Bad timing for Banro

Unrest in the Democratic Republic of Congo couldn’t have come at a worse time for Banro Corp. (BAA-T), whose Twangiza gold mine started commercial production there in September.

The Congolese rebel movement known as M23 has seized control of the city of Goma in eastern Congo and plans to take control of Bukavu, the capital of South Kivu province, according to reports from Associated Press.

In a statement yesterday, Banro said its operations in the country have not been disrupted because Twangiza is about 200 km southwest of Goma. Management also said it has “a number of alternative supply routes should the current borders be affected, which is not the case at present,” and blamed media attention in part for creating concern among investors and negatively impacting the company’s share price.

News of the rebel uprising initially sent Banro’s shares down 44¢ or 12.54% to $3.07 on Nov. 20 and down a further 18¢ or 5.86% to $2.89 on Nov. 21. But its shares closed higher today at $3.12, up 23¢ or 7.96%.

Banro stated that the Congolese rebel movement marched on Goma in order to draw attention to their concerns about conditions and pay. It also noted that M23 was made up of former members of the DRC military based in North Kivu, who rebelled from the Congolese army in March 2012.

Exclusive Analysis, a political risk forecasting group based in London, said in a press release earlier today that the M23 rebel group is likely to deploy towards Bukavu, which “could trigger retaliatory attacks by rival armed groups and raise collateral risks to mining operations.”

“Violent protests have taken place in Kisangani, Kindu, Bunia and Kinshasa,” Natznet Tesfay, the group’s head of Africa forecasting, said in prepared remarks. “In case such protests continue for longer than a week and security forces fail to put down outbreaks of unrest in Kinshasa, the risk to President Kabila’s government will increase significantly.”

In addition to its Twangiza oxide operation, Banro is developing three other wholly owned gold projects along the country’s 210-km long Twangiza-Namoya gold belt in South Kivu and Maniema provinces. Banro began construction on the Namoya oxide gold mine in the second quarter of this year and anticipates completion in the second half of 2013. Development is on track for commissioning in mid-2013 with ramp up to peak production of 13,000 oz. gold per month by December 2013.

In an operational update released yesterday along with its statement on the ongoing unrest, Banro noted that Twangiza poured 5,123 oz. gold in the month of September, 6,534 oz. gold in October, and expects production to approach 8,000 oz. in November.

The company forecasts operating costs will remain steady in the fourth quarter at US$5.6 million a month, bringing cash costs per oz. into the US$750 per oz. range. As efficiencies improve and the plant is expanded, cash costs should reduce every quarter and fall to about US$550 per oz. by the end of next year. Banro has already started to increase plant capacity at Twangiza to 1.7 million tonnes a year by the fourth quarter of 2013 with a further upgrade to 2 million tonnes per year in 2014.

The company has also completed prefeasibility studies for hydro-electric power generation projects that it says have demonstrated low capital-cost opportunities to deliver power to both Twangiza and Namoya within two years.  The power generation projects could potentially drive down costs below US$500 per oz., it said. Meanwhile, exploration continues to find additional targets at all four of its projects in the country, Banro says.

Cosmos Chiu of CIBC World Markets has a 12-18 month price target on Banro of $4.75 per share. “The production/cost improvements reported at Twangiza for Oct./Nov. are consistent with our view that Sept. monthly results reported last week were not representative of [a] steady state,” the mining analyst wrote in a Nov. 21 research note to clients. “That said, we believe instability in northeastern DRC will continue to weigh on the story.”