Interactive Investor

Don't overlook Burkina Faso for mining success

4th February 2011 17:00

Fiona Bond from interactive investor

When one casts an eye over a map of Africa, Burkino Faso doesn't necessarily spring to mind in terms of mining prowess.

However, having emerged from a history of political and economic instability, the country has staged a turnaround and analysts believe markets shouldn't be so quick to overlook it.

Just earlier this week, President of the country's Professional Mining Association, Elie Justin Ouedregao, said the country's gold production is likely to rise a whopping 32% to 33.74 tonnes.

That follows on from 25.6 tonnes produced last year and 11.73 tonnes in 2009.

The landlocked country, nestled deep in the heart of west Africa, has spent the past two decades working hard to overhaul its economy; reducing its dependence on agriculture and developing its other resources.

It's a move that has proved fruitful, with Burkina showing constant economic growth for the past 15 years.

In 2003, Burkina Faso - which translates as "land of honest people" - introduced a new mining code with the intention of luring foreign investment.

Since then, mining, and more specifically gold exploration, has gathered momentum and it now plays host to six operating gold mines, as well as over 20 listed exploration companies.

Of course, the country is not without its risks, after it was recently ranked among the least attractive places to do business by the World Bank due its prohibitive energy costs and remote location.

That said, Burkina Faso has worked hard to make its mining sector attractive to outside investors and so far it has outperformed its other labour-intensive industries, with the government outlining its intention to produce gold output worth some $307 million a year from 2015 onwards.

It was also ranked fourth globally by the Fraser Institute in its Survey of Mining Companies 2009.10 for its mineral potential given its current mining policy.

Charles Kernot, analyst at Evolution Securities, said: "We would argue that Burkina Faso is one of the best mining jurisdictions in west Africa, especially when compared to countries such as Guinea and the Ivory Coast.

"With stable politics and good geology, we believe that Burkina Faso is well on the way to being a major player in the west African gold space."

It is against this backdrop that UK-listed companies have decided to develop their assets in Burkina.

LSE:CLF:Cluff Gold

Cluff Gold has enjoyed a strong past 12 months, with shares shooting up over 82% amid a growing interest in the gold mining industry.

The company, which floated on AIM back in 2004 with a suite of gold assets in the west African region, took the decision two years later to develop its two gold mines; Angovia in Cote d'Ivoire and Kalsaka in the north of Burkina Faso.

Cluff featured as one of Edmond Jackson's five stocks to watch for the year. Read his five special situations for 2011

Last year proved a pivotal one for the project, when it produced over 74,000 ounces of gold - a 35% increase from 2009 and smashing through the 70,000 ounce target set at the start of the year.

Taking into account the strong output, analysts at Evolution Securities estimate that the company will have some 570,000 ounces of gold resources remaining at the site, comprising oxide, transitional and sulphide resources.

But that hasn't proved enough for this gold miner, who has put an aggressive exploration programme in place to increase its resource base and therewith, extend the mine life.

Cluff has committed to a 63,000-metre drilling programme this year and has said it will look to identify oxide resources close to the mine in order to lengthen its existing heap leach operations.

If successful, it would certainly buy Cluff more time to pursue its exploration activities.

The company has already highlighted its dedication to an exploration campaign, with $32 million earmarked for work at both Kalsaka and Angovia.

Evolution Securities, which visited the gold mine in December, said it feels the market is largely unaware of the exploration potential at Kalsaka.

"We came away with the impression that the company has a good chance of increasing the life of the existing operations and making potentially significant discoveries on its existing licences. We increase our target price from 150p to 160p as a result of the continued strength of the gold price and our view that this will continue through 2011."

In addition to work at Kalsaka, Cluff has also laid its hands on four new exploration licences in the east of the country; Kankandi, Tyabo, Partiaga and Bouamounandi.

John Meyer, mining analyst at Fairfax, said: "The year ahead could well be an exciting time for Cluff, particularly from exploration work at Kalsaka. Ongoing results from Kalsaka (and Baomahan) could well see considerable value growth for shareholders."

Matthew McDonald, mining analyst for Seymour Pierce, tagged the stock with a 137p price target and a 'buy' recommendation.

LSE:AVM:Avocet Mining

A second UK-listed company making a splash in Burkina is Avocet Mining, whose shares has soared a whopping 135% over the past year to reside around the 218p mark.

At the end of 2010, Avocet made further ground when it announced the conditional sale of its South East Asian operations, paving the way for the company to channel its focus entirely on west Africa.

"The transaction will leave Avocet as a west African gold producer with a clear strategy for growth in that region," the company said.

It views Burkina as a rapidly expanding hotbed of mining activities and points towards the many tax exemptions for the industry and the full repatriation of profits permitted by the mining code as key attractions for its involvement in the country.

To this end, the company has announced its intention to double its reserves at the Inata mine in Burkina. As of last June, compliant mineral resources at the mine were 1,837,900 ounces, while the ore reserves stood at 1,081,500 ounces.

Analysts at Collins Stewart said: "With potential funding in place from the sale of high cost South East Asian assets currently going through, Avocet can now fully focus on planned mill expansion at its Inata operation as well as an extensive drilling programme to expand resource on a very highly prospective lease.

"We view Inata as a technically simple, low risk operation, which should be a consistent, profitable performer for the company. Avocet remains one of our favoured names in the London gold space."

The mine, which poured its first gold in December 2009, churned out a total of 137,732 ounces last year -ahead of its own guidance and sufficient to encourage Avocet to charge ahead with its plan to increase the throughput rate of the plant.

Analysts at SEB Enskilda said the exciting exploration potential in the region is more or less values to zero at current share price levels and said they remain convinced that the drilling programme for 2011 will provide promising results.

In addition to Inata, Avocet holds eight exploration licences spanning some 1,660 square kilometres within the prospective Belahouro district, surrounding the Inata mine and is set to embark on a $40 million exploration programme this year.

"Renewed exploration at Belahouro is likely to discover additional gold resources for development as modern-day exploration procedures have not been applied to the very prospective land surrounding the Inata gold mine site," the company said.

However, Tyler Broda, analyst at Canaccord Genuity cautioned that the company's operations could be exposed to political risks due to the nature of such emerging markets.

Nevertheless, he said encouraging operational results at the mine highlighted management's ability to meet its output targets and market expectations.

"Its strong balance sheet, encouraging operational results and significant potential exploration upside may result in the shares re-rating significantly from the current P/NAV of 0.88 times towards its target multiple of 1.1 times, especially if the recent weakness in the gold price proves short-lived," he added.