Thursday, November 19, 2009

Congo could turn out to be a gold mine

It's still chancy, but this Central African nation has monstrous unexploited mineral deposits and finally, after years of dictatorship and civil war, may be stable enough to draw investors.
Bummed by all the gray-haired killjoys telling you that all the fun is gone from investing, that small caps are dead, emerging markets are over, commodities are a bust and cash is king?

Then step right up to Jon's little House of Crazy Joy, because have I got a thrill-ride stock for you. It's an idea for these stressed-out times so ridiculous that no one in their right mind would consider it. So, you know, it just might work.

Don't call your financial adviser, in other words. She'll never go for it. Instead, put down your granny glasses, twirl a globe to equatorial Africa and put your finger smack in the middle on the fat patch of country the size of Western Europe. It's probably labeled Zaire, but after decades of civil war, dictatorship, corruption and name-changing, this minerals-blessed nation with fewer than 400 miles of paved roads prefers to be known as the Democratic Republic of the Congo.

Hey, you know: Tomato, to-mah-to. If a United Nations-sponsored election in three weeks works out as expected, you could call this place the Democratic Republic of Buried Treasure because political stability will lead world credit-rating agencies to upgrade its sovereign rating -- an important step toward unlocking its incredible resources. For hidden beneath the DRC's dense mountain jungles are tens of billions of dollars worth of unexploited gold, diamonds, uranium, cobalt, tin and tungsten that have escaped major miners' grasp because the countryside has been far too dangerous to deploy modern equipment and workers.

The smart and sane way to play a new era of peace and prosperity in the DRC would be the shares of large international diggers such as BHP Billiton (BHP, news, msgs). But if you want to get all Jack Sparrow about it, then you'll want to know that the really big commercial winners will be a handful of small Canadian public companies with untapped claims that rank with the richest in the world.

One of the most compelling investment opportunities of the bunch may lie with tiny Banro (BAA, news, msgs), a Toronto-based company that has substantial U.S. and British capital backing, a strong management team and, most importantly, four 100%-owned properties in the heart of the country's key 130-mile-long gold belt. If geological testing continues to pan out as it has so far, the company's annual gold production is expected to start as soon as 2009, at around 50,000 ounces a year, and run up to 500,000 ounces annually by 2012, at an average cost of less than $250 an ounce.

Raymond James and RBC Capital Markets analysts who have studied the company believe Banro has access to at least 12 million ounces of gold, and probably much more. At current prices, that would make the company, which now sports a $400 million market cap, worth well over $1 billion in the next couple of years.

High risk, high reward
Before your eyes get too big, keep in mind that there are many significant physical and psychological hurdles for both the country, once known as the Belgian Congo, to leap. Four million people have died from war, disease and famine in the past decade, and the election -- which is costing the United Nations around $400 million as part of an effort to stabilize all of central Africa -- may fail. The interim government, led by soft-spoken Joseph Kabila, has won surprising kudos from Western civil rights organizations and is ahead in the running to form the country's first freely elected leadership. But it has also imprisoned journalists to muffle dissent, so its acceptance on the world stage is not a slam dunk. Still, almost anything would be better than the outrageous thievery of brutal dictator Mobutu Sese Seko, ousted in 1997, or the vicious ethnic strife that followed.

And also note that several other small Canadian developmental miners with significant stakes in the Congo, including Moto Goldmines (CA:MGL, news, msgs) and First Quantum Minerals (CA:FM, news, msgs), may do better than Banro. So might larger, and thus more diversified, miners with claims in the area, such as South Africa-based AngloGold Ashanti (AU, news, msgs) and Gold Fields (GFI, news, msgs), or BHP Billiton, the Aussie.

Of the so-called "junior golds" in the DRC, Banro appears to be special in the quality of its executives, its remarkable focus on providing jobs and scientific development opportunity for native Congolese, and the potential for its properties. After so many stormy years of death and frustration, a Raymond James analyst calls Banro "the gold at the end of the rainbow."

Companies with major mining claims in the Democratic Republic of Congo Precious Metals 7/11 Close Mkt. Cap. Home
Banro (BAA, news, msgs)
$322 M

Moto Goldmines (CA:MGL, news, msgs)
$276 M

BHP Billiton (BHP, news, msgs)
$77 B

AngloGold Ashanti (AU, news, msgs)
$12 B
South Africa

Gold Fields (GFI, news, msgs)
$11.6 B
South Africa

Base Metals

Adastra Minerals (CA:AAA, news, msgs)
$288 M

Anvil Mining (CA:AVM, news, msgs)
$388 M

African Copper (CA:ACU, news, msgs)
$72 MM

Phelps Dodge (PD, news, msgs)
$16.3 B

Equinox Minerals (CA:EQN, news, msgs)
$204 M

First Quantum Min (CA:FM, news, msgs)
$3.2 B

Tenke Mining (CA:TNK, news, msgs)
$708 M


BRC Diamond (CA:BRC, news, msgs)
$52 M

Source: RBC Capital Markets

Banro's projects were cobbled together out of stakes owned by European investors in a series of deals in the mid-1990s hammered out by Arnold T. Kondrat, a Toronto venture capitalist with a history of taking on risky efforts. He put together a management team that includes former leaders of Ashanti, Nevsun Resources (NSU, news, msgs) and BHP Billiton with more than 150 years of experience in directing exploration programs in the Congo, Ghana, Tanzania and South Africa.

