A Golden Opportunity in Africa

09/02/2011 12:30 pm EST

Focus: GLOBAL

Louis James

Senior Editor, Metals Division, Casey Research LLC

Going where others fear to go can be very profitable, if we can determine that the fear is overdone, writes Louis James in Casey’s International Speculator.

Mali is an hourglass-shaped country right in the middle of West Africa. The southern part is greener, but pretty dry outside of a torrential rainy season, and the northern part stretches into the heart of the Sahara.

I was given to understand that the government has a smaller presence in the northern part of the country, which is where the drug and human trafficking is said to take place…Well, okay, I was told it’s become a lawless no-man’s land, and was warned quite emphatically not to go there.

That actually sounded pretty interesting to me—I’m sure my mentor, Doug Casey, would have charged off to the north at once. But unlike Doug, I have kids waiting for me at home, and decided that caution was better in this case.

I flew in from Liberia—over the southern part of Mali—to the capital of Bamako. It was just after sunset, and I have to say I was deeply impressed by how few lights I saw.

Instead of the usual splashes of lights from towns as I flew over, even small ones, I saw a vast, vast darkness, with rare pinpricks of light—I felt that I had truly penetrated into Africa’s heart of darkness. I could see the economic stagnation…statistics from Andrey Dashkov’s country report brought to life.

Outside of Bamako, it’s largely subsistence farming that supports the populace, but there is a long history of gold mining. I saw massive garimpeiro workings, though in Mali, they call them "galamsey"—some as big as anything you’d see in Brazil or elsewhere in South America.

But these are not semi-mechanized operations with dozers and shovels and hoses to wash down the dirt: These are large swaths of narrow pits in the ground, usually less than a meter across, straight down and deeper than the eye can see.

In some places, these informal miners have been so active that whole hillsides are caving in, sometimes exposing rat holes that don’t seem large enough for a man to breathe in, let alone work in.

I had to wonder how many men get trapped in such cave-ins every year. It was hard to imagine how anyone can crawl into such a hole, with the ground visibly cracking all around. And yet, that’s exactly what I saw.

I was later told that some of these miners use drugs to slow their breathing and calm the sense of claustrophobia. I also understand that some of the smaller tunnels are worked by children.

I didn’t see any children crawling out of the holes in the ground, but I did see plenty of them helping their mothers work the ore that the men brought up. And I saw toddlers playing in the waste heaps, surrounded by the uncovered holes, yawning black, all around.

I heard of a legendary king of Mali who spent so much gold on his way to Mecca that it actually depressed the price of gold at the time. True or not, there’s such a long history of mining in the country and all this active traditional mining now that people are not afraid of mining or exploration, the way they are in some other places. That’s good.

However, when exploration companies find something to drill, the galamsey swarm the place like locusts and cart off a surprisingly large amount of the higher-grade, near-surface ore. Not good.

The galamsey pose a safety hazard to themselves as well as anyone who walks the ground afterward, and
leave the environment trashed—literally—for others to deal with.

The law actually encourages this by giving the galamsey the right to mine anything they can using "traditional" means—wooden mallets and the like. This holds true even where exploration companies have mineral rights and are actively exploring: One can only legally force the galamsey away when one has an exploitation license, builds a mine, and puts a fence around it.

This sounds crazy, but the idea was that if the locals could continue mining by their traditional methods, they would not be able to take much, and would not feel so strongly that white people came and stole their gold. That actually makes some sense; these people’s ancestors have mined the area for gold for centuries—and would not have been able to mine the hard-rock stopes at depth.

But, of course, the galamsey do sneak in some jacklegs, trip hammers, and other mechanized equipment. I even saw holes in the ground lined with tarps, in which ore was being soaked in sulfuric acid. It was whispered that foreigners had come in, bringing mercury amalgamation with them as well.

|pagebreak|

Avion Gold (Toronto: AVR) is the company I went to see in Mali in May. We liked it then, but we did not have much track record with management and were still a bit nervous, given the then-brewing political trouble across the border in Burkina Faso.

Since then, trouble has not spread from Burkina Faso, and the company has delivered excellent exploration results, upgraded its resources and reserves, and increased production. This is all positive news that makes the play more secure, but still leaves plenty of upside ahead, particularly in the form of a doubling of production in the works.

Avion is run by John Begeman, formerly with Zinifex/Wolfden, a company we made a lot of money on early on in this cycle. We didn’t meet John on site, but know people who’ve worked with him in the past; they say he’s a straight shooter.

We were favorably impressed all around, but we have more than a subjective evaluation: these guys turned Nevsun Resources’ (Toronto: NSU) former money-losing disaster, Tabakoto, into a profitable mine, and are discovering more ore as they go. They have our confidence.

Avion’s flagship project, Tabakoto was a $100 million project Nevsun built to show the market (and bankers) that they could build a profitable mine before attempting to finance their much larger Bisha project in Eritrea.

Things did not go as planned, and not long after start-up in 2006, Nevsun pulled the plug on Tabakoto, then sold it to Avion in 2008 for $20 million. Avion now has an 80% interest, with the other 20% being held by the government of Mali. There was an NSR, but it was bought back.

Avion has healthy cash flow, net income, and gold in inventory. The company currently has no debt, but it has secured a credit facility (at 7% interest).

It’s good the company has cash, because early shareholders had to endure quite a bit of dilution to get Avion to where it is now, as you can see in the 406.2 million shares issued and outstanding. That’s a lot more paper than we like to see out there, but with the dilution behind us, it’s the market capitalization that matters most now.

And that market cap is relatively low for a profitable 100,000-ounce-per-year producer with growing resources, well on its way to becoming a 200,000 OPY producer.

Plus, a significant number of cheap warrants have been cleared up, so there’s no imminent pressure from cheap paper about to hit the market. Also on the plus side, the large float makes for good trading volumes, which makes this an easier stock to enter and exit than most juniors—a very good thing.

Avion has good assets in hand, a high probability of added value in the near term, good news flow ahead, and is a good value at this morning’s price. We’re not counting on the assays pending to send the stock up in the very near future, but that is possible.

This does not, of course, mean these shares cannot go on sale if we see gold reverse its recent gains—they could and would. But it’s also possible that gold could leap rather than fall in the weeks ahead, so we recommend taking a first tranche now.

But do remember to buy in tranches—the best way to mitigate against the extreme volatility our market is prone to. You’ll be glad to be able to lower your cost basis if presented with a chance to do so.

Subscribe to Casey’s International Speculator here…

Related Reading:

Related Articles on GLOBAL