I recently had the pleasure to travel to Montreal and meet with SEMAFO President and CEO, Benoit La Salle. SEMAFO (SMF.TO) is a junior mining company that produced over 100,000 ounces of gold in 2007 and plans to double this number during 2008 by moving their third mine into production. Their stock took a beating in 2007, falling all the way from a high of C$2.50 to just $0.73. The market punished SEMAFO for missing production estimates and the stock declined 70% in a few months time. The junior mining sector can be very unforgiving.
SEMAFO’s production shortfall was more of a technicality than any serious issue with their properties or crew. Operations were put on hold for 6 months due to the company being unable to procure a replacement part at one of their mines. The situation has since been rectified, an inventory of spare parts is now on hand and their Mana gold project is about the come online. Their stock price has recently recovered to $1.30 – a 78% gain in the last month alone. Add in the fact that SEMAFO recently discovered two new gold zones at its Samira Hill gold project and made significant extensions at their West Baland structure and you are left with a very undervalued gold company that should easily push above the $3 mark before the end of 2008.
SEMAFO has measured and indicated gold resources of 4.2 million ounces. Their three main assets are their Kiniero mine in Guinea, the Samira Hill mine in Niger and their latest project, the Mana mine in Burkina Faso. They have been producing since 2002 and plan to double 2007 production and reach as much as 200,000 ounces of gold during 2008. These are impressive statistics for a company with a market cap under $300 million. In this light, SEMAFO could become a takeover target for larger mining companies looking to shore up resources.
Looking at comparative valuations as a measure of Enterprise Value per Ounce (M&I) is a good way to determine if a mining company is over or under-valued by the market. This calculation simply looks at the company’s market cap and divides it by their measured and indicated resources. The chart belows shows that the average is around $150. SEMAFO looks very undervalued at just $62 or less than half the average of other Canadian junior producers.
SEMAFO has a long history in West Africa and has helped to build and improve communities throughout the region. They have good relations with the local governments, were one of the first miners to the region and have created thousands of jobs and tax revenues for the economy. This leaves the company in a good position to quickly receive all of their necessary permits and avoid delays experienced by miners in more politically-sensitive areas. Management is top-notch, with proven success moving mines into production, the ability to raise capital, resistance to hedging and aggressive plans for ramping up production and increasing shareholder value. The only downside I can see to the company is that they aren’t heavily promoted and are only listed on the Toronto exchange. They fly under the radar of many gold investors, which is really a gift for anyone reading this article and taking a position while their stock price is still dirt cheap.
Disclosure: I own a position in SEMAFO and believe their stock will outperform other miners.
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