The Gold Report: You have been working in West Africa since the time when only a handful of companies explored there.
Benoit La Salle: I created Société d'Exploration Minière d'Afrique de l'Ouest (SEMAFO) Inc. (SMF:TSX; SMF:OMX), West Africa Mining Corp., in 1985. At the time, I was a member of the board of a very large non-governmental organization, and we were spending hundreds of millions of dollars in Africa. Mining was a very small component of the economic activity in those countries, more specifically in Burkina Faso, where mining did not exist. I decided to create a company that could help them develop the mining sector, accompanied by sustainable development. So very early on, we brought in the concept of sustainable development with geological and mining development.
Africa is a very interesting geological ground. It's similar to South and North America, with big greenstone belts that had not been looked at for many years. When SEMAFO came in with global positioning systems, geophysics, new tools and satellite imagery, we were able to see things they didn't see 100 or 50 years ago. We found mines in Guinea and Niger, which we developed and built. We found the Mana district in Burkina Faso. We've already developed the first mine there.
For the people involved, these are career-making discoveries, especially the one in Burkina Faso, where the structure is 150 kilometers (km) long, and we've looked at 25% of the structures. We have a fantastic first-class asset. When we first started, Burkina Faso had fewer than five permits issued; today, it has 770 permits issued.
TGR: The growth has been phenomenal. There has to be a tremendous advantage to having first-mover status.
BLS: Absolutely. Where in the world can you own a belt? You can't. We own most of the Houndé belt right now, 2,200 square kilometers of it, and that's because we were there first—we were able to position ourselves.
TGR: SEMAFO produced about 250,100 ounces (250.1 Koz) of gold in 2011 from three mines in three countries—Niger, Guinea and, of course, Burkina Faso. Your average cash margin on those ounces produced was an astounding $909/oz.
BLS: What is really amazing is those margins are pure gold margins. We don't have credits because we produce silver or copper.
TGR: No byproduct credits.
BLS: It's a pure gold play. Sometimes you see a mine that has a margin greater than one of ours, but it's a zinc mine that the company transformed into a gold mine. At SEMAFO, we have pure gold mines. Our total cash costs last year were in the $600s/oz, giving us a margin of $900/oz. Those are exceptional. Could you see margins like that elsewhere in Africa? Not in South Africa, where the mines are very deep and very expensive, and it's very difficult. There are mines like that in Mali, with Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE). The new mines of North America, once Osisko Mining Corp. (OSK:TSX) is up and running at full capacity and Detour Gold Corp. (DGC:TSX) has gone through commissioning, will have margins that are similar to this. When we put Kiniero in production in 2002, our margins were hardly $40–50/oz. Even in 2006, the margins were still $50/oz. In 2011, the cash margin was $900/oz. If you looked at our financial statement in Q4/11, the margin was $1,024/oz.
TGR: Are companies that complain about creeping cash costs making a valid point or are they not operating efficiently?
BLS: In the industry right now, there are the operators that have real mines, and there are the ones that have mines that should not have been mined, but are because of the high gold price. The good companies that have mines with 2, 3 or 4 grams per ton (g/t) have absolutely fantastic profitability. If a company is putting into production a 0.8 or 0.9 g/t deposit, it has to be extremely good at what it does and very efficient because there is no room for error. If that mine is in a country where the currency appreciated, then it can be even more difficult for a U.S.-reporting or Canada-reporting entity, where the currency is playing a negative role in costs. For us, of course, we're affected by fuel; fuel is a main cost driver in our structure. But in Africa, because the main currency is the euro, with the euro coming down, the gold price going up and the U.S. dollar going up, we win on all fronts.
TGR: You believe the SEMAFO Foundation is crucial to your success and has provided SEMAFO with a social license to operate in West Africa.
BLS: SEMAFO is not a company that mines gold, ships it out and, once that is done, breaks down camp and leaves. Though that approach was the approach for the past 50 years, I do not believe that, in a high gold-price environment, with social networking, it is viable anymore. We saw that 15 years ago. When we built our first mines, we made sure that the communities were involved.
Four years ago, we realized that promoting all of our social work through a structured foundation would be even more profitable for the community, the government and the organization as a whole. Through Fondation SEMAFO, our suppliers can also give back to the community. It is a standalone organization that works in the communities surrounding our mines. It has three approaches to its global strategy: education, health care and income-generating projects. If people have access to education and health care and can earn a living, their lives will be changed. And SEMAFO remains strong. We have no employee turnover. They have ownership of the brand. The families are involved, and people make a decent salary. The kids go to school. They have access to our medical clinics.
We build schools, and we negotiate with the government so that it hires and pays the teachers, because we want this to be sustainable. As another example of sustainability, in each new school, we create a lunch program. The first year, we subsidize it. The second year, we help them create a garden to produce vegetables. The third year, we make sure they know how to run it correctly. The fourth year, it's a self-sufficient cafeteria. When we arrived in this area, 20% of the kids were going to school. Now, 80% are going to school, and they scored 20% better than the national average. We did this in four years.
