Semafo Inc. T.SMF

Top 5 Mining Stocks To Watch In 2020

[JB3729]

https://seekingalpha.com/article/4314618-top-5-mining-stocks-to-watch-in-2020

1. SEMAFO (OTCPK:SEMFF)

SEMAFO is an established mining company that offers a lot of value. However, only the less risk-averse investors should consider buying the stock. As can be seen in the chart below, SEMAFO's share price peaked in early August, and a steady decline followed. The decline was initiated by the pit wall collapse at the Mana mine (Wona pit) that resulted in a downward revision of the 2019 production guidance by 40,000-50,000 toz gold.

Another hit came in early November, when SEMAFO announced that a convoy transporting its workers and supplies from the city of Fada to the Boungou mine was attacked by an armed group. As a result, 37 people died and 60 were injured. The problem is that the Boungou mine is located in the eastern part of Burkina Faso, which has become more dangerous lately. Although the mine alone was not attacked and its operations were not directly disrupted, SEMAFO decided to suspend its operations until a solution to improve the security of workers is found. SEMAFO is in talks with the government of Burkina Faso regarding improvements to the security of the road to Boungou. Moreover, the company is considering transporting its workers by air.

 

Data by YCharts

 

The suspension of Boungou operations is a big problem for SEMAFO, as Boungou is its key mining operation. While the Mana mine was originally expected to produce 170,000-190,000 toz gold at an AISC of $950-1,020/toz, Boungou was expected to produce 220,000-240,000 toz gold at an AISC of $470-510/toz in 2019. It means that at the current gold price, Boungou should be able to generate free cash flow around $200 million. As a result, it is in SEMAFO's best interest to restart it as soon as possible. On the other hand, it is also in the best interest of the government of Burkina Faso, as the mine provides employment and meaningful tax revenues. Moreover, Burkina Faso owns 10% of the mine.

 

The Boungou mine restart should be a major catalyst. One can expect the restart (at least the restart of the mill) to occur before February 15 in order to fulfill the Macquarie credit agreement terms. It is possible that SEMAFO will start by processing 1.1 million tonnes of ore stockpiles that should be sufficient for approximately 10 months. That should be more than enough time to complete the airstrip (it is expected to take around 3 months). After that is completed, it will be possible to transport the workers more safely, which will enable SEMAFO to also restart the mining operations.

After the mine is restarted and the dust settles down a little, the share price should start climbing higher. As shown in the chart above, it seems like the price reversal has already started. SEMAFO will probably never command as high a valuation as its comparable peers operating in safer jurisdictions. However, its current market capitalization of less than $720 million is really low, given that the company should be able to generate free cash flow around $300 million at the current gold price if everything goes well. Buying SEMAFO shares at their current prices will lead to 50% gains if the share price returns to the early November pre-attack levels and to 100% gains if it returns to the early August pre-wall collapse levels. With a little luck, both the targets should be attainable in 2020. However, as I stated at the beginning, this stock is definitely not suitable for risk-averse investors.

Disclosure: I am/we are long NAK, TGB, LMCNF. 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.