Avesoro woes highlight junior mining struggles in west Africa
News that Avesoro has cut its full-year production outlook amid the threat of gold production at its Youga mine in Burkina Faso being suspended highlights the dangers of investing in African mining juniors.
Avesoro, which is traded on London’s AIM market and in Toronto, said in a regulatory statement on June 10 that it had experienced “significant ore dilution” at Youga.
The company, which had stuck to its full-year production target as recently as April, said it was extending contractor mining at Youga to reduce costs – but this had led to miners downing tools. Mining there will be suspended unless the dispute is resolved by June 12, it said.
The stock promptly lost nearly two-thirds of its value. That was enough to put the shares firmly into value investing territory, with a market cap of around US$40 million versus net book value of US$211 million at end of the first quarter.
Investors should resist the temptation to try to catch the falling knife – even if the dispute is resolved.
Jeff Quartermaine CEO at Perseus Mining, which operates in Côte d’Ivoire and Ghana, told the Official Mining in Africa Country Investment Guide (MACIG) 2019 that there is a gulf in understanding of mineral economics between mining companies and governments.
Quartermaine pointed the finger at international organizations such as the World Bank and the OECD.
- African countries who need to borrow are told by these organizations to “extract more value from the country’s existing resources,” he said.
- “There seems to be a belief amongst some politicians . . . that the mining industry is not sufficiently contributing to their host countries’ economic welfare.”
In Burkina Faso, artisanal gold mining of gold has become the second-largest rural occupation after agriculture. The government says that the gold industry can become a backbone of national economic development by 2026. But according to Tidiane Barry, president of the Burkina Faso Chamber of Mines, the country may have shot itself in the foot with a mining code adopted in 2015.
- “The reality is that the new code is less attractive than the previous one,” Barry argued in the 2019 MACIG report.
- Previous tax incentives for investors have largely been dropped, Barry says.
- Côte d’Ivoire and Mali are better placed to attract investment than Burkina Faso because they have “very attractive mining codes”, he says.
The Burkina Faso code introduced a “preferential” dividend status giving the state priority in the distribution of dividends, to be paid before any other allocation of distributable profits.
- Avesoro’s subsidiaries in Burkina Faso are restricted from holding their cash accounts outside of the country and the company lists “adverse or arbitrary changes in applicable laws or regulations” in Burkina Faso as among the risks it faces.
“Governments must stop thinking of mining companies as having massive war chests, particularly in African countries that are heavily reliant on the junior segment,” Daniel Major, CEO at GoviEx Uranium, argued in the MACIG report. “Juniors have generally only had enough money to do what they need to do. Many governments have the misperception that these companies have cash to spare, when in fact they work very hard to get what they have and it goes straight into the ground.”
Bottom Line: Mining juniors are far less equipped than the big boys to absorb government revenue demands. Don’t try to catch the falling knife in countries where that message has not been understood.