Semafo building strength in West Africa

In mid-April, Semafo (SMF-T, SEMFF-O) announced it had beaten its own production guidance by 4,200 oz. in turning out 28,700 oz. gold for the first quarter.

With high gold prices, such an increase from a company with a proven track record — via two producing mines in West Africa and a third on the way — could well have been expected to bring a healthy bump in its market capitalization.

But Semafo shares remained sluggish at the time, perhaps being weighed down by a reserve update from mid-March that showed replacement ounces fell short of maintaining reserve and resource levels from 2006.

Proven and probable reserves fell to 1.97 million oz. for 2007 with an average grade of 2.48 grams gold from 2.04 million oz. gold with an average grade of 2.82 grams in 2006.

While more ounces were being defined at Semafo’s Samira Hill mine in Niger and at its newly minted Mana mine in Burkina Faso, the drop off in total ounces came from an unexpected twist in the geology at its Kiniero mine in Guinea.

The twist came when, after four years of mining, it was time to move from the primary structure at the site to the secondary.

“Unfortunately, the inside of the structures were very erratic, and our interpretation did not see that, and that created significant internal dilution,” company president and chief executive Benoit La Salle explains.

To create a clearer picture, La Salle likens the secondary structure to a Lego construction. While the top block of the Lego is aligned with the bottom, the ones in the middle had moved out on the sides.

“We were imagining it as straight down, so we were mining waste on the second and third level and were throwing away mineralized ore because we thought it was outside the box,” he says.

The misstep caused gold production costs to rise last year to the US$700-per-oz. neighbourhood, but La Salle says such a dollar amount isn’t representative be- cause barren ground was being mined and ore thrown away.

He expects costs to come back to the US$450-$500 per oz. range for 2008.

Cost reductions will come with a change in mining methods.

Once tighter drilling gave Semafo a clearer picture of the shape of the orebody, it realized it should be bulk mining the deposit rather than selectively mining it.

The change in methods reduces the overall head grade but means the company won’t get stuck with internal dilution and wouldn’t be throwing away mineralized material.

La Salle has taken notes from the experience.

“The twenty-five metre spacing for definition drilling is good for primary structures, but once you’re in the secondary structure, you need fifteen-metre spacing,” he says. “Then you can pick up internal dilution.”

Going forward, ore at Kiniero will come from both the secondary structure, which averages 2.6 grams gold per tonne, and the West Balan deposit, roughly 5 km away. West Balan ore averages more than 3 grams gold per tonne.

“West Balan has grown 500 metres now to a 1.6-km strike length and it is still open to the south,” La Salle points out.

With La Salle believing the company has firm control at Kiniero, he is free to enthuse about Semafo’s most recent accomplishment — production at its third mine, Mana, in Burkina Faso.

On May 6, Semafo announced the mine reached commercial production at Mana by hitting its target for April of 4,300 oz. gold. Commercial production came hot on the heels of the first gold pour, announced at the end of March.

Gold production at Mana is anticipated to ramp up to between 29,000-34,000 oz. in the fourth quarter of 2008, for total production in 2008 of between 60,000 and 70,000 oz.

Built in 14 months, La Salle says the speed with which the mine was constructed is a testament to the political and social stability in Burkina Faso.

“There are few countries in the world you build a mine that quickly in,” he says.

Mana is currently running on a small ball mill, allowing it to process 2,000 tonnes per day but a larger ball mill is on-site and when it is added to the circuit, it will increase production by 4,000 tonnes to 6,000 tonnes per day.

That staggered approach to production came more by way of circumstance than by design.

Semafo ordered a larger ball mill a few years ago but, “we didn’t realize that delays or delivery schedules meant nothing for the manufacturers,” La Salle quips.

So while the mill was scheduled to arrive in August last year, Semafo was told last summer to expect a delay of many months.

The company made a quick decision to look elsewhere and was able to source a 4,000-tonne ball mill in Canada. The mill was refurbished and transported to Burkina Faso.

