This African gold mining stock could be a good bet for the brave

Rich in natural resources and now opening up to investors, West Africa is seeing the beginnings of a gold rush. Here, Dominic Frisby looks at one small-cap exploration company for the bold.

If you were to compile a list of countries to invest in, I'm not sure that the West African republic of Liberia would be near the top of it.

Its reputation is tainted with blood diamonds and two civil wars. Its infamous former president, Charles Taylor, has just been convicted of war crimes in The Hague.

But it's come a long way in the nine years since the second civil war ended. Last year its current leader, Ellen Johnson Sirleaf Africa's first female president was awarded the Nobel Peace Prize.

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And in a promising sign for investors, Liberia won 'Best Country' in the Mines and Money annual awards.

So today I'm going to take a quick look at Liberia and one gold miner operating there in particular...

Liberia is risky, but now could be a great time to invest

Liberia's first civil war ran from 1989 to 1996; the second from 1999 to 2003. In 2003, a peacekeeping force moved into the country as Taylor resigned. In 2005, Sirleaf was democratically elected, and last year she was re-elected.

The country is improving from a low base (as you can imagine). The post-war environment often makes for some of the greatest investment opportunities Germany and Japan post-1945, being the most famous examples.

Indeed, I know of one exploration company Lydian International (TSX-V: LYD) whose management deliberately targets countries where conflicts have recently ended. Lydian has now built up excellent projects in Armenia and Kosovo and finds itself in a strong position. This may sound exploitative, but post-war-torn countries badly need this kind of investment.

Back to Liberia. Sirleaf has managed to get nearly $5bn of national debt written off (it's now close to zero), as well as raising $18 bn in foreign investment. GDP now stands at just below $1bn, and has been rising steadily since 2003. Indeed, Liberia is now one of the fastest-growing economies in the world. The Economist Intelligence Unit expects GDP growth of 9% this year, and 7.5% next.

Almost half the population is under 25, and the cost of labour is cheap. But Liberia's main attraction for investors is that it is rich in natural resources. In September 2011, Arcelor Mittal's iron ore mine went into production, making the country's first shipment of iron ore in 20 years. BHP Billiton is also in the country, Malaysian conglomerate Sime Darby is there for palm oil, and Firestone for rubber.

The well-located port of Monrovia (home to 10-15% of the world's merchant shipping fleet lists as home) is being redeveloped, and a new electricity grid laid down.

There are of course, political risks. Recently-proposed anti-homosexual laws, for example, may not directly affect natural resource investment, but are not illustrative of a government that is on a progressive path. And Liberia remains one of the poorest countries in the world, so its current stability cannot be taken for granted.

One way to invest in Liberia

That said, one stock I like (full disclosure: I own it through my Individual Savings Account) is Aureus Mining (Aim:AUE / TSX:AUE). Aureus, which has a market cap of about £70m, plans to put Liberia's first commercial gold mine into production. Here are five reasons to like it.

First, management. Chief executive and director David Reading has done this before several times. He was a founder member of Randgold Resources, now one of the stars of the London Stock Exchange. As Randgold's general manager of African exploration, he was instrumental in discovering the Tongon, the Loulo and the Morilla mines, which have many millions of ounces of gold production between them. In 2004, Reading left Randgold to become CEO of European Goldfields, which went on to become another stock market star.

Second, Aureus's properties. Its main project, the New Liberty mine, has a current resource of 1.5 million ounces of gold in the ground. At 3.6 grammes/tonne (g/t), this is high-grade rock in other words, it has a lot of gold in it. The higher the grade, the easier and more economic (usually) it is to mine. Hence the saying in mining, 'grade is king'.

Third, the infrastructure around the mine. There is 20km of laterite road leading to the property from the main tarmac road, which is a further 80km to the port of Monrovia less than three hours' drive away. The bridges have all been tested and are in good order, so getting equipment to the site should not be a problem.

Fourth, the projected economics of the mine are encouraging. Production is to average 123,000 oz a year for the first four years with a total operating cost (mining and processing) of $632 per ounce. If these economics are met (and, in mining, usually they aren't) Aureus will make at current gold prices something like $1,000 per ounce of gold mined, before taxes, royalties and other such expenses.

Building the mine is expected to cost $113m. At current gold prices, that should see payback within 18 months. The company currently has around $25m in cash, enough to fund its 2012 operations. It plans to raise the money for the mine through debt and equity (if the share price is higher). (Incidentally, there are 117 million shares outstanding, 11 million options and no warrants).

Fifth, the size of the resource could increase. Exploratory drilling around New Liberty itself is very encouraging. And drilling has made all sorts of discoveries in various locations within a 25-mile radius of the mine - some of it bonanza grade (up to 33 g/t).

This year we have the results of more drilling to look forward to plus the imminent release of the definitive feasibility study. Then the ESIA (Environmental Social and Impact Assessment) will be submitted to the Liberian Environmental Protection Agency. All being well, board approving and financing in place, long lead items will be ordered in the third quarter, with mine construction to start before year end.

This has been an awful year for gold mining stocks

This is a horrible market for gold stocks, as bad as I have ever known. Aureus, currently trading at 65p, has been in a range between 60p and 90p. If it continues to meet its targets and the market gets more favourable, it should move above that range.

If the market continues its slide, or Aureus meets problems either in the ground or in the Liberian political spectrum, there's a chance that support of 60p could fail.


However, either way, this is a genuine operation one of the 2% or 3% of exploration and development companies that will actually go on to build a mine. Aureus still has many hurdles to overcome. Mining is not an easy business.

But if it makes its 100,000 oz-plus production targets and with someone like Reading in charge there's reason to believe it will it's easy to envisage a market cap many times bigger than today's.

Disclosure: Dominic Frisby holds shares in Aureus Mining (Aim: AUE) which is a small company share-listed on Aim. Be aware that small company shares can be relatively illiquid, which means they can sometimes be hard to trade and there can be a large bid/offer spread.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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