Growing Momentum in the Junior Space

Junior investment makes a comeback in a sentimental market

Since 2013, the junior space has suffered wavering investment appetite. Through this period, juniors have decreased aggregate budgets by 10% year on year, according to S&P Market Intelligence’s recent data. Furthermore, gold explorers in Africa trade at lower rates compared to their Australian and Canadian peers due to the political risks associated with the jurisdictions of operation. The median valuation for African gold projects is at US$18.87/oz, Australian juniors are valued at US$44.74/oz and Canadians at US$29.81/oz, based on the Gold Junior Index. Undervalued, African-focused explorers have had a tougher job raising money in the cash-tight climate. For the last three years, Asante Gold, a small cap junior listed on the CSE, has been trying to fund the construction of its Ghanaian Kubi mine, an underground 315,000 oz resource with a proposed production rate of 40,000 oz/year for nine years. Douglas MacQuarrie, president and CEO of Asante Gold, believes the higher gold price will finally help the company move into production: “Looking for funding to develop the mine has been an elusive process, but the good news is that for every US$100 that the gold price rises, the value of Kubi goes up, the value of Kubi goes up by ten million. The current market dynamics become a very catalytic event that puts everything into motion. Once we are funded, the market capitalization of Asante will change to the upside drastically, because we are only 10-12 months from our first production.”

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“We expect to see a rush to assets in order to meet production demand because there is a scarcity of quality assets out there and so majors and mid-tiers will need a pipeline of projects to scale up resources.”

Mike Brown, CEO, Chesser Resources

When the soaring investment appetite for long-term value is met with short-term supply, explorers become essential players in closing this gap. According to S&P Market Intelligence, only 25 major gold deposits were discovered during the last decade, which consist of a total of 154.3 million oz; these represent only 7% of the gold content discovered since 1990 (of a total of 278 deposits). At the Joburg Indaba mining conference, Barrick Gold’s CEO Mark Bristow warned of an imminent and serious reserve crisis, as the average life of gold mines across the industry has decreased from 20 to 10 years.

Importantly, however, more than 35% of all gold discoveries of the last 10 years were made in Africa. The continent holds over 40% of the world’s gold resources, while being the least explored; this paradox has earned Africa the nickname of “the last frontier” for gold. The undeniable resource potential is offsetting investors’ and developers’ risk aversion. Moreover, discovery costs can be very low in West Africa, as junior explorer Tietto Minerals proves at its Abujar gold project in Ivory Coast:

Tietto Minerals has been running intense drilling campaigns at record low costs of US$35/m, while some Canadian explorers pay around US$150 per drilled meter. The difference is made by Tietto’s in-house diamond drilling team and equipment. Tietto also expects easy metallurgy: based on this year’s met tests, the ore identified is soft and easy to process with recovery rates of between 96% to 98%. Based on these credentials, Tietto Minerals has seen its price share rise from AU$0.14 in March, to AU$0.87 in October, being one of the best valued companies in the region, and for good reasons: the Abujar gold project showcases a 3.02 million oz resource at 1.2 g/mt, following a consecutive third upward resource update. What excites the market is that Tietto has only drilled 10% of a land area of 1,114 km2 of the main licence, and continues to show huge upside potential, so further resource growth will be the focus of its current 70,000 m drilling program.

Like Tietto, many West African juniors have seen massive re-evaluations, especially in Q3. In Burkina Faso, Orezone is developing the Bombore project, a 6.16 million oz deposit, at low grades (under 1 g/mt), but with outstanding project economics, at an AISC of US$672/oz for the first 10 years, followed by an average of US$730/oz over the life of mine. This cost is at the same level with the region’s cheapest operation, the Kalana mine, belonging to Endeavour Mining.

Re-ratings also took place on the back of an encouraging news-flow of recent discoveries, including Tietto Minerals’s, which are reinvigorating confidence in the exploration sector: In Guinea, Predictive Discovery showcased its Bankan asset, expected to be in excess of 2 million oz. One of the largest tenure holders in Burkina Faso, West African Resources defined a high-grade, 1 million oz resource at M1 South Shoot, while Chesser Resources is returning spectacular drilling results at its Diamba Sud in Senegal, with a maiden resource to be defined by 2021.

Refilling budgets before refilling the reserves pipeline

Making the most of a friendlier investment climate, many juniors have gone to the markets over the summer and autumn of 2020 and found their placements oversubscribed. Although the pandemic has limited juniors’ ability to meet investors and promote themselves, the sector has managed to turn this challenge into an opportunity: juniors can now participate at a large number of digital events, at lower participation fees and with no travelling costs. Digital attendance is more inclusive, especially helping small juniors with reduced budgets.

Completing one of the biggest capital placements, Tietto Minerals managed to raise AU$56 million, which will fund the PFS, DFS and start moving the Abujar project into construction. To a smaller degree, Mako Gold, selected among the five best precious metals companies in Africa to watch in 2020 by the Investing in African Mining Indaba, recently raised US$10 million in a heavily oversubscribed placement to advance its Napié project in Ivory Coast, for which it hopes to have a maiden resource for Q1 2021.

