After surviving DRC’s dog days, Banro nears its payday

SITE VISIT

Bukavu, Democratic Republic of the Congo — Flying over lush green folds of land in the eastern Congo, the village huts below, surrounded by groves of banana trees, create such an idyllic scene it’s hard to imagine the violence that gripped the region over the last decade.

But as recently as 2004, the region’s centre, the city of Bukavu, was captured by the infamous breakaway general, Laurent Nkunda. After taking control, Nkunda told his troops the city was theirs to do what they wanted with for three days. Sadly, they did.

But in the Congo, where the UN, the World Bank and the International Monetary Fund have carved out a significant presence, things are changing quickly and Toronto-based Banro (BAA-T, BAA-X) has positioned itself as both a driver and beneficiary of that change.

Driving through downtown Bukavu to Banro’s sample preparation lab, the only guns to be seen are in the hands of UN soldiers and the streets buzz with the activity of people free and secure enough to begin the process of rebuilding.

As a measure of how well Banro is embedded in that rebuilding process, the company uses no armed guards at the lab, at its offices in Bukavu, or at its exploration camps.

“Our main security is the true partnership with the community we live in,” chief geologist Chris Bawah tells a group of reporters that has gathered on the green hilltops of Banro’s flagship Twangiza property.

But the years of war have left scars. Despite being the regional capital, and home to over 1 million people, there is nary a paved road in Bukavu, and the town centre is composed of a great mud pit in place of a piazza.

“The infrastructure is bad all over, but you can take a positive perspective on it,” says Banro’s recently minted chief executive, Michael Prinsloo. “Either there’s nothing here, so when we build we can get it right the first time, or what little is here has been built with funds from the international community, so it’s been done right.”

In September, Prinsloo took over as CEO from Peter Cowley — who in turn, moved into the role of president — to guide the company into the development stage.

Targeted by Banro chairman Simon Village for his previous experience as chief executive of intermediate producer DRDGOLD (DROOY-Q, DRDD-J) and management positions with Anglo American’s (AAUK-Q, AAL-L) gold division, Randgold & Exploration, and Gold Fields (GFI-N, GOFD-L), the South African Prinsloo’s 35 years of mining experience are complemented by the fact that most of those years were spent in sub-Saharan Africa.

Those mine-building skills and African know-how have been put immediately to task as he takes the helm of an exploration company already in fifth gear.

Banro is slated to finish prefeasibility studies for both its Twangiza and Namoya properties in the first quarter of 2008, and a scoping study on its Lugushwa property is to follow closely thereafter.

Twangiza

Scoping studies for Twangiza and Namoya were finished in the summer and put combined resources at 7.81 million oz. gold. Twangiza has 6.25 million of those ounces, with the remaining 1.56 million oz. lying within Namoya’s claims.

Combined, the projects would turn out between 500,000 and 700,000 oz. gold a year, with production startup slated for the beginning of 2011 and capital costs estimated at roughly US$535 million.

Twangiza is the key driver behind such strong economics. Discovered by Minire des Grands Lacs (MGL) in the 1950s after the company followed alluvial deposits upstream from the Mwana River, the deposit is defined by low-grade, metamorphosed sediments from the Proterozoic period that have been folded into a series of anticlines and synclines.

Gold is hosted within mudstones, siltstones and greywackes that have been intruded by mafic and feldspar porphyry sills along the crest of an anticline.

The scoping study estimates average annual production at 312,500 oz. gold per year for the first seven years, and an average of 268,900 oz. per year over the 11-year mine life. That production is to come from an open pit that will be built by carving off the side of the mountain and continuing downwards.

To turn out that much gold, Banro will have to raise some US$300 million for initial capital costs, with ongoing capital costs coming in at US$27.7 million.

Prinsloo envisages building two smaller carbon-in-leach (CIL) processing plants rather than one large one. The smaller mills would not only mean smaller parts to transport to the difficult to reach location, but they would also hedge against malfunction risk.

“By building two smaller mills — at any stage, your mill is running,” Prinsloo says. “There’s not one big five-million-tonne mill, because if you did that and if there ever was a problem, it would shut down the whole company.”

Operating cash costs are estimated to average US$331 per oz. over the life of the mine.

Banro has the internal rate of return (IRR) pegged at a very attractive 33% when a US$600 gold price is used and a net present value (NPV) of US$511 million with a payback of 2.6 years with a discount rate of 5%.

With mineralization occurring near surface and labour costs low, the only burdensome costs the company is facing are those associated with transportation.

