SEMAFO (SMF) Revises NI 43-101 Resource Forecast

Before market opened on Wednesday; SEMAFO (TSE:SMF) released an revised NI 43-101 resource forecast for the recently acquired Natougou Au deposit in Burkina Faso. We reiterate our “Sector Outperform” rating on SEMAFO shares and our 12 months target price of C$5.50. Our risk assessment remains “Speculative”.

The revised resource forecast includes an Indicated resource of 1.1 million oz Au at 5.87 g/t and an Inferred resource of 442k oz Au at 3.49 g/t. The prior JORC-compliant resource was 1.2 million oz Au Indicated at 5.1 g/t and 800k oz Au Inferred at 2.3 g/t.

Next steps include preliminary $2.5 million drill program (22km) at Natougou designed to upgrade and in-fill the resource, followed by a 10km drill program in second quarter of 2015 to test associated structures and for condemnation drilling. We believe SEMAFO to continue project development throughout the balance of this year with a feasibility study planned for release in first half of 2016.

We presently model production start-up at Natougou in 2018, with LOM average Au production of 200thousand ounces/yr at cash costs of $599 per ounce with pre-production capex of $300 million. Natougou comprises 23% of our asset net asset value forecast. Recall SEMAFO’s 2015 production outlook is 245-275 thousand ounces at a TCC of $575-$605 per ounce (or AISC of $715-$750 per ounce).

New resource delivers lower tonnage and ounces but higher grade. On March 31, 2015, SEMAFO released an revised resource forecast at the Natougou gold deposit in the Tapoa Permit Group, Burkina Faso. (The Natougou deposit was recently acquired through the Orbis acquisition transaction which closed in February 2015.) The revised resource forecast includes an Indicated resource of 1.1 million oz Au at 5.87 g/t and an Inferred resource of 442k oz Au at 3.49 g/t. The prior JORC-compliant resource was 1.2 million oz Indicated at 5.1 g/t and 800k oz Inferred at 2.3 g/t.

Additional project updates anticipated in the coming quarters. The new resource is derived from prior drilling finished by Orbis Gold, comprising 714 RC and DD holes and has been pit-constrained using a gold price of $1,300 per ounce along with other relevant mining parameters that are reflective of the potentially development scenario (outlined in Exhibit 2). Next steps include an preliminary $2.5 million drill program (22km) at Natougou designed to upgrade and in-fill the resource, followed by a 10km drill program in second quarter of 2015 to test associated structures and for condemnation drilling. We believe SEMAFO to continue project development throughout the balance of this year with a feasibility study planned for release in first half of 2016.

Latest Natougou resource mainly supports our longer-term thesis. We presently model production start-up at Natougou in 2018, with LOM average Au production of 200thousand ounces/yr at cash costs of $599 per ounce with pre-production capex $300 million. Natougou comprises 23% of our asset net asset value forecast. Company’s Orbis Gold acquisition gives it visibility on reiterating over 200 thousand ounces of annual gold production for the next 10 years. We believe SEMAFO will focus on infill drilling and optimization of Natougou in 2015 and believe more details on near-term plans concurrent with the release of a feasibility study (first half of 2016).

We perspective SEMAFO as a top-tier firm derived from (1) its solid management team, (2) a stronger track record of meeting outlook (over the last seven years), (3) its ability to generate notable forecasted positive free cash flow of $57 million in 2015 at spot gold prices ( $1,180 per ounce; see Exhibit 3), and (4) near- and long-term production growth prospects from Siou, Fofina, and other possible discoveries. SEMAFO presently trades at 0.77 times P/net asset value and 6.2 times 2015 estimate P/CF versus competitors at 0.66 times and 5.4 times, correspondingly.

About

Jeremy Bullard, MBA, is investment analyst and focuses Services, Financial & REIT and Industrial Goods sectors. Prior joining Broadway Leader, Jeremy Bullard worked with Telsey Research. If you have a great story idea for Jeremy Bullard, you can write at [jeremy.bullard@broadwayleader.com].

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