Semafo gets cash for Samira Hill

In a tough gold market, Semafo  (TSX: SMF; US-OTC: SEMFF) has turned a non-core asset into cash.

The company announced it has struck a deal to sell its 80% stake in the Samira Hill gold mine in Niger to Australian-based Middle Island Resources (ASX: MDI). The government of Niger owns the remaining 20% of the mine.

Middle Island will pay US$1.3 million and a fixed net smelter return royalty (NSR) of 1.2% on gold sold from the mine. The NSR royalty is payable only if the spot price of gold is more than US$1,450 per oz., and capped at US$12 million.

And while those numbers are not overwhelming, they look better when considering that the high-cost mine has already brought Semafo two impairment charges, and is scheduled to be put on care and maintenance by year-end.

The most recent impairment charge — for US$35.1 million —  was triggered by the decision to put the mine on care and maintenance. At the end of last year the company took a US$60-million impairment on the mine as well.

Removing the asset from its balance sheet, however, depends on Middle Island completing a $4.8-million equity capital raising, as well as governmental and regulatory approvals.

The deal is expected to close by the end of September.

Samira Hill sits 90 km west of Niamey in Niger, on the Samira Horizon gold belt.

It has proven and probable reserves of 7.9 million tonnes grading 1.25 grams gold for 317,900 oz. gold and measured and indicated resources of 11.7 million tonnes grading 1.43 grams gold for 539,400 oz. gold, as well as inferred resources of 7.9 million tonnes grading 2.55 grams gold for 649,400 oz.

The mine life extends for another 21 years.

Costs have been a major concern at the facility because of high power expenses in the country, which are associated with its poor infrastructure. Such concerns, along with the project’s sensitivity to the gold price, led Semafo towards strategic alternatives for the property in late 2012.

The mine is expected to produce between 23,000 and 26,000 oz. gold over the next six months, with total cash costs between US$985 and US$1,035 per oz.

These higher costs — compared to Semafo’s other two operating mines, and combined with weaker gold prices — gave the company little leverage in trying to drive up the price paid for ounces in the ground.

Kerry Smith, an analyst with Haywood Securities, calculates that the deal translates into a “modest” price paid by Middle Island of US$5.73 per total in-situ resource ounce, based on an upfront, US$1.3-million cash payment and US$12-million maximum royalty.

“We believe the deal is overall ‘neutral’ to our valuation — as it gives management more time to focus on Mana — however, it is slightly dilutive to our 2014 cash flow-per-share estimate,” Smith writes.

Smith calculates a net asset value for the mine of US$13.2 million, using a US$1,280 per oz. gold price.

Semafo has three producing mines in West Africa. Beyond Samira Hill, it has the Kiniero mine in Guinea, and its flagship Mana mine in Burkina Faso.

The company expects to produce 235,000 oz. gold this year, at a cash-operating cost of US$810 per oz.