Since infrastructure is still in an undeveloped state, Banro relies heavily on two helicopters commissioned from South Africa. The aircraft are used daily to run supplies and samples between the camps and offices in Bukavu.

But a lower-cost avenue is on the way.

From Banro’s perspective, one of the more important construction initiatives in the region is the rebuilding of a 200-km road from Bukavu heading west to Kasongo that will pass near Twangiza. The unpaved road is being built by a private Chinese enterprise under a World Bank-sponsored program. Banro plans to hook up to the road via a 24-km access road.

When complete, the road will provide the final link in road access from the port of Mombasa in Kenya — roughly 1,100 km east of Bukavu.

‘So much to explore’

One of the most striking features of Banro’s land claims is just how many there are. There are few exploration juniors in the world with such a dominant position in a hitherto unexplored gold belt.

Its claims are so promising that Haywood Securities analyst Eric Zaunscherb wrote in a July report that the company has “a land position worthy of a senior gold producer.”

But having so much prospective territory is not without its challenges.

“The problem for us,” Prinsloo says, “is to find an exploration budget and stick to it. There’s so much to explore.”

Banro currently has 14 mining permits and 13 exploration permits along the belt. That locks up a continuous swath of land from Twangiza in the north to Lugushwa in the centre. Banro holds the massive stretch of remaining land between Lugushwa and the more southerly Namoya under an exploration permit, and is in the process of applying for full title.

Back up around Twangiza, the company plans to move rigs over to a couple of major artisanal sites near the deposit, known as Mufwa and Tshondo.

Circling Mufwa by helicopter, a white Banro tent has been established on a hilltop, below which a handful of Belgian-built adits pockmark the exposed side of the hill, where artisanals bustle about.

Beyond the two active artisanal sites, chief geologist Chris Bawah is excited about moving the drill rigs farther north from the currently defined deposit, believing the mineral-rich anticline at the southern end of the deposit will be repeated to the north. Drilling will begin there in the new year, as well.

While Bawah tackles the exploration upside of Twangiza, Prinsloo is left to contemplate the operational aspects of building a producing mine.

Chief among his challenges will be sourcing out the best possible power supply.

While diesel-fired generator sets (gensets) are an option, the remoteness of the project com
bined with a seemingly ever-rising oil price, has the company looking for alternatives.

Prinsloo says the best way to tackle the issue is to tap into the region’s vast hydroelectric potential. The approach would benefit the community with clean power, and could be done using river diversion techniques, which are less environmentally disruptive than building a dam.

Banro says it would cost roughly US$65 million for an 18-megawatt hydroelectric power mill, but the economics of the project will be clearer when a feasibility study on the project is finished in December.

Ideally, Prinsloo says, a 50-megawatt plant would be built with Banro paying for one-third of the capital costs, while the government and Chinese investment would equally split the remainder. The excess power would be used by the surrounding communities.

And while Twangiza is currently the company’s most robust and advanced project, and as such, takes the lion’s share of development attention, it by no means is the lone jewel in the belt.

“Twangiza was always the primary target, but we put it on hold and went over to Namoya because of unrest at Twangiza,” says Prinsloo, speaking of the days when General Nkunda’s troops came to town.

Namoya is the most southerly lying project. Vast, untouched rainforest must be flown over before arriving at its lower and more humid elevation.

The project currently has an indicated resource of 8.9 million tonnes grading 3.27 grams gold per tonne for 938,800 oz. and another 7 million tonnes grading 2.73 grams gold for 621,500 oz. in the inferred category.

And the geological team assembled at Namoya is enthused by drill results from recently tapped targets around the outlined deposit. Chief among them is Kangurube, which sits 1.5 km east of Namoya, and where one drill hole returned 10.4 metres grading 2.63 grams gold per tonne. Trenching at the site returned highlights of 6.6 metres grading 18.36 grams gold and 8 metres grading 8.51 grams gold. Results from a second diamond-drill hole are pending.

The scoping study for Namoya itself — which is composed of three separate open pits — estimated average annual production at 165,000 oz. gold per year over an 8-year mine life. Operating cash costs were pegged at US$217 per oz. for the first five years of production (average US$238 per oz. over eight years).

Post-tax net present value is anticipated at US$204 million based on a 5% discount rate and a gold price of US$600 per oz., with an IRR of 37%, and a 2.3-year payback period.

Next in the line in terms of project priority is Lugushwa, which sits roughly in the centre of Banro’s land claims.

