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West Africa beckons as Aussies go for gold

Some time in the next couple of years, goldminers who call Australia home will be producing more gold from operations overseas than they do here.

The historical shift is partly explained by the concentration of ownership of Australian mines in the hands of non-ASX listed gold groups such as Canada's Barrick and South Africa's Gold Fields, but the main factor is the explosion in new overseas mine developments by Australian gold producers.

Peter Rudd, a mining analyst at Balnave Capital Group and long-time gold sector watcher, estimates that by 2011 the total gold production effort by ASX-listed companies will be bigger overseas than at home.

Papua New Guinea has long figured strongly for Lihir. It is also home to Newcrest's newest overseas push, the company already being active in Indonesia. Another Melbourne group, OceanaGold, is the biggest producer in New Zealand and wants to add copper/gold in the Philippines. The exodus list goes on.

"The trend will gather pace as established mines here work through their operational life, leaving fewer and fewer mines because of falling discovery rates," Rudd said.

"The overseas experience is different. Many highly prospective areas have barely been touched by the geologist's pick, let alone the latest in exploration techniques. Being geologically younger also helps, as there's less weathered overburden to contend with  as is often the case in Australia."

While there is a diverse and growing spread of overseas gold operations by ASX-listed companies, there is also a favourite destination emerging. And it may come as a surprise to local investors who traditionally like to keep their dollars in first world countries, far away from the civil wars, abject poverty and political corruption that has long characterised the new hot spot for gold  West Africa.

According to the United Nations definition, West Africa covers 16 countries covering some 5 million square kilometres. They are Benin, Burkina Faso, Cape Verde, Ivory Coast, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone and Togo.

But when it comes to gold, the focus in West Africa is on countries that have large tracts of greenstone belts, the same sort of rocks that host most of the gold mined in Australia's golden state, Western Australia.

That cuts the field back to Ghana, Mali, Guinea, Ivory Coast, Burkina Faso, Senegal, Mauritania and Niger.

ASX-listed companies are well represented in all of them  plus a few of the others not so well known for their gold potential  and they also have aggressive development and expansion plans for the region. Which might be just as well given Australian gold output  by ASX listed companies or not  has been in decline at a rate of 3.2 per cent a year since 1997.

Analysts at the Canadian institutional investment dealer, Clarus Securities, say West Africa is an emerging giant in global gold supply.

"West Africa is the fastest-growing gold producing region in the world with mine production growing at a compound annual rate of 4 per cent over the past nine years compared to total global mine supply, which actually declined by 1 per cent over the same period," Clarus said in a recent research note.

Current gold production from the region is about 5.9 million ounces a year. Output is forecast to surge by 43 per cent to more than 8 million ounces over the next three years. Australia produced 7.16 million ounces in the year to June 2009, according to Surbiton Associates

Clarus believed production from West Africa would increase as exploration success in less-surveyed countries such as Ivory Coast, Burkina Faso, Mali, Guinea and Senegal was converted into producing mines.

"We estimate that in two years the West African region will produce more gold than South Africa, standing only second to China," Clarus said.

That means the region will be vying for the position with total Australian-based production. According to Surbiton, Australia is equal third in the global rankings with South Africa but could displace the US in second position thanks to the recent commissioning of the $3.5 billion Boddington mine in Western Australia.

Importantly for investors, sovereign risk in West Africa is not as big an issue as it once was. Clarus said that with 14 of the 16 countries having democratically elected governments, the number of conflicts in the region was at a 10-year low. Ghana and Senegal have been shining examples, Clarus suggested.

Because of the reduced risk, Clarus believed the current steep discount in the valuation of West African gold assets compared with the global average was no longer warranted.

A mining analyst at BGF Equities, Warwick Grigor, recently hosted an investor tour of Australian gold explorers/developers in the West African nations of Ghana and Burkina Faso. On his return he explained why Australian gold producers/explorers were pushing offshore to West Africa and elsewhere.

"Why chase tired West Australian brownfield projects when Ghana and Burkina Faso offer so much more?

"Given the dismal failure of brownfield gold producers to deliver satisfactory results in Australia  in fact most have gone broke in recent years  we see lower-risk investors buying shares in the companies covered (Adamus, Ampella, Azumah, Gryphon and Perseus)," Grigor said.

More to the point was Grigor's assessment that West Africa had plenty of potential for the discovery of 1 to 3 million ounce projects, something that recent history suggests is increasingly difficult to achieve in Australia.

Present Australian producers in West Africa are Lihir at Bonikro in Ivory Coast (160,000 ounces a year), Mineral Deposits at Sabodala in Senegal (160,000 ounces), and Resolute Mining at the restarted Syama mine in Mali (planned rate of 250,000 ounces a year).

Lihir has said it wants to increase its West African footprint, with Grigor picking Perseus as the obvious target. Perseus is on its way to becoming a 230,000 ounce-a-year producer from its first project in West Africa, the 5 million ounce Ayanfuri project in Ghana.

Mineral Deposits is also the subject of continual takeover speculation, with its Sabodala treatment plant shaping up as the central operation for new discoveries made by the company and others in the region.

Then comes the long list of potential developments in West Africa expected to flow from the presence of Australian explorers/developers.