Semafo impresses with high-grade reserves

VANCOUVER — The future is looking brighter for Montreal-based gold producer Semafo (TSE: SMF; NYSE: SEMFF) at its Mana mine in Burkina Faso, after a reserve update showed higher-grade ounces at the company’s satellite Siou deposit.

During this year’s second quarter Semafo completed a 25,000-metre delineation program at Siou using four core drills and two reverse-circulation drills at up to 25-by-25-metre spacing, to a depth of 150 metres.

The company’s $22-million exploration program has totalled 55,000 metres within 20 km from Mana’s processing plant.

Semafo has now bumped up the reserve ounces by 28% to 26.8 million proven and probable tonnes grading 2.77 grams gold per tonne for 2.4 million contained oz. Siou’s reserves account for 4.8 million tonnes grading 4.94 grams gold for 769,300 contained oz., boosting Mana’s reserve grade by 20%.

“Siou is [our] most important discovery to date. It brings quality ounces to Mana, and improves the average grade at the processing plant, which will ultimately have a significant impact on the total cash costs per ounce and overall production profile,” commented president and CEO Benoit Desormeaux during a conference call. “The deposit demonstrates its potential through significant inferred resources. It’s also important to note that Siou’s mineralization remains open laterally and at depth.”

Measured and indicated resources at Siou total 2.1 million tonnes grading 2.34 grams gold for 154,200 contained oz., while inferred resources tack on 6.2 million tonnes at 3.97 grams gold for 795,300 oz. Since the satellite deposit lies 15 km east of Mana’s processing facility, the company can truck higher-grade ore to feed its mill.

The company intends to have Siou in production by mid-2014.

Because Siou is relatively close, Semafo can develop the deposit with minimal capital expenditures. The company will not need a new plant, tailings dam, camp and other costs. Siou’s estimated 2014 capitalized expenditures total $25 million, and include minor infrastructure, mining and auxiliary equipment, crop compensation and road-construction costs.

The first three years of production at Siou are estimated at 27,000 oz. in year one, 163,000 oz. in year two and 161,000 oz. in year three. According to Semafo’s updated mine plan, total cash costs are estimated at US$364 per oz. in year one, US$282 per oz. in year two and US$383 per oz. in year three. The average strip ratio over the mine’s  life is pegged at 18.8-to-1.

“Again, we’re focusing on quality ounces and optimal cash flow per ounce. For the next two years, our priority will be to focus on maximizing the throughput feed from Siou and on rebalancing the ore mix from [the Wona-Kona pit], Siou deposit and Fofina deposit in order to maximize cash flow,” Desormeaux added, noting he expects the feed mix from Siou in year two to account for 32% of Mana’s 7,200-tonne-per-day hard-rock feed plant capacity.

Regarding permitting, Semafo has completed and filed Siou’s environmental impact assessment, and expects a green light on the expansion within nine months.

Desormeaux commented that due to falling gold prices, the Burkina Faso government had been noting declines in gold production, and so were pleased to see a high-grade discovery.

“No, [I don’t see any issues] because it’s only a pit that we want to do. We don’t want to build a tailings dam, water dam and stuff like that. It should be quicker. And we have good support from local authorities,” he added.

BMO Capital Markets analyst Andrew Breichmanas maintains an “outperform” rating on Semafo shares and a $3.25 target price.

He notes in a Sept. 19 research report that “the new production profile is slightly better than BMO Research forecasts, which had already included contribution from Siou. However, costs are significantly lower than anticipated as a result of reduced material movements from a slowing of the Wona-Kona super pit and lower waste-mining unit costs.”

During the second quarter Semafo generated cash flow from operations totalling $24 million, or 9¢ per share, when it produced 58,600 oz. gold at average cash costs of US$752 per oz. The company reported US$116 million in cash and equivalents at the end of June.

Semafo shares have traded within a 52-week range of $1.23 and $4.64, and closed down 4% on Sept. 20 at $2.35 per share.

The company maintains 273 million shares outstanding for a $629-million press time market capitalization.