Semafo shows short term sacrifice pays off

Semafo (TSX: SMF) decided some short term pain would be worth the long term gain.

The company had braced itself for a weak first quarter in terms of production, and that’s what it got. The reason: it decided it was better to focus on accelerating the development of Siou and Fofina deposits at its Mana mine in Burkina Faso at the expense of its producing deposits.

By ramping up its efforts at the two new deposits, it had to re-work the mine plan sequence so that it could deploy some of its mining fleet from the producing Wona-Kona deposits to Siou and Fofina.

That meant production at Mana fell to 35,100 oz. of gold for the quarter compared to 42,700 oz. for the same period last year.

The good news for investors is the short term sacrifice on the production side has set it up, according to Semafo, for an upsurge in production over the rest of the year.

That optimism is based on ore already being processed from the Siou deposit with stellar results. Higher grade ore from Siou, blended with ore from Wona-Kona, helped lift Mana’s overall head grade to 2.6 grams gold per tonne in March compared to an average of 1.6 grams in the first two months of the quarter. That increased grade helped get March production to 17,340 oz. of gold at cash operating costs of US$689 per oz.

BMO Capital Markets analyst Andrew Breichmanas said March production numbers were more indicative of anticipated performance going forward.

“Encouragingly, in April, the company processed ore grading 2.9 grams gold per tonne and produced more than 20,000 oz.,” Breichmanas noted in a research note.

Scotiabank analyst Ovais Habib wrote in a research note that he expects costs at Mana to decline steeply over the course of the year to US$578 per oz. by the fourth quarter as production from Siou and Fofina increases.

Semafo maintained full-year guidance for production of 200,000-225,000 oz at total cash costs of US$695-745/oz.

Further optimism can be gleaned from the fact that pre-stripping at the Fofina deposit started in April, ahead of schedule.

Semafo also sent a signal that it isn’t worried about softness in the gold price. The company increased its exploration budget for 2014 by roughly $2 million to a total of $20 million to take advantage of its expanded land package at Mana and new targets.

In Toronto on May 6 the company’s stock was off 4¢ to $4.03 on 1.85 million shares traded.