Capital Drilling

Source: Mining Journal

mining-journal.com/research/news/1375591/golden-era-beckons-for-west-africa

Date: 12.11.19

Golden era beckons for West Africa

Mining Journal's West Africa 2020 review shows more than US$3.7 billion of new mine and expansion projects currently in build mode, approved or awaiting final development and financing decisions.

There are also several hundred million dollars of renewable power projects in construction or planning, and countless other infrastructure and social initiatives diffusing gains from mining beyond government treasuries to remote communities. The latter are seen by observers such as Australian Strategic Policy Institute (ASPI) international program head, Lisa Sharland, as essential "peace drivers" in a region increasingly impacted by the activities of groups such as Al Qaeda in the Islamic Maghreb (AQIM), Boko Haram and al-Shabaab.

"Local communities can often be the best form of defence against potential security risks," says Sharland, who was among about 200 people from nearly 80 companies and organisations in attendance at the first West Africa Mining Security Conference in Accra, Ghana, in June this year. The event hosted by Australia's Department of Foreign Affairs and Trade and ASPI highlighted the large presence of Australian companies on the continent and in West Africa.

"If there is poor engagement and interaction with the local community, it may serve to fuel local grievances and potentially exacerbate some of the drivers of violent extremism," says Sharland, who spoke on a security risk panel at the recent Africa Down Under mining conference in Perth, Western Australia. The discussion was notable for highlighting shifting attitudes among leaders of foreign companies towards negotiating seemingly intractable risks posed by violent extremists in West Africa and elsewhere, and particularly for views that showed companies might be genuinely pursuing measures that go beyond shielding expatriate staff from danger.

"The ultimate solution isn't insurance and it isn't [risk] mitigants, it's actually creating a stable environment," said John Welborn, CEO of expanding West Africa gold producer Resolute Mining.

"I believe in the long term future for companies like Resolute not because Mali's situation is getting better - it may be getting worse - but because I believe we can operate safely and securely with a multi-layered approach and not just think about protection."

More than 90% of the nearly 58,000 workers at 38 mines in Mining Journal's West Africa 2020 listing are ‘nationals'. Image: Resolute Mining

In the short term the costs to communities and companies are rising.

Of about 100 people officially confirmed dead or injured in the latest extremist attack on a vehicle convoy taking 250 people to work at Canadian-listed Semafo's Boungou gold mine in eastern Burkina Faso, nearly all were locals. So while the targets of the hate and violence might be foreign interests, the victims are mostly Africans.

More than 90% of the nearly 58,000 workers at 38 mines in Mining Journal's West Africa 2020 listing are ‘nationals', underlining both the impact of labour regulations, and domestic training and investment by mining companies over the past 5-10 years, on workforce composition in the sector.

The financial and economic costs of actual security risk and mitigation efforts, and indeed broader upskilling of workers, are evident in some ways but otherwise invisible. Mining industry transparency in this area continues to be lacking.

An analyst report on ASX-listed Iluka Resources' 2016 investment in Sierra Rutile suggested there was "no doubt the [A$375 million deal] has not lived up to expectations". The major problem was infrastructure, but "other key issues include a lack of local technical skills and a reluctance of skilled personnel to work in Sierre Leone".

"Iluka concedes the difficulties of operating in Sierra Leone were significantly underestimated."

Not surprisingly equities were smacked in the wake of the latest atrocity in Burkina Faso, where parts of the country and neighbouring Mali have seen an escalation of violence and security risks posed by so-called ‘jihadist' groups, and also bandits and artisanal miners.

Smaller companies with the most exposure to disruption, or risks to personnel, were hardest hit.

There are no indications yet that the problems will hit current financing discussions for one or two significant projects, though equity devaluations certainly won't help.

Other signs of costs associated with the ‘normal' way of operating in the region are less apparent to those assessing them from afar, but certainly evident on the ground. Barrick Gold accounts for more than 40% of Mali's annual gold output at its world-class Loulo-Gounkoto complex, and declining Morila mine.

"The Loulo mine property is partially fenced with 2.4m-high chainlink fence topped by flat wrapped razor wire and a road runs along the entire perimeter. Site fencing is also provided at Gounkoto. The plant area is fenced with the access controls at the main gate and to the more sensitive areas within the plant. An electronic access system for the plant is operation. There is one main entrance to the Loulo site, where a Security Gatehouse has been erected and manned by three guards, on a 12-hour shift cycle. A similar arrangement exists at Gounkoto. The spares and materials storage sites are fenced off by a 1.8m fence topped by a 0.5m barrier of flat-wrapped razor wire. The access gates are kept permanently locked and access is controlled by staff in an adjacent office."

