Semafo stumbles on Mana expansion update

Montreal-based gold producer Semafo (SMF-T) found out how punishing markets can be these days when the company released long-awaited exploration results at its Mana gold mine 200 km west of Ouagadougou, Burkina Faso. Originally expected early this year, Semafo’s reserve report was delayed pending sampling reviews at independent assay labs. The company released its update on July 12, to a hostile market response.

Semafo’s update focused on expanding reserves and resources at Mana in a bid to increase throughput capacity to 6,000 tonnes per day, which would boost the company’s total gold production by 120,000 oz. per year.

Semafo announced in September that it was aiming to build a US$100-million satellite crushing and milling facility at Mana to transition ore to its plant. The company had already moved ahead with equipment and construction contracts, including a pipeline to provide more water and extend operations.

Semafo conducted a US$39-million exploration program during 2011 that included 438,000 metres of drilling at Mana and focused on establishing reserve increases that would underpin its growth strategy, but results indicated that Mana’s goldfields might not warrant the planned capital expenditures.

Infill drilling at the Fofina and Fobiri deposits — two of the main targets in Mana’s south sector — revealed that total reserves and resources had plummeted from 18 million tonnes grading 2.5 grams gold per tonne to 12 million tonnes grading 1.95 grams gold. As a result contained resources and reserves dropped from 1.4 million oz. gold to 818,000 oz.

Semafo found solace in exploration at its southern Yaho deposit resulting in 39 million inferred tonnes carrying 1.3 million contained oz. gold, though a low, average grade of 1.06 grams gold may be reason for concern. Yaho boasts measured and indicated resources totalling 21 million tonnes grading 1.03 grams gold for 724,000 contained oz.

On top of a disappointing exploration effort, Semafo is dealing with degrading contained gold and grade reserves at Mana. Reserves dropped from 25 million tonnes grading 2.64 grams gold for 2.2 million contained oz. in 2010, to 26 million tonnes of 2.4 grams gold for 1.98 million oz. gold in 2011.

Semafo’s proven and probable reserves decreased from 36 million tonnes grading 2.4 grams gold for 2.8 million contained oz. in 2010, to 37 million tonnes at an average grade of 2.18 grams gold for 2.65 million tonnes contained gold in 2011 — a number that includes the company’s Kiniero gold mine in Guinea and Samira Hill mine in Niger.

Further complicating Semafo’s plans were underwhelming metallurgical results on samples from its southern deposits, which include Fofina, Fobiri and Yaho. According to reports, Semafo faced sulphide-related challenges that produced recovery rates of 20% at Fobiri, 26% at Fofina and 48% at Yaho during preliminary carbon-in-leach testing. The company says it remains optimistic about metallurgical improvements from potential sulphide flotation, concentrate re-grinding and oxidation.

Semafo is developing its Wona-Kona super open pit, which contains 22.7 million tonnes at 2.32 grams gold for 1.7 million oz. in reserves. Though the project has high strip costs with 272 million tonnes of waste carrying a US$239-million price tag over the life-of-mine, it saves the company an upfront capital expenditure totalling US$140 million that would have been needed to develop the underground infrastructure to access extra ore.

Semafo has swallowed US$17 million in underground-related investments it says were “associated with feasibility studies, ­penalties on cancelled equipment purchases, subcontractor expenditures and infrastructure specifically related to the underground project.”

Investors were quick to strike following the release, and they sold off Semafo shares at nearly 10 times the usual rate, with 10.5 million shares changing hands. The company dropped 22.1%, or 96¢, en route to a $3.39 close. Semafo has been trending downward since late January, losing 29%, or $2.20 over the past five months. The company has traded within a 52-week range of $3.24 and $10.48.

BMO Capital Markets analyst Andrew Breichmanas downgraded Semafo to “market perform” and dropped his target price from $7.50 to $5 after the release. He cited the failure of an “aggressive exploration program” and poor metallurgical recovery rates as reasons for the downgrade.

“Semafo’s assets offer good potential to support higher production rates, however, the timing on delivery of growth is now uncertain,” Breichmanas writes in a July 11 research report. “BMO Research assumes capacity increases at the existing Mana plant to process additional saprolite ore and offer near-term growth opportunities. The contribution from the south sector remains in forecasts, but has been delayed for initial production toward the end of 2015.”