Semafo hopes to boost gold production

Montreal-based Semafo‘s (SMF-T) three operating mines in West Africa are expected to produce between 235,000 oz. gold and 260,000 oz. gold on a consolidated basis in 2012 at an estimated operating cash cost of US$700 to US$750 per oz., excluding royalties, according to forecasts published on Jan. 30. 

That compares to Semafo’s 2011 production guidance of between 238,000 and 263,000 ounces at an operating cash cost of US$595 per oz. to US$645 per oz.

Dan Rollins, an analyst at UBS Investment Research describes Semafo’s 2012 guidance as “disappointing” and, while he is maintaining his “buy” rating on the stock, has cut his twelve-month price target to $10.50 from $13.50 per share. “Although guided production was lower than expected given weaker production from Kiniero and Samira Hill, we are more disappointed in SMF’s operating cash cost guidance,” Rollins writes in a note to clients. “Given the ongoing delays with assays; increased level of political risk associated with SMF’s operations; and ongoing cost escalation, we have lowered our target multiple from 0.95 times to 0.80 times.”

Rollins forecasts 2012 consolidated production of 246,000 oz. (216,000 oz. on an attributable basis) at an average operating cash cost of US$730 per oz. “Including royalties and UBS’ forecast gold price of US$2,050 per oz., we estimate total cash costs are likely to average US$835 per oz. in 2012.”

About 75% of the gold Semafo says it expects to produce this year, or between 178,000-195,000 oz., will come from the company’s Mana mine in Burkina Faso, 46,000-50,000 oz. will come from Samira Hill in Niger and 11,000-15,000 oz. from its Kiniero mine in Guinea. 

Semafo has earmarked US$45 million for exploration this year, of which 80% will be spent on Mana. Last year Semafo invested US$38.5 million on exploration at Mana with more than 300,000 metres of reverse-circulation, diamond and air-core drilling and about 135,000 metres of auger drilling.

About one-third of the drill samples taken at Mana in 2011 are pending and as a result the company has deferred updating the mine’s reserves and resources until June so that it can include all exploration results up to Dec. 31, 2011. To speed up assay processing, Semafo decided in June 2011 to spend US$500,000 to build a laboratory on the Mana property, set to open in the first quarter of 2012.

“The ongoing assay backlog and delayed reserve-resource update is not an ideal situation for a company which has generated much of its success through exploration results and whose future success also relies heavily on exploration,” Rollins notes.

The construction of all surface infrastructure and services to support underground operations at Mana will be finished by the end of  2012’s first quarter, according to mining contractor Dumas.

Capital expenditures this year are expected to total US$195 million, including the current expansion at Mana (US$10 million); development of a new production facility at Mana (US$52 million); and stripping costs at Mana of (US$37 million.)

After releasing its guidance on Jan. 30, Semafo shares closed down 98¢ or 12% at $7.04 on Jan. 30 within a 52-week band of $6.06-$11.40 per share. The company has about 273 million shares outstanding. At presstime on Jan. 31, Semafo was trading at $6.77 per share.