It bodes well for the company that the arrival of the mill, which will expand capacity, coincides with growing resources at the site.

Those increases are largely being generated by a recently discovered feeder zone underneath the open-pit outline at the Wona deposit. Wona is one of three structures at the site and will be mined via an open pit that spans 2.3 km and descends 150 metres.

The feeder structure beneath it reaches a depth of 400 metres below the pit and extends roughly 1 km, extending beyond the pit outline in a northeasterly direction.

Highlights from separate drill holes intersecting the feeder zone include: 6.28 grams gold per tonne over 12 metres; 3.47 grams gold over 51 metres; 2.95 grams over 49 metres; and 5.66 grams gold over 13 metres.

Earlier drill results from the zone worked their way into the inferred resource, swelling the figure to 1.9 million oz., up from 444,800 oz. at the end of 2006.

The strong intervals have Semafo considering an underground operation as well as two small open pits to go along with Wona’s large open pit.

The company will spend roughly $4 million on drilling this year to further delineate the new zone.

Semafo’s third producing mine is Samira Hill in Niger.

The mine was built in 2003 as a 6,000-tonne-per-day mine with capital costs of just $34 million — a figure hard to fathom considering today’s rising capital costs. A year earlier, Semafo did even better when it built the 2,000-tonneper-day Kiniero mine for just US$12.5 million.

The 2008 production target for Samira Hill is between 68,000 and 73,000 oz. gold.

Reserves at Samira Hill have been headed in the right direction, increasing by 21% in 2007 to 735,900 oz. with an average grade of 1.81 grams gold per tonne.

The mine has another 1.23 million oz. gold in the measured and indicated category grading 1.15 grams gold.

And while building a mine back in 2003 saved Semafo a boatload on capital costs, gold’s low price at the time had undesirable consequences when it came to dealing with the banks.

“The only problem with the timing (of construction) was that it came with hedging,” La Salle says. “People thought I was cuckoo for building a gold mine back then, but today a 6,000-tonne-per-day mill will cost you $200 million to build.”

The hedge at Samira has 32,000 oz. of gold production remaining for 2008, and 35,000 oz. in 2009. Those ounces will be sold at US$380 a piece.

While that figure takes some of the zest out of increased production atthe mine — it produced 16,300 oz. in the first quarter — the 12,400 oz. produced at Kiniero in the same quarter was sold at higher prices. Production from both Kiniero and Mana is completely unhedged.

Semafo’s average sales price for the first quarter was over US$900 per oz. compared with US$661 per oz. for the same period last year.

Future cash flows look promising as well, with production guidance for 2008 coming in at a lofty 165,000-185,000 oz. gold.

As for its exclusive focus on West Africa, Semafo has advantages that go beyond just having spent more years in the region than some Johnny-come-lately juniors.

With upper management fluent in French and English, the Montreal-based company is able to skate over many bureauc
ratic obstacles that often arise in the region.

Most importantly for La Salle, from the perspective of political stability, is that people in the region are seeing the economic benefit that is beginning to be generated and he believes that responsible mining will play a key role going forward.

“Mining is how they will come out of their poverty issues,” La Salle says.

And while Niger and Burkina Faso have been stable during Semafo’s tenure there, even recent political upheaval in Guinea did not interrupt production at Kiniero.

La Salle says the situation — which saw worker protests shut down the capital for many days just over a year ago — has settled with a new government that has brought stability.

Political upheavals or not, nothing speaks to Semafo’s ability to navigate West African waters as much as its production track record.

“The strength of Semafo,” La Salle says, “is that we are the only midtier company to have three mines built in West Africa almost on time and on budget.”

Semafo’s financial statements for the end of 2007 showed cash flows from operating activities coming in at US$10.3 million and a net loss of $23 million — which includes an unrealized loss of US$17.9 resulting from the mark to market of gold sales contracts.

The company’s shares have traded from 73-$1.93 and over the last 52 weeks and it has roughly 213 million shares outstanding.