This is not tied just to the mine. Once the mine is over, which can be 10, 20 or 30 years, the infrastructure will stay behind. We also have programs to cultivate paprika and sesame that employs about 15,000 people, and a Shea manufacturing facility where soap is manufactured, marketed and sold internationally. All of that is income generating, and it's sustainable. We have a weekly radio program, Together for a Better Society, which is broadcast in five official languages and airs throughout much of West Africa. We did a survey in Burkina Faso recently, and 76% of the people who participated in the survey recognized SEMAFO's name or the logo.
People see SEMAFO as being a very good corporate citizen. That is the proof that this approach is the only approach, especially in today's environment where there's a great discrepancy between the haves and the have-nots, especially in developing countries. The mine is not something to envy but something to help grow because of the positive ripple effect.
TGR: What do you say to the company that looks at your margins and decides to try for even bigger profit by not investing as much in the community?
BLS: I'd say the company is dreaming, especially if it wants to come to Burkina Faso, because we have set the standard here. The ministers of mines and of development have visited the project and our philanthropic sites, and that is what they want for their population. Last year in Burkina Faso, the unions wanted to go on strike in the mining sector. There were five mines that had issues, and Mana, which is the SEMAFO mine, didn't lose an hour of production. We didn't even hear about the strike until later because the people who were approached said, why would we do this—we have it exactly the way we would dream of a company operating a mine in Africa.
I really believe that all companies are going to start to realize it's not only the new way but also the only way going forward, especially if the gold price keeps going up. It will be unbearable for the people who use the old method. We'll see what we're seeing right now in South America, where the governments are either saying they're going to own a lot more or giving a new tax rate. The reason they do this is because the populations don't see the benefits of these mines, and they have to see the benefits of these mines. And more and more shareholders are asking to review our corporate social responsibility (CSR) approach. Today, many people believe that the CSR report is more important than our annual report.
TGR: Ethical funds are becoming increasingly prevalent in the investing space. Would that be another argument for why companies should take this sustainability and social-license approach?
BLS: It's an argument, but I think it's the wrong argument. It has to be part of the company's values. If it's not part of the values, it's going to be a task. If it's a task, the company's not creative, not motivated. OK, ethical funds are popular, so it's going to do that. Which vice president is not busy enough so he can take that task? It doesn't work. It has to be part of the company's culture. If the company really wants to have a presence in this way, it should be on the NASDAQ OMX, an ethical exchange, and it can only get there if it goes through the Ethics Committee, and it's very demanding.
TGR: Back to the gold part of your business. In your annual message to shareholders earlier this year, you wrote that in 2011 SEMAFO paid off all of its debt and remains "unhedged and able to fund our value creation activities internally." Does that mean you're looking at mergers and acquisitions (M&A) activity or conducting further exploration and development work on the areas surrounding your mines, especially your flagship Mana gold mine in Burkina Faso?
BLS: Yes, we have the money to fund all of our own growth internally. Today, there's a massive capital expenditure (capex) inflation, so it's very difficult for people to build. We have a team of 150 seasoned mining executives in the company, working in Africa and in Canada, making up our development, engineering and construction teams; we do almost everything internally. Mana is our primary project, but we're still extremely vigilant about looking at other assets. Many are being devalued because the company's balance sheet is weak, the company will never be able to raise the money to develop the asset, it doesn't have the team or the market is just tired of waiting for a company to develop the asset. There will be great opportunities in the months and years to come for producers like us to pick up projects at a very deep discount.
TGR: Talk more about projecting gold price.
BLS: I always pay close attention to what Pierre Lassonde at Franco-Nevada Corp. (FNV:TSX) says. I like Kevin MacLean at Sentry Investments Inc. Both of these guys look at China. There alone is a constant growth in demand for gold. Also, the devaluation of currencies around the world and the change in the philosophy from cutting expenses to increasing expenses to create some growth—all of that is positive for gold. There is going to be massive printing of money in North America, and that is unbelievable for gold. The more you print, the more people will go into the gold space to protect their assets.
TGR: SEMAFO produced just under 61 Koz in Q1/12, including 48 Koz from the Mana mine. SEMAFO trades at a 10% discount rate to its midtier peers in West Africa. How do you explain that?
BLS: We have produced 61 Koz. We haven't yet put out our financial results, so the $0.10/share is what the Street expects. We put out a selling price at $1,710, but we haven't yet put out our earnings per share. That will be out on May 15. [Editors note: On May 15, SEMAFO confirmed earnings per share of $0.10.]
Being in Burkina Faso, we are part of a massive exploration rush. Hence, the labs that do the assays on our samples are completely bogged down. The results of our drill campaign of September, October, November and December are only coming in now. When we announced in January that those results were late and that the reserve resource update would be late, the market immediately assumed that was bad news, and our stock was penalized.
TGR: What are other companies operating in West Africa that you keep an eye on?
BLS: We look at Randgold, IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX). Avion has the Tabakoto and Segala mines in Mali. In Burkina Faso, we watch Avocet Mining Plc (AVM:LSE).
