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In the news: West African Resources & African Gold M&A Report

Published: 09:22 22 Jun 2018 BST

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FROM THE BROKING DESK

WEST AFRICAN RESOURCES (WAF AU A¢35) — POSITIVE UPDATED DFS OUT

West African Resources has released a very positive updated DFS for its Sanbrado Project in Burkina Faso. The previous DFS (February 2017) was based on an open-pit development only, but the updated study benefits from the addition of an underground development of the deeper material at the high-grade M1 South deposit, which has been defined over the past year and a half.

The US$185m development project is based on a 1.56Moz reserve with life-of-mine production of 1.45Moz over a life of 11 years. Average production is 143koz pa, although it averages 211koz pa over the first five years. LoM AISC are very attractive at US$618/oz.

The study addresses issues relating to the valuation of the company, which some previously viewed as a little inflated. This negative perception was mainly due to the lacklustre results of the previous study, which returned an NPV5 of US$100m and an IRR of just 21%. The updated study shows a much healthier NPV5 of US$405m and an IRR of 49% at a gold price of US$1,300/oz, reflecting the quality of the project. The WAF share price was up 6% in Australia on the study results, and the company is now at a market cap of A$242m. It has recently topped itself up through a placement that will allow it to undertake early development work, and cash is currently A$44m for an EV of A$198m/US$149m.

The main M5 and M1 South deposits remain open at depth and WAF was keen to point out that it expects the project to improve with further drilling over the coming year. As we mentioned in our recent report (see below), Sanbrado is one of a handful of +2.5Moz development-stage projects on which feasibility studies are planned to be completed this year and which we anticipate could attract third-party interest. The results of the study demonstrate its potential to become a low-cost project of a decent scale with further potential. What’s not to like?


AFRICAN GOLD M&A REPORT RELEASED

Earlier this week we released a thematic report: African Gold M&A — The Market is Open, June 2018. In this 130-page piece we look at the past, present and future for M&A activity in the African gold space (excluding South Africa). We review M&A activity over the past ten years to provide some context, we assess the current strategies and financial position of some of the likely acquirers and review some of the possible targets with a view to anticipating where future M&A could take place.

We think that the time is right for more M&A activity. Although M&A got itself a bad name as a result of over-enthusiastic prices being paid for assets at the top of the cycle, it remains a mechanism through which companies build their businesses or transform their status. We see this as being of particular significance in the current market conditions, where the lack of gold price volatility and the reduced ebb and flow of capital into the sector provides a high level of transparency on companies’ activities.

 

We believe that in this environment the ‘urge to merge’ is a current theme of company strategy. This should be reflected in M&A activity over the coming year as companies look to attract the attention of the pools of capital that remain interested in the sector, which appear to have become more and more concentrated. Times change, and we suspect that gold price volatility will increase over the coming years; this will result in new shareholder demands, in response to which company strategy and M&A activity will continue to adapt. In any event, the Market is Open. 

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