Hitting The High Notes Of African Resource M&A: Nana Sangmuah

TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

With six mining deals in 16 months, mining takeovers in African nations are happening with increasing frequency, and Nana Sangmuah, managing director of research with Toronto-based Clarus Securities, says more African M&A is on the way. But he cautions investors about companies high-grading reserves to generate cash flow. When the music stops, Sangmuah says, those companies will crash. In this interview with The Gold Report, Sangmuah tells investors how to avoid the party crashers and seek names that can hit the high notes with long-life production assets that can generate significant cash flow to retire debt, grow the business and return some profits to shareholders.

Merge

The Gold ReportThe Indaba Mining Conference in Cape Town, South Africa, is an ideal spot to take the pulse of the global mining business. You were there in February. What did you learn that could benefit mining equity investors?

Nana Sangmuah: The key takeaway is that exploration has left the scene and it's no longer a core focus in weak equity markets. The focus on conserving margins by both senior and intermediate metals producers meant slashing exploration budgets. Those miners will not be able to replenish the reserves they are mining and are probably mining themselves out of business. The only way to correct this—given the 10- to 12-year gap from discovery to production—is for merger and acquisition (M&A) activity to pick up in a big way. Most of the conversations at Indaba went in that direction given the compelling valuation available in the sector.

What was also striking is the increase in companies saying publicly that they are on the hunt for acquisitions. Those included Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE), Newmont Mining Corp. (NEM:NYSE), Newcrest Mining Ltd. (NCM:ASX) and Acacia Mining Plc (ACA:LSE) (formerly African Barrick Gold Plc). But, quite frankly, there is a short list of potential targets.

TGR: Did the M&A chatter focus on African assets?

NS: It's clearly heating up on the continent. I can count about six transactions in Africa over the past 16 months. The time needed to advance projects seems to be much quicker on the continent because a lot of countries have a significant portion of their gross domestic product tied to the mining sector; those governments are more willing to get projects moving. The biggest problem is infrastructure and it adds to the cost of getting projects up and running.

TGR: Metal prices were a significant topic of discussion at Indaba. Was there a consensus on which metals offer the most upside?

NS: Metal prices are always an issue. Generally, there's a view that the strength in the U.S. dollar is not going to be sustainable beyond H2/15. Any potential weakening of the dollar should translate into stronger commodity prices. As with all the currency wars, there could be an increased investment demand for gold as a currency that cannot be manipulated by any central bank. But the reality is almost all the current mine supply is being gobbled by Asian demand. Central banks are not selling, so any increase in investment appetite should drive the gold price a lot higher.

TGR: Please give our readers your price decks for gold and silver.

NS: For valuation purposes, we've kept our gold price deck flat at $1,350 per ounce ($1,350/oz). We expect a stronger second half for gold. We've seen it test $1,300/oz and pull back. We think gold can leap on a weaker U.S. dollar and increased fiscal buying from Asia.

TGR: And silver?

NS: We have $18/oz. Silver should mirror the movements in the gold price. I don't expect any significant increase in industrial demand because global economies remain weak. Any movement will be U.S. dollar-related.

TGR: What should investors focus on as they conduct their due diligence on mining equities?

NS: The key is to watch how individual company mine plans look beyond three years. Typically, companies provide three-year production growth and free cash flow forecasts and that's it. But a lot of these companies have handicapped their mine plans by focusing on high-grade ore. Beyond that, the grade is not economic and there's little value there. The focus should be on what will happen beyond that timeframe and the companies that have stories to tell. Some examples are Randgold and Acacia Mining, that have a 10-year and a 5-year mine plan respectively. Those situations are the ones that investors should gravitate to because those longer mine plans are fully funded at these price levels.

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Disclosure:

1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides ...

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