20 have more than halved. West African-focused gold stocks have been hardest hit.

Sentiment is terrible. Gryphon Minerals, featured in this column in June, increased its gold resource this month to 4.5 million ounces from 2 million and is rapidly advancing its Banfora project in Burkina Faso. Yet its shares fell 2.5¢ to 69.5¢ on the news and are now 60¢. They were $2.05 a year ago and are back to levels when the miner had a resource of only 1 million ounces.

Before the resource upgrade, consensus price targets for Gryphon based on 12 broker estimates ranged from $1.25 to $2.30. One of the better judges, Canaccord BGF, values the shares at $2.20. On my maths, Gryphon’s enterprise value (EV) per ounce of resource that complies with the Joint Ore Reserve Committee Code is less than $40.

A few years ago, top African gold explorers sold on an EV per ounce of $300 to $400 and the long-term benchmark is about $170 for projects maturing to the development phase. Gryphon may not be a screaming short-term buy in a weak market but it shows how valuations of some African explorers have swung from exceedingly over-priced to under-priced.

Mining stocks generally have lost favour as fears have grown that China’s economy will slow more than expected. The S&P/ASX Metals and Mining Index shed 31 per cent in 2011-12. African-focused stocks have fallen even more. Civil war this year in mining hot spots, such as Mali in West Africa, have reminded investors about sovereign risk in emerging countries.

Papillon Resources, which has the Fekola gold discovery in Mali, dropped from $1.42 in March to 90¢ as conflict intensified but it has since recovered to $1.15, making it the best-performing African-focused exploration stock over one year, on BRW analysis, having raced upwards from a 52-week low of 38¢. It reported an initial gold resource of 3.14 million ounces at Fekola this month.

The changing profile of Australian companies in Africa is also weighing on short-term performance. Key stocks, such as Perseus Mining, have moved from exploration to production. Others, such as Gryphon, are a few years behind. As explorers move towards production, more capital has to be raised through share issuance, meaning potential dilution for shareholders. And feasibility studies and plant commissioning are less exciting than making big finds.

The market wants the next batch of explorers to get to production. Gryphon and Papillon have done a good job building bigger resource bases to underpin feasibility studies. But others, such as Ampella Mining, another former market darling, has shed 80 per cent this year amid concerns about recovery rates and difficulties, and lack of takeover interest. Ampella has the 3.1 million ounce Konkera resource in Burkina Faso.

Investors want the next wave of emerging gold explorers to deliver on their promises. Blackthorn Resources and the Canadian-based PMI Gold Corp have delivered strong share gains in the past 18 months and others, such as Mt Isa Metals, are still well up on prices of a few years ago.

Middle Island Resources and Azumah Resources, both of which have exploration merit, have tumbled over 12 months. Noble Mineral Resources in July upgraded its main resource at Bibiani from 2 million ounces to 2.5 million but has shed 66 per cent over 12 months.

Even in a bear market it is hard to reconcile these share price falls with the magnitude of resource upgrades from the likes of Gryphon and, to a lesser extent, Noble. My guess is that the bear market is drowning exploration news from African explorers and speculators have no time for such stocks when market sentiment is so against them.

If this trend continues, watch for more takeovers in the next six months. Large miners surely will be attracted to gold explorers with deposits of 3 to 4 million ounces and share prices that have more than halved. Investors should never buy solely on the basis of potential takeover but valuations for some African-focused stocks are rapidly improving.

Portfolio investors should stick with higher-quality companies, such as Perseus and Resolute Mining, while speculators might investigate Gryphon. Investing in African miners carries high risk and suits experienced investors and speculators.

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