Semafo Inc. - Buy The Dip If You Believe In Gold

Semafo has a pit wall failure at Mana, which has hit the share price.

2019 guidance reduced.

The shares have fallen 18% since the news and now look good value.

The Mana project seen below (from the Semafo website)

Introduction

I am bullish on the long term future of gold and have been amassing gold mining shares as the opportunities arise. Semafo Inc. (OTCPK:SEMFF) is a mid-tier gold miner that operates in Burkina Faso. The shares have recently tumbled as the company gave notice that the mine at Mana (shown above) had experienced a pit wall failure. There were no injuries or damage to machinery, but the company revised the 2019 production down by 30-40,000 ounces of gold, to reflect the event.

The Valuation

I have re-evaluated the end 2019 P/E to reflect the changes to the projections due to the pit wall failure. The company has 2 mines and the second mine at Bongou is not effected. To make the calculations below, I have assumed a gold price of $1375 (very conservative) and used the mid points of the company's guidance on production and all in sustaining costs (AISC, see link for explanation).

Revised End 2019 P/E

1. Depreciation is calculated at the last available rate (1st quarter 2019) plus the extra capitalized spend for 2019 of,

Development expenditure $49m

Exploration expenditure $10m

Depreciated over 10 years for an extra annual cost of $5.9m.

2. The company has $120m financed at Libor (presently 2.3813%) plus 4.75% but will pay off $15m per quarter starting in March 2019. This works out to the following:

3. The rate that the company expects to pay for 2015.

Valuations

P/E

There are 334,435,433 issued shares so the prospective P/E at a share price of $3.50 is 9.7.

Price to book

At a share price of $3.50 the market capitalization is $1,170,523,900. The book value as at 31.7.19 was $778,414,000 so the price to book is 1.5. This is higher than the average mid-tier gold miner's price to book of 1. However the company has development potential that will substantially increase production in the next few years. Please read my previous article here for details.

Conclusion

The recent pit wall failure is a setback for the company and the shares have fallen substantially since the event. However the shares are not expensive on a P/E basis, even using an extremely conservative gold price of $1375. The present gold price of $1500 would make the valuation even more attractive. The revised guidance is for 2019 only and the company does not expect that the problem will persist into next year. I would therefore expect 2020 guidance to be above the original 2019 projection of 410,000 ounces (2019 guidance is now 365,000 ounces). This would be an increase of at least 12%. The prospective P/E under these circumstances will be much lower than the end 2019 P/E of 9.7. If the gold price just stagnates for the next year, the shares will become cheap. If it moves higher, they will be in the bargain basement. If you believe in the gold price, this dip is an opportunity to buy the shares, as they look attractive after the recent fall.

Disclosure: I am/we are long SEMFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.

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