I attended the annual Prospectors and Developers Association of Canada (PDAC) conference in Toronto a couple of weeks ago. It was my 12th year in a row at the show – the biggest mining conference in the world.
In 2013, the theme is survival. Metals prices for the most part remain high, but mining costs have sharply escalated. This year, there is no inflation in the price of gold, but plenty of inflation in the price of gold mines.
Financing is hard to get. Stock prices have dropped and mining companies don’t want to issue more stock at low prices. Small exploration companies are hanging by a thread, and many threads threaten to unravel in the months to come.
The mood is so down, it feels like the next move should be up. But it’s tough to find a reason why the market would reverse.
I tried to explain to some friends at the show why I write the Green Miner - dedicated to investing in renewable energy. In part, it comes from my geological background.
One important function of Geology is the study of ancient climate change. These next paragraphs are from an article I wrote for Salon.com in 1998 - an article about a bear market in tech stocks. I used a geological analogy. . . . . . . . . . . .
I was a geologist in the oil business during the late ‘70s and early ‘80s. In those days bulldozer drivers (‘catskinners’ we called them) would barrel down the dirt rig roads of Alberta in white Lincoln convertibles with cases of Chivas Regal. The oil patch took all comers.
Every time we drilled a well thousands of feet down through the historical record of hundreds of millions of years, the pattern of the rock described some basic truths:
a.) Everything changes. In the moon-like cold and emptiness of January in northern Alberta, we hunted for ancient reefs where oil and gas were trapped. These reefs had flourished with life in the same spot, which at the time they were formed was the floor of a warm shallow sea like the Caribbean.
b.) Bear markets are short in duration and severe in their consequences. The fossil record that we found in core samples showed repetitions of the same drama in different epochs. A few examples of a new shell would show up in the limestone. As you moved up the core (later in time) the critters increased. Finally there was an era when there were so many of them that they must have been banging into each other in the ocean because the rock becomes a solid mass of fossilized shells.
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Then something happens, something climatic and climactic. The rock changes, exhibiting a deluge of mud and silt, and the critters are gone. Often, there is no gradual phasing out, no gentle transition from one life form to the next. You can draw a line with a ruler through the contact between the two types of rock - the two ages. On one side of the line is the culmination of the critter’s dominion, the golden age. The rock is packed with them. On the other side of the line they are gone. None are left.
Geologists know that climate can change fast. The thickness of a pencil line in rock can represent many years, but some big changes can happen almost overnight. Right now, there is ample evidence that the earth’s climate is changing quickly. For that reason among others, the switch to renewable energy from burning carbon based fuels appears inevitable to me. We’ll stop burning petroleum long before we run out of it.
There is a possibility of chaotic change in such a massive switch. But there is opportunity as well.
The mining industry already benefits from the demand for materials used in building renewable energy infrastructure - lithium, copper, rare earths, graphite and silver are some of the minerals that are essential to renewable energy and electrified transportation. 38% of the platinum mined in the world is used in catalytic converters to reduce fuel burning auto pollution.
Mining is not perceived to be the most environmentally friendly business, but mines produce the materials that are absolutely necessary for the reduction of the burning of fossil fuels. Environmentalists and miners don’t much like each other. But when bigger threats appear on the horizon, former enemies can become allies.
Another benefit for the mining industry with renewable energy - improved technologies and dropping prices for equipment make it possible for mining operations to use solar panels or wind turbines to make electricity in remote locations.
Here’s an example: Semafo Inc. is a gold mining company based in Montreal, with operating mines in Burkino Faso, Niger, and Guinea in West Africa.
Semafo has always been active in the communities near its mines and has worked hard over the years to develop good relationships with local people and governments.
Burkino Faso is landlocked and there is no hydroelectric potential. The country produces electricity using imported oil to run generators. Expensive and polluting. In 2009 the government of Burkino Faso approached Benoit Lasalle, the former CEO and current Vice Chairman of the Board of Semafo, with regards to increasing power generation in the country. Burkino Faso had done business with Mr. Lasalle to develop the Mana gold mine, and the government trusted him to work on energy projects – projects that would help mining as well.
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Semafo studied the possibilities and told the government that the company could build a solar power plant. Burkino Faso is blessed with plenty of sunshine. The company decided that if they were going to do it, they would do it big. Semafo created a separate company – Semafo Energy.
This company is working on building a 20 Megawatt solar farm. When completed, the plant will have 10% of the total electricity generation capacity of the country. Semafo Energy's plant will feed its electricity to the national grid. It will be the largest solar power plant in West Africa and the first private solar project in sub-Saharan Africa.
The total cost of the project is estimated to be 40 million Euros. Semafo Energy is now negotiating for most of the financing for the project with the African Development Bank, the same institution that lent Semafo money to develop its flagship Mana Mine in Burkino Faso. Semafo Energy is also negotiating the power purchase agreement with the national energy company.
According to Ugo Landry-Tolszczuk, the Director of Operations for Semafo Energy, assuming all financing and agreements are in place, construction of the project is expected to start in September. Semafo Inc. currently generates its own electricity for the Mana gold mine and mill using diesel generators. Burkino Faso’s power utility is currently building a line out to the mine. The presence of the solar plant will help in a few ways.
The power line to the solar plant will also feed six or seven villages in the vicinity that currently do not have electricity. Also, the solar plant’s close proximity to the mine (about 7 km) will mean that there is not a lot of electricity lost in transmission to the mine.
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A large number of gold mining stocks are bargains right now. Semafo is among them.
The company expects to produce between 215,00 and 240,000 ounces of gold in 2013 at a cash operating cost of between $855 and $905 US. At today’s gold price, the company is generating lots of cash. In the quarter that ended last September 30, cash flow from operations was $24.9 million – about 9 cents per share.
Semafo has been exploring successfully and continues to expand reserves. This past year the company has been exploring the Siou deposit, about 15 km from the mill at the company’s Mana mine. Semafo’s drilling to date at Siou has delivered strong results - an inferred resource of just under one million ounces of gold.
Semafo is continuing to drill at Siou to confirm and enlarge the resources and the company is doing more exploratory work on the larger geological trend - searching for other gold deposits. Semafo expects to start mining the Siou deposit sometime late in 2014 or early 2015.
As of the end of last September, Semafo had about 70 cents a share in working capital per share and no debt. The stock closed at $2.50 Can. on Friday. Semafo pays a dividend, and the yield at Friday’s closing price is 1.60%
Last week the company announced that it would write down some of the value of its Samira Hill mine in Niger. That didn’t help Semafo’s stock which is trading down from $14 where it traded at the end of 2010. Quite a drop.
Some are now suggesting that the current bear market in the mining industry marks the end of the long term secular up trend in commodities. Or it could just be a pause and a shakeout until the trend resumes and metals prices get bid up again.
We’ll know soon enough.
The secular trend of the mining industry warming up to renewable energy is just starting.
By. Dave Zgodzinski
