I have been a shareholder in Semafo for over 2 years and still believe that this company is a great long-term opportunity for anyone who believes that, over time, the gold price will continue to appreciate. However Semafo Inc. (OTCPK:SEMFF) had a very bad 2019. They operate 2 gold mines in Burkina Faso. In August they experienced a pit wall failure at their Mana mine and in November buses carrying staff to their Boungou mine were attacked leaving 37 staff dead and many others wounded. The company shut down operations at Boungou until they could safely transport staff to the mine.
The problem Boungou mine (picture from the Semafo Inc. website)
On the 6th February, the company reported that the processing plant had been restarted, using stockpiles only and that the plan was to restart mining operations in the 4th quarter 2020, assuming that the government of Burkina Faso was able to provide extra protection in the area of the mine. At present the company is flying staff to and from the mine (there is a partially completed landing strip at the mine). In the press release the company stated,
Our phased plan foresees a restart of mining in the fourth quarter while continuing to process stockpiles. The current stockpile holds 1.1 million tonnes at an average grade of 3.4 g/t Au, representing approximately ten months of mill feed. However, we need the government to improve security on the public road and in the surrounding region in order to increase the frequency of deliveries required to operate after the initial three months.
There has been no press release to say that an agreement has been made with the government, but the processing plant has been restarted. The company will only commit to projecting 3 months of processing as any further timescale would involve transporting further stockpiles to the mine, which they are not presently prepared to do. It is my guess that the company will be able to continue processing stockpiles after the initial 3 months. Either the government will give the assurances that they will provide greater security in the area or the company will provide the extra security themselves. In the conference call after the results, the CEO was upbeat about relations with the government and suggested that the company may well fund some government organized security in the future. This is still a high risk guess despite the comments of the CEO, but one that I am happy making as the company has to find a long-term solution to the Boungou mine. The next 3 months gives them the time to decide how to best operate the mine safely. As I have said several times in previous articles, this is a very capable management team. I expect that they will find a solution to the problem.
Assuming that the processing plant at Boungou operates continually until the mine is restarted in the 4th quarter, the 2020 P&L would look as follows (using information from the latest press release),
| 2020 P & L | in ,000 US$ | |||
| Revenue (note 1) | 619,200 | |||
| AISC (all in sustaining costs) (note 2) | (337,605) | |||
| Gross profit | 281,595 | |||
| Finance income (2019 run rate) | 2,233 | |||
| Income before expenses | 283,828 | |||
| Finance cost (note 3) | (2,374) | |||
| Depreciation (note 4) | (156,171) | |||
| Total expenses | (158,545) | |||
| Profit before tax | 125,283 | |||
| Tax @ 15% (note 5) | (18,792) | |||
| Profit after tax | 106,491 | |||
| earnings per share (note 6) | 32c | |||
Notes
1. Boungou is 90% owned. Assuming that the 3 month run rate for the processing plant is continued until the mine re-opens, the production is as follows (assuming the midpoint of guidance in the press release and a gold price of $1600)
Boungou
Feb-Sep (8 months) @ 14,667 pm x 90% = 105,600
Oct-Dec (3 months) @ 96,000 x 90% = 86,400
Mana (100% owned)
195,000
Total 387,000
2. AISC
Boungou
Feb-Sep 105,600 x 545 = 57,552,000
Sep-Dec 86,400 x 770 = 66,528,000
Mana
195,000 x 1095 = 213,525,000
Total 337,605,000
3. The company has $60m financed at Libor (presently 1.57563 %) plus 4.75% but pays off $15m per quarter. This works out to the following:
| 1st quarter | 6.32563 x 60m/4 | 950,000 |
| 2nd quarter | 6.32563 x 45m/4 | 711,000 |
| 3rd quarter | 6.32563 x 30m/4 | 475,000 |
| 4th quarter | 6.32563 x 15/4 | 238,000 |
| total | 2,374,000 |
4. Depreciation rates are in the press release per ounce sold. They are
Boungou 192,000 x 398 = 76,416,000
Mana 195,000 x 409 = 79,755,000
Total 156,171,000
5. This is the rate that the company expects to pay.
6. There are 334,435,433 shares issued
The company valuations are therefore
The end 2020 P/E ratio with the share price at $2.26 is 7.1
The price to book with the share price at $2.26 is 1.06
Conclusion
The company has had a disastrous 2019 and the share price has reflected this. If the company can get back to pre-problems production, the shares are very cheap on a prospective P/E of just over 7 and a price to book of just over 1. The company has just over $98m in cash and had free cash flow from operations of $247m in 2019, so the balance sheet is strong. It is my opinion that the shares offer compelling value at this time for anyone prepared to take on a very high risk investment. So what are the risks? Burkina Faso is a high risk jurisdiction with ISIS causing ongoing security problems in the areas (see link) in which the company operates. It is quite possible that there is another incident that causes Semafo further operational problems. If this were the case, the share price would fall substantially further, as the mine operations would come into doubt. However if the government strengthens security or the company can organize sufficient security on its own, the shares look extremely cheap. The company also has another area of development, so production should continue to rise in the future and AISC are some of the best in the industry. At present the market is ignoring all of these positives due to the security issues. If these can be resolved, I would expect the share price to double from the present level. This share is not for the faint of heart but the risk/reward is very compelling. I have recently added to my holding.
Disclosure: I am/we are long SEMFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
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