Semafo Shuns Quebec for Africa to Double Its Gold Output

Semafo CEO Benoit La Salle
Beniot La Salle, president and chief executive officer of Semafo Inc. Photographer: Norm Betts/Bloomberg

The Quebec government plans to spend C$47 billion ($45 billion) to attract mining investment over the next 25 years. Benoit La Salle, a former aid worker who runs Montreal-based Semafo Inc., sees more opportunity in Africa and is braving military coups and mine invasions to drive the company’s expansion.

“Africa is the new frontier,” La Salle, Semafo’s chief executive officer, said in a telephone interview. “That’s where you’ll find the most favorable geology.”

The operator of three gold mines in Burkina Faso, Guinea and Niger, is betting it can double output in the next five years with its current properties as it scouts for acquisitions. Semafo produced about 250,000 ounces of the metal last year, and plans to reach 500,000 ounces to become Canada’s ninth-biggest producer based on 2011 production.

“Here in North America, we’ve been exploring for 300 years and there really isn’t much left in the ground,” La Salle said from Montreal. “Burkina Faso has seen seven mines built in the last five years. It’s been several decades since we saw that kind of activity in Quebec.”

Semafo, coming off a record year for net income and gold sales in 2011, said May 15 that first-quarter net income jumped 55 percent to $28.1 million as gold production reached 60,900 ounces. Total cash margin jumped 34 percent to $1,002 an ounce from a year earlier as gold prices averaged $1,694 an ounce.

Stock Drop

The company, with a market value of C$1.64 billion, said Jan. 30 it expects to produce as much as 260,000 ounces of the metal this year.

Semafo stock has dropped 7.9 percent this year, compared with a 7.3 percent drop in the S&P/TSX Global Gold Index and a 4 percent drop in Canada’s S&P/TSX Composite Index.

Gold prices have dropped in the past three months as concern about Europe’s debt crisis intensified, strengthening the dollar and cutting the metal’s appeal as an alternative asset.

Last year’s so-called “Arab Spring” revolts in countries including Libya and Egypt also curbed investor appetite for risk, reducing demand for shares of miners that operate in Africa, said Stuart McDougall, an analyst with Jennings Capital Inc. in Toronto.

“Ever since the Arab Spring, the African producers and explorers have been hit pretty hard because of the geopolitical risk, and they just haven’t recovered,” McDougall said in a telephone interview. “Investors are very focused on geopolitical risk now. In the meantime we’ve had a sector correction that acted like a double whammy against Semafo.”

Humanitarian Worker

McDougall has a buy rating on Semafo, in part because he expects gold prices to rebound. He predicts gold will climb in the second half of this year and reach $2,000 next year.

An accountant by trade with an MBA, La Salle founded Semafo in 1995 after a stint as a humanitarian worker in Burkina Faso. Semafo initially focused on exploration and opened its first mine at Guinea’s Kiniero gold field in 2002. Production at Burkina Faso’s Mana mine, which accounted for three-quarters of total output last year, began in 2008.

After almost two decades of working in Africa, La Salle said he’s well acquainted with geopolitical risk. Guinea, which provided Semafo with about 6 percent of its gold production last year, was the site of a military coup in December 2008.

Semafo had to close its Guinea mine for about six months last year after residents invaded the mine and began illegally mining for gold. Production resumed in April.

‘Political Instability’

“The best way to reduce risk is to be active in several countries,” said La Salle. “Political instability in Africa doesn’t mean you will be expropriated. Expropriation risk is something you will see in industrialized countries like Argentina. Governments in Africa, and especially West Africa, don’t want to see the mines close. If they nationalize, they know that foreign investors are going to stop coming.”

La Salle has no such concerns with Burkina Faso, even after a mutiny last year by soldiers spread across the country. Semafo’s operations in the country, one of Africa’s poorest, weren’t disrupted by the unrest.

Semafo said May 30 drilling results at its Wona-Kona deposit at the Mana mine support its plan to improve economics by converting a considerable part of the reserves to open-pit operations instead of drilling underground. A cost and production study is under way, results of which will be announced this month, La Salle said.


“We view this news positively as it will likely enhance the open pit scenario at Wona-Kona, and we could ultimately see a more robust underground mining scenario emerge as well,” Brian Christie, an analyst at Desjardins Securities Inc., said in a note May 30. Christie has a buy rating on the stock with a C$8.25 price target.

Semafo is also studying whether to build a second processing facility on the Mana permit area, which covers about 2,200 square kilometers. The new mill could produce as much as 120,000 ounces annually and cost up to $125 million, Tara Hassan, an analyst at National Bank Financial in Toronto, said in a note to clients May 16.

“Mana is so big, it will have more than one processing mill,” La Salle said. “One good thing about mining in Africa is that you can have access to very large territories.”

While Semafo’s total cash margin, or average selling price minus cash production cost, rose to $1,002 an ounce in the first quarter, Semafo’s cash cost per ounce is still higher than some of the major gold producers, according to data compiled by Bloomberg.

Cash Costs

The average industry cost in 2011 based on data compiled from nine companies was $542, while Semafo reported costs of $677 an ounce, up 31 percent from a year earlier. First-quarter cash costs for Barrick were $432, Goldcorp’s were $251 and Newmont’s were $580 while cash cost at Semafo rose 8 percent to $708 per ounce from a year earlier.

The company is flush with about $174 million in cash and has no debt as of March 31. Semafo is on the lookout for new properties in West Africa, La Salle said. The company will consider projects in countries such as Ghana, Mali, Mauritania and Senegal, he said.

In the meantime, La Salle’s goal of doubling output by 2017 is “reasonable,” Jennings Capital’s McDougall said.

“They should be able to finance what they intend to do in the medium term, such as the new mill, unless gold drops out of the market,” he said. “In that case, they won’t be the only ones having trouble.”

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