Mako actually completed two financing rounds, one in May, and a second tranche in July, a decision which Peter Ledwidge, managing director, explains: “Some people were surprised by our subsequent AU$10 million raising happening so quickly, but the logic behind this was that it is better to cash up now, not knowing how long the bull market will last.”

This thinking resonates across the junior space, which has learned to act promptly to take advantage of the rare market disposition: TSX-listed Roscan Gold closed a CA$7.5 million financing, topped up by additional investment from Warrants Exercise of another CA$3.3 million in July. Another Canadian junior, Newcore Gold, went to the market with an initial capital raising of US$10 million to fund their exploration campaign at the Enchi gold project in Ghana, but ended up cashing US$15 million after seeing its placement oversubscribed. Besides financing another 50,000 m of drilling, the raise also led to a diversification of Newcore’s investment base, already 32% management owned, to more institutional investors.

Moving to Senegal, Chesser Resources also saw a shift in their register over the past one and a half years to both more geographically dispersed investors and stronger institutional support: “Chesser Resources has traditionally been a majority retail-held company (…) Our latest financing was heavily oversubscribed, and we have been encouraged by the number of mainly Australian institutions supporting us. We are now fully financed to run our next drilling program, which will be a significant one starting in October, after the rainy season,” said Mike Brown, CEO.

This summer, the African Gold Group (AGG) closed an oversubscribed capital raise at US$11.1 million within two weeks, also bringing in institutional investors. However, the company sits at the lower end of valuations in the region, despite its attractive near-term project with a published DFS. Its Kobada gold mine in Mali has an AISC of US$782/oz, which is in the lower cost quartile in the West African space, together with a 100,000 oz per annum production following an increase in reserves from 500,000 oz to 755,000 oz. “African Gold Group remains very undervalued compared to our peers. As a near development operating gold producer, we are running at a market cap probably three to four times lower than our peers who are not even at the same stage as we are. I believe there is a massive opportunity in terms of investment upside,” CEO Danny Callow said to GBR.

A possible explanation could be the high-capital cost of constructing the mine at US$140 million for the entire project, out of which US$80 million is to be spent on the processing plant. James Wallbank, managing partner of closed-end private equity mining fund Ibaera Capital, has noticed a funding gap in the junior market when projects are in their late-stage of development, close to construction, like AGG or Asante Gold: “The public-listed markets will typically fund exploration companies, while the very large institutional investors and the mining companies will tend to invest in projects that are already past the construction phase. (There is) a gap in funding for advanced projects which, as they get closer to construction, they find it more difficult to be financed.”

In answer to this gap, Ibaera participates in projects to help junior explorers transition this critical point. Most recently, Ibaera took over Azumah Resources in Ghana, which, according to Wallbank, had lost the interest of investors despite the very positive fundamentals of the Black Volta (formerly known as Wa) project. Ibaera already invested US$40 million since 2017 in the project, preparing to start construction in early 2021.

Re-rated juniors, re-rating jurisdictions?

West Africa is known as a high-risk, high-opportunity mining destination, and this profile has attracted a particular crowd of unwavering juniors, miners and investors. If producers have declared that they intend to stay cautious through the market upturn, juniors have been higher-risk takers, moving forward aggressively. Noted to be trading at “discounted” rates based on the jurisdictional risk, juniors in West Africa are flirting with shifting investors’ preferences between different countries.

Although the Birimian belt stretches across multiple countries, these countries receive uneven investment attention. An attractive fiscal code, political stability and access to infrastructure play strongly into the choice. Ghana is a good reference in this sense- the region’s most mature market, Ghana has an history of around 200 million oz discoveries to date, even though the country contains only 19% of the Birimian Greenstone belt. By comparison, Ivory Coast holds 35% of this prolific geological structure, yet it has seen little exploration, especially due to political instability prior to 2010.

While the previous cycle favoured Burkina Faso and Mali as the principal exploration destinations, this time around Ivory Coast is the rising star in the region. Security is a key differentiator in turning the tables. The coup to remove Ibrahim Boubacar Keïta in Mali has been the most prominent issue in recent months, but the violence in the Sahel region has spread outside of Mali, and Burkina Faso is now the epicentre of the troubles, according to Liam Morrisey, CEO of London-based risk consultancy MS Risk: “The international community is treating Mali as a country with problems, but it is ignoring its neighbours. In Mali, the war has been contained because of the presence of an international military operation (…) but the international community is not nimble enough to be able to project its assistance across the region yet.”

In the meantime, Ghana, West Africa’s darling for gold production, has been losing its appeal in terms of exploration funding. Simon Meadows Smith, managing director of SEMS Exploration Services, a consultancy and exploration services company based in Ghana, believes this is due to a lack of recent activity on the exploration front: “Ghana has suffered from a perception issue: it is seen as a well-trodden jurisdiction, surrounded by countries with easier and better opportunities. That perception is wrong; there are fabulous opportunities in Ghana, but the lack of a news flow has not encouraged investors.”

With exploration almost stalled in Burkina Faso and more costly in Mali, Senegal becomes, by comparison, an attractive alternative by virtue of its reputation for stability. Nigeria is also promoting itself as the newest postcode for mining in Africa. In the country-by-country section, you can read about the mix of challenge and opportunity each country holds.

Image courtesy of Teranga Gold