That was from Barrick's latest technical report on its most important West Africa site.

ASX-listed Perseus Mining, building a second gold mine in Cote V'Ivoire to add to its mainstay Edikan operation in Ghana, lists more than 1,000 security personnel, including contractors, government forces and its own employees, at its three sites.

"Obviously, it's something that we are monitoring, I would say, nearly on a daily basis for the team here and on the security side," said Endeavour Mining CEO Endeavour Mining Sebastien de Montessus on the company's latest quarterly conference call. Endeavour has four mines in Cote d'Ivoire and Burkina Faso, and the Kalana development project in Mali. "We haven't seen any implications of those security issues [for] … Karma or Hounde [in Burkina Faso]. But on a regular basis we do reassess. And in particular, we increase from time to time the security protocols around some of our mines and in particular Karma, which is in the north of the country. So far we haven't been in a position where we had to take radical decisions.

"I think that what is evident is that there has been an increased level of attacks, in particular in the north and the east part of Burkina. Overall, if you take a step back on the region, you see that there has been some movements from the north of Mali to the south of Mali at the border of … Mali, Niger and Burkina Faso. But what we see also is an increasing presence, which probably explains those different attacks, from the G5 Sahel, the five countries from the Sahel … within the joint forces to tackle the [problems]. And also increased forces from both the US and France."

A corner turned

Despite the volatility in the region also fed by wider geopolitical instability in what are still poor nations looking to channel new gold-mining gains into broader economic growth, West Africa has been a magnet for mining-investor capital and that momentum is building as exploration successes multiply and companies demonstrate consistent operational and ESG delivery.

"Sometimes people do focus on the negatives re-Africa, and people tend to highlight the security threats," Australia-Africa Minerals and Energy Group CEO Bill Witham said at the Africa Down Under conference. "But I think to be realistic there is a lot of work going on there, and a lot of people operating successfully and making money, and that is why there is a successful and a strong insurance market, for example, and a funds market."

"[Orezone Gold Corp CEO] Patrick Downey said at Beaver Creek [2019 summit] West African project risk was often overstated. He compared West Africa to Canada [and asked], how many projects have been brought in on time, budget, etc, and hit their production targets and costs straight away. And he peeled off half a dozen in West Africa," says the CEO of Burkina Faso gold explorer, Sarama Resources, Andrew Dinning, a veteran of Africa's gold scene.

"In Canada you've got 50-100% capital overruns continually, and missing targets, and I think that was a valid point."

West Africa has trailed only Canada as a global mining ‘jurisdiction' that has pulled the most equity-investor capital in the past decade, Endeavour's de Montessus said at the recent Denver Gold Forum in Colorado. The region, collectively, has attracted more mining capital (more than US$6 billion raised) than Australia, and the US.

West Africa's share of global mineral exploration spending trailed only Canada and Australia in that period, with Burkina Faso, Ghana, Cote D'Ivoire, Mali and Senegal leading the way.

In terms of actual discoveries, West Africa was miles ahead of Colombia, Chile, Canada, the US and other global gold exploration hot spots with more than 80 million ounces of resources outlined in a decade.

"Despite a rally in gold price from lows in 2000 to record highs in 2012, gold discovered consistently fell from 2006 to 2012. Lows in gold discovered came in 2014 and levels have remained depressed in recent years, indicating to us a systemic problem," RBC Capital Markets analysts said in the Canadian bank's ‘Imagine 2025' global gold report.

"Anecdotally, we can think of little to no success in delineating large new projects globally that work even at … prices of circa US$1,300/oz. In our view, this illustrates that finding new economic deposits is getting harder not just due to gold price but also due to so-called easier geological deposits and near surface material in preferred jurisdictions having largely been discovered."

This largely ignores what has been happening in West Africa since the turn of the century.

Geologist and head of Sydney-based MPS Securities, Barry Dawes, says West Africa's Birimian greenstone belts have produced at least 16 two-million-ounce-plus gold deposits since 2000; seven above 4Moz. The biggest, at this stage, is Cardinal Resources' Namdini in northern Ghana (7Moz), only found in 2016.

"The Birimian Gold Province in West Africa with about 10,000 tonnes of endowment is the world's second largest gold province after the massive 100,000t Witswaterand conglomerate deposit in South Africa that has already produced over 54,000t," Dawes wrote in a recent initiation report on Cardinal.

"In comparison, Australia's Yilgarn is about 8,000t and the Carlin Trend in the USA is around 6,000t.

"The four main countries hosting the Birimian rocks are Ghana, Mali, Burkina Faso and Cote d'Ivoire with extension north into Senegal and east into Niger.

