Golden Opportunity in West Africa

Although the African continent fell short of its World Cup “Golden” aspirations last Friday as Ghana was eliminated from the tournament, there are still many reasons to believe the future of the region will excel in the near future.  One source of success could be provided by SEMAFO (TSX:SMF), a gold mining and exploration company currently with gold production and operations in West Africa.  The Canadian based mining company has a market capitalization of $1.9 billion and presently controls three gold mines: the Mana Mine in Burkina Faso, the Samira Hill Mine in Niger and the Kiniero Mine in Guinea.

The Chief Executive Officer, Benoit La Salle is aware of the threats of global inflation and seems committed to focusing on cost containment, as the company reported a steady rise in total cash margin over the last quarter.  A relatively strong balance sheet indicates the debt to equity ratio is at a manageable 10 percent compared to 13 percent at the end of 2009.  This strategy could yield strong returns for shareholders, as the company’s organic growth approach and extensive exploration during this first part of 2010 enhanced confidence in ongoing drilling programs and prospective positive impact on reserves and resources.

Investor Considerations

Cash Flow Generation – SEMAFO exhibits an attractive Price to Cash Flow ratio of 20.6 over the trailing twelve months compared with the industry average of 24.9.  This is of particular interest since the greater relative liquidity might be important for the company to expand its drilling program or enhance flexibility to pursue additional organic opportunities.

Financial Strength – A very efficient Operating Margin of 27 percent over the past twelve months is relatively strong compared with the industry average, and indicates management is successful at achieving their objective within a challenging economic context.

Profitability – The company demonstrates a long term track record of relative profitability with a 5 year Earnings Before Interest, Taxes and Depreciation (EBITD) margin of over 27 percent comparable to an industry average approaching 14 percent.

Share Price Return – Investors should take a precautionary note of the strong price appreciation of the shares on a year to date basis.  This will be a critical consideration for value style investors, as the current price range already reflects a significant price increase over the course of the year.  A well known disciplined strategy to minimize risk of over paying for a stock is to monitor the price and begin building a position over an extended time horizon, gradually acquiring additional shares when the market provides a discount.

Location – Another source of concern should be the risk premium or discount that might be applied to a theoretical intrinsic value for the share price based upon the mining operations and geopolitical context. Independent and reputable consultants at the Fraser Institute provide some assistance in this endeavor by publishing an annual survey of mining companies.

One objective of the survey aims to establish how mineral endowment and public policy factors, such as taxation and regulation, affect mining and exploration investment.  A current mineral potential index for this year shows that, although African countries rank significantly lower than other international jurisdictions, many nations on the continent have shown steady improvement in factors that influence mineral exploration investment.  This year’s survey places Burkina Faso fourth in the world, which is the highest-ranked African country in the index.

Current Events

On June 28th the company reported an update for its Mana Mine, indicating reserves totaling 1.7 million mineral ounces. The Pre-feasibility study for the Wona underground deposit combined with revised open pit reserves resulted in a 125 percent increase in reserves, and represented an additional 961,000 ounces at Mana.   This most recent press release followed closely an announcement in mid June of a discovery of several new gold mineralized zones at the same mine, seeming to confirm the effectiveness of the company’s systematic exploration methodology and $9 million drilling program. The first reverse-circulation drilling results from this new Fofina Zone returned gold values of up to 4.12 grams per tonne over 30 meters, including 9.12 grams per tonne over 10 meters.

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