In 1998, DRC leaders expropriated Banro's projects a few months before a civil war between the nation's 200 ethnic groups exploded into a regional war that drew in Rwanda, Uganda, Chad and Tanzania. Kondrat sued the government for hundreds of millions of dollars, which naturally meant nothing until peace was brokered by the United Nations four years later. Banro then dropped its claims against the DRC in return for a return of ownership of its stakes, though it lost many millions of dollars worth of looted equipment and stolen gold.

By 2004, Kondrat saw the prospect for material improvement, as the United Nations installed its largest peacekeeping force in the world -- now numbering 19,000 soldiers. Last year, Banro managed to meet all the requirements to launch an initial public offering of shares on the American Stock Exchange and Toronto Stock Exchange. Among its investors now are Los Angeles-based mutual fund giant Capital Research & Management, with a 14% stake through March 31, and the Boston-based value mavens at Wellington Management, with a 2.2% stake.

Won't get fooled again
One reason to mention the company's major backers is that they perform a lot more due diligence than you or I are capable of doing. They're keen to get this one right after so many lost millions in the mid-1990s on a seemingly gold-plated developmental Canadian company called Bre-X, which claimed to have found a mine totaling 200 million ounces in the jungles of Borneo. After Bre-X's stock soared on the wings of Internet chat-room fervor and the company received sizable takeover offers, further investigation by a potential acquirer revealed it was all a scam. No gold was ever discovered, and the company's chief geologist threw himself out of an airborne helicopter.

With that in mind, you can understand why Raymond James analyst Eric Zaunscherb braved a visit to the still-dangerous DRC in February to check out Banro's Twangiza, Namoya and Lugushwa projects and the company's main office and management. Banro paid for the trip, but I'll note anyway that he came away impressed with its staff, exploration camps, sample-preparation laboratory, documentation, communication with government and religious groups, and balance sheet.

Perhaps the most remarkable effort he found under way was Banro's effort to use geologists from established African countries such as Ghana and Tanzania and educate promising young Congolese geologists. While many foreign-based miners in Africa use a lot of mechanical digging equipment and shoo away local laborers and "artisanal," or freelance miners, Zaunscherb found that Banro was employing more than 1,000 locals at substantial wages as part of its effort to improve the country and build trust. He found that a company foundation was also active in the community, building bridges and hospitals.

Skeptics should also keep in mind that gold projects in the Congo are not like ventures in Mongolia and elsewhere that are almost purely speculative. Substantial mining before the civil war that made the Congo too dangerous to explore has shown conclusively that the Central African copper belt holds at least 5 billion tons of copper and as much as 40% of the world's cobalt reserves.

Gold is always found in similar mineralization zones. In this case, it is in equatorial areas where large cratons –- blocks of the Earth's crust -- have contracted and formed rich mountainous belts. Banro is focused on an area wedged among the Congo Craton to the west, the Tanzania Craton to the east and the Zimbabwe Craton to the south. Gold, tin, tungsten, tantalum and other ores fill gaps in the cracks of smashed-up sedimentary and granite layers.

Place your bets
Analysts point out that Banro's 25-year permits to explore 1,014 square miles of the Twangiza-Nomoya gold belt -- and applications to explore in another 2,636-square-mile area -- are of a size more commonly associated with much larger companies. And indeed, just as young biotech companies may sell off stakes in promising molecules to large pharmaceutical makers, Banro might peel off pieces of its projects to senior gold producers to keep operations funded without diluting shareholders.
Independent Canadian researchers at the Fraser Institute have concluded that the gap between the current level of mineral production in the DRC and what it is capable of producing is the largest of any region in the world. Certainly no area with comparable potential wealth has yet to be exploited with modern mining techniques.

But before it can all be monetized, the elections have to run without a major hitch. Nearly half of Congo's 60 million people have reportedly registered to vote for one of 33 presidential candidates and 500 of 9,000 people running for seats in a new legislature. The United Nations has trained 300,000 election workers. Optimism, for the moment, has replaced rampant cynicism in both the public and commercial spheres over whether the vote -- which will conclude with a September run-off -- will work for citizens and investors alike.

Chester Crocker, a former assistant U.S. secretary of state for African affairs, told Bloomberg last week that he was happy to see companies "jockeying for position, trying to be part of a success story" in this "treasure-trove country."

It may be nuts, but if you want to have some fun with the sliver of your portfolio devoted to well-informed speculation, it's time to place your bets. To capitalize on the potential for commodities in a rebounding DRC, consider the basket of international mining stocks listed in the chart above.

Fine Print
To learn more about Banro, visit its Web site. This page provides links to the company's presentations to mining conferences and shareholders. … Read all about the Congo at the CIA's World Factbook, or in Wikipedia, or at the African Studies Center page of the University of Pennsylvania, or in a BBC profile, or in a UN profile. If you read French, check out Congo Online. And if you'd like to travel there, check out the Lonely Planet Guide, which advises "Congo's security situation is at best 'unstable', its infrastructure is in shambles and many of its citizens are in fear for their lives. As for travelers, the DRC remains a no-go zone." … To learn more about the Fraser Institute's work on mining companies, visit this page. .. To read a popular book about the Belgian king who brutally colonized the Congo, check out "King Leopold's Ghost" at Of course, the classic novel about the Congo is "Heart of Darkness" by Josef Conrad. And finally the Jack Sparrow reference vis a vis buried treasure hails from this popular movie. Yo, ho, yo, ho.

Jon D. Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at; put COMMENT in the subject line. At the time of publication, Jon Markman did not own any stocks mentioned in this column.

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