"The Birimian has seen the discovery of major deposits totalling over 60Moz in the past 15 years with almost 50% located in Burkina Faso."

Teranga Gold CEO Richard Young says while world gold production is tipped to fall over the next decade, West Africa's fairly recent exploration successes are set to underpin significant growth in regional output. "There are few regions with this much activity. West Africa produces half of the continent's gold and is closing in on North America production levels. This is remarkable progress over the past 25 years," he says.

"There have been about a dozen projects built over the last five years and, with one exception, they are coming in on time and on budget."

Brendan Clarke, Africa director in London with leading international geological and mining consultancy, CSA Global, says this year's slowdown in equity markets has had a knock-on effect on public-company exploration reporting of meaningful drilling and resource activity, though generally there has been "a strong recovery throughout West Africa". He believes a contraction in Burkina Faso results reporting reflects "an increase in safety and geopolitical risk there, whereas Mali remains reasonably steady".

Exploration spending and discovery rates in West Africa continue to rise. Image: Roxgold

The biggest growth jurisdiction is clearly Ivory Coast," Clarke says.

"Of interest are Sierra Leone and Liberia [where] gold deposits are geologically different and lend themselves towards underground mining. There was a real loss of interest in these under subdued gold pricing up until mid-2019 really. I'd expect a higher gold price to see people dusting these deposits off and having another look at them."

Also notable was Ghana, which was seeing "much lower reporting levels this year".

"[There is] not much exploration happening compared to its massive brownfields gold endowment," Clarke says.

Capital Drilling founder and executive director Brian Rudd, who has lived and worked in Africa for more than 20 years, has overseen a fundamental shift in the contractor's business in the past few years as it expanded beyond the footprint established in East Africa in 2005 to have one of the biggest active fleets working in the west.

"We started with two underground rigs and three surface rigs three ago. We're now up to 34 rigs on the ground and we've got another 6-8 coming into various parts [of West Africa]," Rudd says.

"Our last six months has been our busiest tendering period for quite some time, and we've converted the majority of those. So there is certainly an uptick in the exploration area, and in brownfields works around current mines."

Capital Drilling, whose London-listed shares have also been hit by the latest events in Burkina Faso but which has seen almost an 80% gain in its market value this year to circa-US$120 million, estimates nearly half the US$1.28 billion budgeted for mineral exploration in Africa last year went into West Africa. The company is moving further into contract mining after its recent strategic deal with Allied Gold in Cote d'Ivoire, and has registered a Guinea entity on the back of emerging opportunities in that country.

Rudd said in-mine production drilling and now load-and-haul market exposure gave the company a stronger revenue and (potentially) earnings platform on which to expand exploration activity when the more cyclical market segment demanded it.

Consolidation

With its discovery and reserve-growth credentials enhanced over the past decade, West Africa is set to play a bigger role in the portfolio renewal and refinement of the world's gold majors over the next 10 years. All, apart from Australia's Newcrest Mining and Russia's Polyus, have high-level exposure to the region, with Newmont Goldcorp, AngloGold Ashanti, Gold Fields and Barrick - dependent on its intentions with Massawa in Senegal - all having significant growth projects in their pipeline.

Next-level gold companies such as Kinross Gold and B2Gold are also investing in new projects, and West Africa specialists such as Resolute, Teranga, Endeavour, Perseus and Semafo all have sights on 500,000ozpa production from their current holdings. Mergers of two or more of these companies are being talked about - all five could be joined, on paper, and the $5 billion nominal market value wouldn't raise too many eyebrows out in investor land.

"If you look at the gold industry, there are too many managers and too few quality assets. A few top companies in the industry have led the way in consolidation, and this industry needs a lot more of that," Mark Bristow said on Barrick Gold's September quarter conference call. Bristow-led Randgold merged with Barrick in 2018 in a US$6.5 billion deal that was followed by Newmont's merger with Goldcorp.

"The priority should be to ensure that we have enough agile, competent management stewarding the limited assets and resources we have. And then to spend time on finding more, which is becoming more and more challenging.

"West Africa has been the most prolific producer of new gold mines, and it's growing some very interesting companies there. Is there a sense that consolidation will bring more optimal management costs? Absolutely.

"If you add up the corporate costs of the industry and you consolidated it … I mean, just look at the Randgold-Barrick deal. In this modern world there's no real logic to have big corporate offices, we proved that's possible at Randgold, we've proved that's possible very quickly in just nine months at Barrick.

"I'm a great believer in the requirement for our industry to consolidate. West Africa is a good place to start. "And we have always said in rationalisation of our assets we are committed to playing a role in that ongoing consolidation. Which we will do."