Thursday, 22 November 2012

Opportunities abound in West Africa junior gold, says heavyweight Goldman

Heavyweight broker Goldman Sachs has started coverage on a mix of West African gold firms, aiming to identify those which look set to outperform.
The region, which includes Nigeria, Ghana and Guinea, has seen a boom in gold mines over the last decade and a number of exploration plays have been funded as production in South Africa has waned and the price of the yellow metal has outperformed.
In an extensive note, Goldman analyst Eugene King begins coverage on five plays, with notably, a 'buy' stance on both Endeavour (TSE:EDV) and Amara Mining (LON:AMA,TSE:AMZ), formerly Cluff Gold. It also updates its coverage onAvocet Mining (LON:AVM).
At the root of Goldman's coverage on these junior gold firms is its bullish outlook for the metal.
This is due to the fact it believes US interest rates will continue to be low, central; banks will continue to buy the metal, and risk appetite among investors is muted so they continue to look for safe havens such as gold.
Relative to the S&P 500 and the FTSE 100, where returns have been flat to negative over the last 12 years, gold has returned a compound annual growth rate of around 18 % (vs copper at 15%), notes the analyst.
"US real rates are unlikely to increase in the next 12-18 months, in our view, which, when combined with QE3 and the generally low risk appetite of investors, is likely to result in gold continuing to outperform and we expect the gold price to top US$1,900 per ounce within 12 months."
Over the past 10 years, returns from gold itself has been much higher than returns on gold-exposed equities, notes the analyst, citing reasons including that under delivery on production from mining firms has frustrated investors.
"But there have been standout equity stories, such as Randgold (LON:RRS) and Eldorado Gold (TSE: ELD) which have seen 500% and 300% returns since 2005 versus virtually flat performance from some of the gold majors, including AngloGold (LON:AGD) andBarrick Gold Corp, he notes.
The analyst also highlights that the upside potential for the junior mining sector can be significant, in an environment where traders are willing to take more risk in their portfolios.
For example, he says: "The exponential growth in Randgold’s share price (around 13.5 times since the IPO in 1998) demonstrates the lucrative returns that can be achieved by junior gold companies if they deliver on their plans to grow or commission production in a timely fashion and within budget."
Endeavour (TSE:EDV) is a well positioned mid-tier gold producer, which generates strong operating cash flow from its three operating mines which is enough to deliver two growth projects to double production, says King, rating the stock a 'buy' with a 12 month target price of C$3.15 - a 41% potential upside.
Meanwhile, Amara Mining (LON:AMA) is in the final stages of a feasibility study for the Baomahun project in Sierra Leone, which is expected in the first quarter of next year, and is the main catalyst for the shares 
"At peak production we forecast Boamahun to produce around 140koz per annum. News flow that confirms Amara is developing the mine on schedule and within the planned capex (our estimates US$317 mn) should see the shares re-rate," says King, who gives a target price of 90p - representing a 49% potential upside.
Meanwhile, Goldman starts coverage on Liberia focused Aureus Mining (LON:AUE, TSE:AUE) with a 65p target price and a 'neutral' rating.
The company's New Liberty mine is expected to come on stream in the third quarter of 2014 following a construction phase of 18 months, and at peak production is expected to produce 135,000 ounces of gold.
Also receiving 'neutral' ratings are Toronto-listed Banro Corporation (TSE:BAA) and Semafo (TSE:SMF) with target prices of C$4.70 and C$4.50 respectively.
"Semafo must deliver a positive feasibility study on the Mana “super-pit” concept for the stock to move forward in our view. Banro has to ramp up on Twangiza production and keep construction at Namoya on schedule (and cost) to avoid a potential additional funding round." says King.
Conversely, the broker has downgraded Avocet Mining (LON:AVM) to 'sell' from 'neutral' because of the flat outlook for production and low asset quality. The target price goes to 55 pence from 90p previously.

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