The African mining stock you should buy today
moneyweek.com
10.04.2008
by Dominic Frisby
So much for the end of the bull market in commodities.
US crude oil inventories fell ‘unexpectedly’ last week by 3.2 million barrels, down nearly 5% on last year, though analysts had expected a gain. That drove the oil price to new highs above $111 a barrel. ‘Zapata’ George’s $160 oil predictions may be proved right after all. (see: Could oil hit $160 a barrel?)
But the real mover this week has been coking coal – the coal used to make steel – rising some 200%.
Unlike commodities such as gold or oil, whose spot price can change from one moment to the next, the coal price is more or less set for the year, based on annual contracts drawn up when the previous year’s expires around March 31st.
UBS Investment Research reported on Tuesday that Australian coal giant BHP Billiton, the world's largest coal producer, had reached a deal with the world's largest steelmaker, Arcelor Mittal. They agreed a price for coal of US$305 a tonne, for the contract year that began April 1st, 2008. There are other reported settlements between BHP and customers in Europe and Japan. They all suggest a tripling in steelmaking coal prices.
The word is, with power shortages across Asia, in China in particular, thermal coal is about to follow coking.
A great way to play coal - buy Madagascar
Meanwhile, there’s been a lot of bullish talk in MoneyWeek and elsewhere of late about the investing opportunities in Africa. There are certainly fortunes to be made there, particularly in the resources sector, but there are also fortunes to be lost, in which all the usual suspects from corruption to incompetence to conflict will play their part.
But there’s one country that is off the radar. It’s barely mentioned in discussions about Africa – perhaps because it is not really seen as Africa – but to me the opportunities are enormous. That country is Madagascar.
Madagascar is the fourth-largest island in the world. Its population of 15 million are among the world’s poorest. But after decades of economic stagnation and downturn, the country has sustained several years of positive real growth and low inflation, and the public deficit is under some control. The political crises which dogged the country until 2002 are seemingly over with the President focusing on business development as the way to grow the economy and improve living standards. Widespread government reforms have been made, including many in the mining sector, which have slowed illegal activities and created a positive environment for outside investment.
Many of the world's economic development programs such as USAID, the International Monetary Fund and the World Bank Group have committed to significant investments, including a five-year reform program designed to attract large-scale mining projects.
When you then realise that Madagascar is one of the most mineral-rich environments in the world, with an abundance of unexploited gemstone and gold deposits, as well as large deposits of bauxite, coal, copper, lead, manganese, nickel, platinum, titanium, zinc and zirconium, you start to get very excited.
How to profit from Madagascar's mineral wealth
If you want a junior mining company with huge (and fairly immediate) potential upside, there’s one company which, to my mind, is playing the Madagascan game better than anyone. That is Pan-African Mining (CA:PAF). (NB: it is listed in Canada and is not to be confused with the interesting, but altogether different Aim-listed company of the same name).
Pan-African's president, Irwin Olian, is extremely entrepreneurial. The former Harvard man got into Madagascar early, built up a huge network of contacts and, as a consequence, got first call on virtually every opportunity there. After extensive research with six geologists across the whole country, the group chose some 22 properties, staking vast swathes of land. It now has some 12,500 kilometres of diversified mineral properties in total, including gold, gemstones, coal, diamonds, uranium and nickel. It also has some exciting diamond interests in Botswana, some gold operations in Mozambique and a position in Enermad, an unlisted company exploring for oil off the coast of Madagascar.
Of those 22 first-choice properties, the company chose to focus on and develop three: a gold project in the Dabolava region, once one of Madagascar’s main gold mining centres; the Tranamaro uranium deposit; and, currently the most exciting, the Sakoa thermal coal deposit.
Like so many juniors, its stock has sold off over recent months, though its story has got better. The group has over $6m in the bank, so there are no funding problems and, with the lows looking like they’re in place at just below $2, the chart looks well set up.
With exposure to a variety of commodities in such an exciting country, Pan African is a great company to buy and hold.
But as I mentioned before, there may be some almost-immediate upside opportunity.
Sakoa is one of the largest coal deposits in the world that is not attached to a major. It is no secret that the group has had all sorts of site visits and a lot of big players from Asia, Australia and Africa are sniffing around. With the stock looking so cheap, to my mind, Pan-African looks a prime takeover target.
The set-up looks perfect. Straits Mining recently bought a stake in Red Island, which owns the (smaller) portion of the Sakoa coal deposit not owned by Pan-African. If the same valuation criteria are used on Pan-African’s portion, my calculations give you a price somewhere between $400m-$500m. Given that Pan-African has a current market cap of just $60m, the company is a screaming buy based on this coal asset alone. But the group is receiving significant enquiries about its excellent gold and uranium assets too. And then there are the 19 other assets it hasn't developed yet, and the offshore oil, and the Botswana and Mozambique properties… did I mention them? |