The project has been hampered by everything from ruthless Mai Mai rebels in the nearby hills — though the exploration team says that government programs aiming to integrate the rebels into the national army have been very successful — to complications with drilling contractors. The latter caused a shutdown of the 2007 drill program. But with Major Drilling Group International (mdi-t, mjdlf-o) now coming in, Banro is confident it will drill enough holes to get a scoping study finished by the end of the first quarter of next year.

Using historical data from exploration work done by Banro in the late 1990s, SRK Consulting outlined an inferred resource at Lugushwa of 37 million tonnes grading 2.3 grams gold for 2.7 million oz. gold.

With roughly US$38 million in the bank, Banro has the funds to push through with a scoping study at Lugushwa and prefeasibility studies at Namoya and Twangiza without having to turn to the markets or take on debt. Prinsloo says the funds will take Banro through to July 2008.

A long, winding road

Banro first came to the Congo back in 1996 — just in time to see the country collapse into a war that saw as many as seven foreign armies fighting on its soil, leaving 4.5 million dead.

Amidst the instability, Banro’s properties were seized by the government.

But Banro founder and executive vice-president Arnold Kondrat didn’t take the confiscation lying down.

He took the government to court, and in so doing, set in motion a series of aggressive legal actions that eventually led to an out-of-court settlement. Banro agreed to hand over a sizable amount of non-gold property claims that it had purchased before the confiscation, in return for the gold properties and a 10-year tax break.

The strength of that agreement — Banro’s property title has the signature of President Joseph Kabila and 17 other members of the government — has kept the company from being mentioned in connection with the review some other mining contracts are currently undergoing.

The Congo’s Commission for the Review of Mining Contracts is looking at 61 contracts with an eye towards increasing transparency and maximizing state revenues. To do so, it says it will change deals that it deems unfair to the state.

While the report has yet to be issued, rumours about its findings hit the share prices of companies like Toronto-based Anvil Mining (AVM-T, AVM-A).

“We are confident that our permits are safe,” Prinsloo says, adding that he hopes the review process is finished quickly so that investor uncertainty can be put to bed.

The company has done well to earn provincial government support, as well. The governors of South Kivu and Maniema — the two provinces that the Twangiza-Namoya Goldbelt runs through — made an appearance at a dinner hosted by Banro during The Northern Miner’s recent visit and offered up a toast.

“We offer our full support to Banro, and hope that the project will advance as quickly as possible,” Clestin Cibalonza, governor of South Kivu said.

Banro has won that support, not only by getting officials and locals to buy into the economic benefits of the project, but also by setting up social programs to help local schools and hospitals and build up infrastructure.

Further, Banro has embarked on a corporate policy of hiring Congolese geologists to help create a better culture of mining.

Currently, there are 38 Congolese geologists on staff, and the company makes a point of going to the university in Bukavu each year to find new recruits.

“The head of the geology department told me that two years ago, there were only ten geology students. Now, he says there are about 110,” chief geologist Chris Bawah says.

But the geological education of the population at large still has some ways to go — an important point, considering the key part managing community expectations plays in maintaining good working relations.

Bawah says such a lack of understanding led many locals to think Banro was far more advanced in its operation than it is, causing expectations to climb.

“They thought we were using the drill rigs to suck gold out of the hills, put it onto the helicopter and fly it out,” Bawah says.

“If only it was that easy,” Prinsloo adds with a smile.

To correct such misconceptions, Banro has launched an intensive interactive program, bringing community leaders to the exploration site and the lab in Bukavu and explaining the exploration process.

As for communities that lie on the future mine site, Banro has set aside US$13 million to move villagers and has an expert from SRK Consulting at the sites talking with locals about the future move.

Since many of those being shuffled off will be artisanals, Prinsloo says some will be recruited into the company, while others will be allowed to mine other areas and sell the gold to Banro.

Like everything Banro does, its dealings with artisanals meet the highest standards.

It’s as though all the difficulties and risks inherent to doing business in one of the world’s most challenging settings have molded Banro into one of the most careful and professional exploration companies in operation. It’s had to set a high standard for itself and meet it to mitigate the risks beyond its control.

The result is a meticulously run company — even the core shacks look as though they were dusted by Molly Maid — pushing t
owards development in a manner that has made some majors take notice. Randgold & Exploration and Gold Fields have both been rumoured to have cast an inquisitive eye at the property.

Prinsloo is aware of the rare position Banro finds itself in. But his approach is to ignore what is beyond his control and focus on driving the project as far as he can.

“I must assume, as CEO, that no one will take us out,” he says. “If I assume that, all that will happen as an exploration company is our share price will drop and we’ll get taken out at a lower price.

“We can’t stand still. If you stand in the middle of the road, you’re going to get hit,” Prinsloo says.