It’s been a common trope in the mining industry in recent years that the larger companies have reined back their exploration spend in the face of leaner times.
But while it may be true in general terms that the majors aren’t as active as they used to be, relying instead on junior explorers to discover the metal they need to replace used inventory, certain regions of the world and certain companies represent a clear exception to this rule.
West Africa is perhaps the most notable example, a region in which gold mining has been taking place for thousands of years, and in which activity continues apace.
The famous Birimian Greenstone Belt provides the geological setting for most of this activity, but political boundaries have made for a mixed picture in terms of historic exploitation and current potential upside.
For the past century or so, Ghana has been the number one destination for gold miners and explorers, attractive both for the bountiful geology that underpinned the creation of gold mining giant Ashanti, now part of AngloGold (ASX:AGG), and for the relative political stability that allowed miners to get on with the job unmolested.
Past political turmoil in Francophone West Africa, by contrast, has meant that these countries remain comparatively underexplored, even though it’s the same Birimian Greenstone Belt beneath the surface.
As it stands, for example, although Burkina Faso and Côte D’Ivoire combined cover around 60% of the Birimian Greenstone Belt, they only account for around 35% of the region-wide discoveries made to date.
Given that some of the discoveries, both in Burkina and Côte D’Ivoire, are world class, like Randgold Resources Ltd’s (LON:RRS) Tongon mine, and Endeavour Mining Corp’s (TSE:EDV) Hounde mine, this dynamic clearly represents a significant opportunity.
West Africa ahead of South America, Asia as investment destination
And all the more so because politically Francophone West Africa has been much more stable in recent years. According to the Fraser Institute’s Policy Perception Index, West Africa ranks ahead of South America and Asia in terms of its attractiveness as an investment destination, not far behind Australia.
Part of the reason for this is that new mining codes have been established in Côte D’Ivoire (2014), Burkina Faso (2015) and Mali (2012). The emphasis has been on a combination of creating a favourable business and regulatory environment and ensuring that corporate social responsibility remains at the fore.
It’s a context that has allowed the likes of Endeavour and Randgold not only to build and operate big mines but also to get out and really explore.
Anyone who doubts that this is happening needs only to consider the most straightforward of statistics. West Africa has been the number one discovery region for gold in the world for more than ten years, with over 79mln ounces discovered in the past decade as a result of a US$5bn spend.
It’s a number to conjure with, considering that the competition comes from prolific gold regions like Nevada, Ontario, and Western Australia, and considering too that in 2016 just 14% of global exploration spend went into the African continent as a whole.
Nevertheless, the momentum is clear. Gold production from West Africa overtook production from Australia in 2016, with Randgold at the vanguard of this process that made it happen.
Randgold has brought four West African mines all the way through from the discovery stage to production.
But there should be more to come, and not just from Randgold. Because while Randgold continues to earmark significant exploration-spend towards its goal of discovering three million ounce-plus targets, other companies like Endeavour are also extremely active.
Indeed, Endeavour’s exploration budget alone represents around 10% of what analysts expect to be spent on regional exploration in the next year, as the company drives to increase reserves and resources to meet an ambitious five-year target.
The thinking is that by spending around US$35mln or US$40mln on exploration annually, the company will be able to delineate between 10mln and 15mln new ounces across its West African portfolio.
This consists of a total of 10,090 square kilometres of ground, primarily in Côte D’Ivoire and Burkina Faso, but also in Mali, representing a very substantial upside for the company.
Nevertheless, since grassroots exploration is notoriously hard to incorporate into analysts’ models, not much of that value has yet been baked into the share price.
But when the likely discovery costs of those 10mln to 15mln ounces of around US$15 per ounce are factored in, the potential value uplift is clearly significant.
Endeavour, like Randgold, has demonstrated considerable acumen in working in West Africa, and will be sure to capitalise substantially on any discoveries made.
What’s more, they may come pretty soon. In the third quarter of 2018, Endeavour completed around 54,000 metres of exploration drilling at a cost of US$11mln, taking the total for the year to date to 346,600 metres.
Of particular interest is the new one million ounce resource at the Kari Pump area of the Houndé project in Côte D’Ivoire. This has provided a significant boost to the existing operations at Houndé, but what is really noteworthy is that this new resource represents only 35% of the gold-in-soil anomaly at Kari. So there’ll be plenty more to come from there before too long.
Another central plank in the Endeavour exploration portfolio is the Fétékro project, also in Côte D’Ivoire. At present, this is the company’s most advanced greenfields project, and was the subject of nearly 32,000 metres of exploration drilling across 2017 and 2018. As a result of all that, a maiden resource is expected imminently, and it won’t stop there, as drilling will continue into the new year.