Semafo's 30% investor dressing down - is it overkill?
Semafo has lost well over C$300 million in market capitalization on the back of a resource update it put out Wednesday, while there is room for disappointment some commentators think the reaction has been a little extreme.
Posted: Thursday , 12 Jul 2012
HALIFAX, NS (MINEWEB) -
Semafo (TSX, SLE: SMF) was pounded yesterday falling 17% after it issued a resource update. Then, today, an hour after market open, it was down a further 20 percent. The resource update, that had been delayed, appears to be the main impetus for investor wrath. It disappointed on gold grade at Yaho, a new major deposit for Semafo in the South Sector about 16 kilometres from its Wona-Kona open pit mine. The update also came with a scary-looking set of metallurgical tests - albeit early stage and limited in scope. Further, Semafo also said there was a change in mine plan, to dig a superpit at Wona-Kona instead of going underground (for now).
According to analysts and Semafo the massive cut-down stems from unmet expectations. Some holding Semafo stock appear to have hoped the new resource from Yaho and environs would make for a kind of "Wona-Kona II" - another especially high-grade, open pit gold mine. It has not turned out to be quite so and for that Semafo has paid, as of presstime, a C$350 million price, about the amount of market capitalization it has lost over two days.
Over reaction? Some analysts and Semafo think so.
First, the details on the resource and operational update. Though overall reserves and resources, net of depletion, grew handsomely to 7.3 million ounces gold from 6 million ounces gold, the market apparently expected more from a few deposits in the South Sector where Semafo has found new deposits over the past few years.
In the Yaho deposit, the most important of these discoveries, Semafo said it had 723,000 ounces gold @ 1.03 g/t in measured and indicated resources with about as much again in inferred resources. Semafo also updated resources at two smaller deposits in the South Sector, for which it had previously calculated resources: There were 188,400 ounces gold @ 2.54 g/t gold in reserves and 187,600 ounces gold @ 1.72 g/t in measured and indicated resources at Fofina and 260,200 ounces gold @ 1.64 g/t inferred at Fobiri.
This makes the gold grade at Yaho about half Wona-Kona, Semafo's operating open pit mines, where it mills ore over two grams per tonne.
It turns out as well that the metallurgy in the South Sector is not the same as Wona-Kona. A series of initial metallurgical tests on a portion of Semafo's resources in the South Sector. Gold recovery tests on material from the Fobiri, Fofina and Yaho zones in the South Sector only delivered 20 percent, 26 percent and 48 percent recovery, respectively, in sulphides, Semafo said. The key word here being sulphides, but more on that in a moment.
On top of this resource and metallurgical update, Semafo also announced it would forego underground plans at Wona-Kona and instead open up a superpit in the deposits. Recent discoveries around the existing pit have made it more economic than going underground, Semafo said. But Kerry Smith, a Haywood Securities analyst, noted in an email the strip ratio and stripping costs for the superpit were quite high. Unadjusted for waste that Semafo plans to capitalize over life of mine the superpit strip ratio is 12:1.
The negative here is undercutting Semafo's shareprice - no doubt about it. But there are some counterpoints worth some consideration. First some analyst reaction. Smith, after noting that the superpit plan may have caused some disappointment, along with the early stage metallurgical results on South Sector sulphides, was blunt in his assessment of the shareprice fall yesterday alone. The "market reaction was a bit extreme," he said on Wednesday afternoon. And he was not the only analyst to voice that opinion. One analyst who preferred not to be named suggested that given the anticipation for better grade and recoveries in the South Sector, he might have expected a modest drop up to five percent. But not near 17 percent. Or now over 30 percent in two days.
Semafo's vice president of corporate affairs, Jean-Paul Blais, made the case that the perceived disappointments were not such big disappointments, or disappointments at all. Of course, he would do this, it's his job. But then his perspective is still worth a listen. Blais was impassioned in arguing that Yaho was not a flop. Yes, the grade was lower than Wona-Kona, Blais did not hide from that fact, but he said the market was overlooking size. Just a year or so after discovery, already Yaho is turning out to be on the scale of Wona-Kona as a deposit, and there is room to grow, Blais said. Lower grade, undoubtedly. But, "Yaho, Fofina and Fobiri, there we are getting something that is absolutely huge," Blais said. The point: maybe it is too early to turn your nose up at Yaho, especially if an economy of scale comes into play.
As for metallurgy, there is no hiding the sub-50 percent recoveries are terrible. And Semafo didn't blow smoke. There are "sulphide-related challenges," it said yesterday. But consider this: The poor metallurgical results are limited to sulphides and not oxides in the deposits, yet the majority of the deposits in question are oxide - 60 percent of the resources - with sulphides accounting for the balance. In fact on Wednesday a Semafo spokesperson, Sofia St Laurent, said it was getting quite a few calls from investors with questions about the metallurgical tests. She seemed surprised herself about the reaction on the market, and made pains to repeat that the scope of the tests were, as Semafo had stated, limited. "There seems to be some confusion in people's comprehension that the metallurgical tests were only in the South Sector and only on 40 percent of resources (in the South Sector)," St Laurent said.
Semafo also expects recovery to get better. And in this it is not alone. Haywood's Smith noted "flotation and re-grind followed by cyanide will probably work here to improve recovery." As for context on the disappointing recoveries, Blais pointed out that these South Sector metallurgical tests were based on the assumption that the material at Yaho and the other nearby deposits would react in a similar way to Wona-Kona given that they are only 16 or so kilometres away. It isn't turning out that way. But now Semafo can try to tweak the recovery process, something that Blais said was ongoing.
The sell-off continued as of the writing of this article and it made one thing very clear. The markets hate any whiff of disappointment. But, then, maybe this turns out like blue cheese. Sometimes things that don't smell so good don't end up tasting that bad after all.