Gold exploration companies are sometimes described as baby turtles scuttling across the beach toward the ocean.
99% of them end up in the belly of a seagull.
To build an economic mine you need the following:
- Gold in the ground
- A location where the locals want the gold mine
- The ability to finance the mine
- High gold grades.
- A taxation scheme that allows investors to profit
A low-profile $198 million company West African Resources (WAF.V) has all those things – and more.
WAF is operating the high-grade Sanbrado Gold Project in Burkina Faso – a (relatively) small country in West Africa.
Burkina Faso carries risks – which has chilled the investment climate in that country. We think those risks are overblown. We’ll explain why in a minute, but first – let’s go through that checklist:
- WAF has gold in the ground
Updated Mineral Resource Estimate included 2.35 million ounces gold in Indicated Resources and 0.55 million ounces gold in Inferred Resources;
Probable Ore Reserve of 20.4Mt at 2.4g/t Au for 1,574,000oz gold – a recent 76% increase.
- A location where the locals want the WAF gold mine
WAF is fully permitted. All environmental approvals were secured in 2018. The project is now ready for mine development. Fast progress – since WAF made its discovery at the M1 South deposit only two years ago.
- The ability to finance the WAF mine
WAF recently raised $43million before share issue costs, resulting in significant dilution. The company has also secured a debt facility of USD $200 million, required to achieve the following objectives:
- Sanbrado development costs;
- Pre-production mining costs;
- Project financing costs including interest, charges and Offer costs;
- Burkina Faso taxes associated with Project construction;
- Exploration; and
- Corporate costs including working capital.
- High gold grades at WAF project
Results recent infill drilling at the M1 South deposit include 4m at 21.45 g/t Au from 421.5m, including 0.5m at 79.7 g/t Au, 3m at 29.52 g/t Au from 434m, including 0.5m at 127 g/t Au, 3m at 14.49 g/t Au from 417m, including 0.5m at 73.9 g/t Au and 16.5m at 14.78 g/t Au from 446.5m.
Drilling along strike included 1.5m at 91.76 g/t Au from 155m, including 0.5m at 215.6 g/t Au and 3.5m at 15.79 g/t Au from 347m, including 0.5m at 64 g/t Au.
- A taxation scheme that allows WAF investors to profit
In 2002, Burkina Faso’s gold mining royalty rate was 3% – a tax on sales revenues. Lured by the low tax rates – international mining companies flooded the investor-friendly country.
Burkina Faso is Africa’s 4th biggest gold producer, with gold accounting for about 70% of its total exports.
In 2010, the government of Blaise Compaoré introduced a new floating royalty mechanism in line with the world gold price.
When gold was less than $1,000 per ounce, the existing 3% royalty would stand. If prices went above $1,000 per ounce, the rate would rise to 4%. Above $1,300, companies would pay a 5% royalty levy.
There are strong moral arguments that the rate should be even higher. Even if the federal taxation doubled, the Sanbrado Gold Project will remain economic.
Open Pit and Underground Feasibility Study confirms:
- Annual production of 211,000 ounces gold over first 5 years of mine life
- 76% increase in Probable Reserves to 1.6 million ounces (20.4Mt at 2.4g/t gold)
- 16-month post-tax pay back on US$185 million pre-production capital costs
- All-In Sustaining Costs (AISC) of US$551/oz over first 5 years and US$640 over life of mine
- Pre-tax NPV5% of US$567m (A$754m) and pre-tax IRR 62%
- Post-tax NPV5% of US$405m (A$540m) and post-tax IRR 49%
- Environmental approval granted, updated mining licence expected Q3 2018
Now let’s talk about the risks.
Burkina Faso is the 16th poorest country in the world. It is a communal versus an individualist society. Generally, people from different tribes and religions co-exist peacefully.
The country is victim to violent outbursts by the jihadist group Ansarul Islam – who have sworn allegiance to Al-Qaeda.
Despite this, the rate of homicide In Burkina Faso is 67/100,000 people – compared to the U.S. rate of 94 homicides/100,000 people.
Al-Qaeda is no barrel of laughs – but moving from Baltimore to Ouagadougou reduces your chances of being murdered by 34%.
Big ass gold mining companies like the $2.4 billion Endeavour Mining (EDV.T) operate there successfully.
EDV’s Houndé mine is comfortably on track to meet 2018 production guidance of 250,000 – 260,000 ounces and the low end of its AISC guidance of $580-630 per ounce.
Another Burkina Faso mine, Karma is on track to meet production guidance of 105,000 – 115,000 ounces and the top end of AISC guidance of $780-830 per ounce.
At the current spot price of CAD $1,738 – EDV’s 350,000 ounces of gold is worth about CAD $600 million
So yes, it’s possible to operate a profitable gold mine in Burkina Faso – and we think Western Africa Resources is about to do it.
FULL DISCLOSURE: We have no financial relationship with any company mentioned in this article.