High Reward Potentialhttps://seekingalpha.com/article/285935-banro-a-high-risk-gold-miner-with-high-reward-potential
Banro: A High Risk Gold Miner With High Reward Potential
With the global economy plagued with uncertainty and realinterest rates remaining negative throughout the Western world andJapan, expect gold prices to continue rise.With gold now at $1,700 per ounce, many African gold mining stocks provide excellent opportunities to buy gold at a bargain.
As of June 2011, Toronto-based Banro Corporation (BAA) provides the cheapest investor cost per ounce of gold at $422.
Banrocurrently has four gold properties comprised of thirteen exploitationpermits in the South Kivu and Maniema Provinces of the DRC. Theseproperties, totaling 2,616 square kilometers, are located along the 210km, northeast to southwest trending Twangiza-Namoya gold belt. Thecompany is climbing out of the development phase with the Twangiza mineslated for production in the fourth quarter of 2011 along with the othermines expecting to be ready by 2013.
Based ona conservative estimated value of gold at $1,200 per ounce, Banro’smines hold $18 billion dollars worth of gold, which is far above thecompany’s current market cap. Nearly half of that production is in theTwangiza mine that will be ready the earliest for production. Banro alsohas a low cost basis of only $350 per ounce to extract its gold, whichmakes the Twangiza mine sustainable during a bear market.
My biggest concern with Banro is the geopolitical risk of 100% exposure in the Democratic Republic of the Congo.Thecountry has been going through a severe Civil War since 1994 (tensionshave calmed down since the peak and the UN has declared peace, but theviolence is ongoing) that has claimed more lives than any conflict sinceWorld War II. The DRC is also one of the world’s most corrupt countriesin the world ranking seventh on the Transparency International surveyfor most corrupt countries.
Since its independence from Belgium, the country also has a history of nationalizing profitable mines. Somereforms have been enacted to make the country more transparent andbusiness friendly over the past ten years. However, I am not quite surethat the government has reformed enough to maintain the safety ofBanro’s assets, but most of this risk is already priced into thecompany.
Financially, Banro is well positioned tocapitalize off its mines. The company has no debt and is trading atvalue with a P/E ratio of 5.88. They also hold cash that exceeds10% ($92 million) of the firm’s market cap and are not tied to hedgingcontracts that restrict earnings in a gold bull market.
AlthoughI feel that investors are better off buying gold directly, for thosewho want to take some risk in African gold mining companies, Banroprovides the best value in the sector. With geopolitical risk holdingdown the price below its intrinsic value, Banro should skyrocket if theDRC can ever achieve moderate stability. Gold bugs who want to add asmall speculative play (5% or less of assets allocated to gold), shouldbuy some Banro.
Due to the instability of the DRC and thefact that its mines are still in the development phase, I give a neutralrating to the stock. I will keep on my watch list, as it may be a buyin later stages of production.