TGR: There are a few explorers out there with some promising projects: Orezone Gold Corporation (ORE:TSX) with Bomboré, African Gold Group Inc. (AGG:TSX.V) with Kobada and Roxgold Inc. (ROG:TSX.V) with Yaramoko.
BLS: Yes. Other projects such as those on our watch list are Gryphon Minerals Ltd. (GRY:ASX), Ampella Mining Ltd. (AMX:ASX), Volta Resources Inc. (VTR:TSX) and Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB) in Senegal. Some already are in bed with larger producers. Merrex Gold Inc. (MXI:TSX.V; MXGIF:OTCQX) in Mali has a deal with IAMGOLD. A few have deals with Newmont Mining Corp. (NEM:NYSE).
TGR: Do you think Avion's Houndé project in Burkina Faso will become a mine?
BLS: Absolutely. I really like the Houndé belt because it is showing grade. Grade is everything. In French, we say "le bon teneur font les bons mineurs"—good grade will make you a very good mining company. That's what Mana is all about.
TGR: In a business where things can often be unpredictable, grade provides a margin of error.
TGR: Last year, we saw Kinross Gold Corp. (K:TSX; KGC:NYSE) buy some assets in Mauritania and then take a $4+ million write-down on those assets.
BLS: It was a very smart purchase. It bought probably the best discovery of the last 10 years. Because the asset is on a belt, the country is very keen to see it develop. Now, the market is changing. The capexes have gone up. The operating expenses have gone up. In Q1/11 in Africa, we were paying $0.91/liter (l) for fuel. Right now, we're paying $1.36/l. Put that into the geological model and look at the effect. It's deadly. The Kinross write-down is an accounting situation. Don't think that it's a project situation. When that's in the model and the gold price is at $1,200–1,300/oz, of course your cutoff grade will change. There is an accounting situation, especially under International Financial Reporting Standards, where companies have to do impairment tests every quarter. Kinross still has a fantastic project. It's just that based on the new capex, based on the approach, it had to take a write-down.
TGR: Do you think that that will scare other majors from coming in and buying assets in West Africa?
BLS: No. It just brought everybody back to the same page. Newmont took a write-down, too.
TGR: What advice would you give to investors seeking exposure to West Africa?
BLS: I think we are going back to the basic principle of investment, and that's management, management, management. Investing in projects that you like without looking at who's behind it has been a mistake for the past three years. I have refocused my project presentation to shareholders to talk about track record. If you have one of the best track records in the industry, like we do at SEMAFO, the shareholders are now paying a lot more attention to that than they were in the very strong bull market of 2009–2010.
TGR: Who has more upside now: explorers, development plays or producers?
BLS: Producers. If you're going into the explorers, you're hoping for the home run. The home run is one out of 500 companies. If your approach is $10,000 into 400 stocks, maybe, but most people don't have the knowledge, the expertise and the time to do this. If you look at the explorers or even the developers, there are too many deadly risks: financing, permitting, construction, commissioning. You don't want to be there in a gold-price environment as we have now. The emerging midtier producers are the ones that are going to give you the best return on your investment in the years to come.
TGR: Agreed, but you have said that you'd be willing to go even further with some exploration projects once the market suits you. There are only a handful of advanced gold projects in West Africa. If you're looking for one, then surely Randgold and some of these larger midtier companies will be looking at those underpriced assets as well.
BLS: True, but some of those development assets still don't make economic sense. If you look at the price you're paying, plus the capex, sustainable capex and the operating expense, there is no money left for the buyer. So if you're a holder of those, you need to get out now. You need to take a close look at the valuation and ask if it's really compelling. People have been looking at Africa and West Africa for the past three years. How many transactions have we seen? Very few because the valuation was ahead of itself, and it made no economic sense for the producers to buy those assets. That's why we are in no rush. We're going to see much lower valuation on the explorers and the developers before we see transactions, before M&A.
TGR: What advice would you give to a junior company that wants to develop a CSR program in Africa?
BLS: Learn from the majors' CSR projects. Work with someone local to the country to understand priorities. Look at what's being done globally so that you see what the possibilities are. Then you go there, do the work, take your time, really establish the needs and the priorities. CSR is an approach. It's not what you do. What you do is part of the approach. But you have to have CSR as a philosophy.
Benoit La Salle is the founder, president, chief executive officer and director of SEMAFO Inc. He is a Fellow Chartered Accountant and a member of the Canadian Institute of Chartered Accountants. He holds a Bachelor of Commerce degree from McGill University and a Master of Business Administration degree from IMEDE, Switzerland. In 1980, La Salle founded Grou, La Salle & Associates, Chartered Accountants. La Salle serves on the boards of several public companies and is the former chairman of the board of Plan International Canada, one of the world's largest international child-centered non-governmental organizations.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Franco-Nevada Corp., Avion Gold Corp., Orezone Gold Corp., African Gold Group Inc., Detour Gold Corp., Roxgold Inc. and Merrex Gold Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Benoit La Salle: I personally and/or my family own shares of the following companies mentioned in this interview: SEMAFO Inc. I personally and/or my family am paid by the following companies mentioned in this interview: SEMAFO Inc. I was not paid by Streetwise Reports for participating in this story.