Join our community of smart investors

West African offers more risk than reward

Shares of iron ore junior West African Minerals have risen too far, too fast given the early stage of its exploration in Cameroon
December 13, 2012

How much would you pay for some geological anomalies on mining prospects next door to major undeveloped iron ore deposits? £164m? Essentially that's the value that London's stock market puts on permits in Cameroon owned by mining explorer West African Minerals - and we think that's too much.

IC TIP: Sell at 58p
Tip style
Sell
Risk rating
High
Timescale
Long Term
Bull points
  • High-profile bosses
  • Blue-sky potential of eastern licences
Bear points
  • Lacklustre initial drilling results
  • Uncertainties about using local infrastructure
  • Slow pace of exploration

Don't get us wrong - we're all for plays in exciting early-stage minerals exploration. But West African's share price rose from 10p to 94p this year as the company advanced its early-stage exploration permits to a drill-ready state. Since then, however, drilling results released earlier this month have been lacklustre. The share price has pulled back but, at 58p, it still looks vulnerable.

Successful iron ore exploration hinges on three things: the grade of the ore, the size of the deposit and access to infrastructure. Recently completed 'first-pass' drilling on the company's Binga permit, near proposed infrastructure on the coast of Cameroon, has yet to meet the first requirement. Drill results so far look disappointing.

True, follow-up drilling could still turn up a sizeable deposit. But not one of 114 scout holes drilled at Binga found substantial high-grade (60 per cent iron) mineralisation, or so-called 'direct shipping ore' (DSO), suggesting limited scope for a valuable new discovery.

So West African is turning to its inland permits in its search for a big high-quality deposit. These permits are beside the huge Mbarga deposit owned by an Australian explorer, Sundance Resources, which is the subject of a A$1bn (£650m) takeover bid by Chinese conglomerate Hanlong. Hanlong plans to spend A$4.3bn building rail and port infrastructure to handle iron ore, and West African's bosses hope to be able to use this infrastructure should they find an economic deposit. But Chinese authorities have held up Hanlong's bid for the past 18 months and there's no certainty it will be pushed through.

WEST AFRICAN MINERALS (WAFM)

ORD PRICE:58pMARKET VALUE:£167m
TOUCH:58-61p12-MONTH HIGH:94pLOW: 8p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:10pNET CASH:£10.6m

Year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20080.1-1.5-2.69nil
200911.110.03.06nil
201014.48.42.54nil
2011-0.2-1.0-1.42nil
2012nil-3.6-2.81nil
% change

Normal market size: 13,000

Market makers: 8

Beta: 0.4

Meanwhile, it could take West African six months or longer to complete first-pass drilling on its inland targets. That's because the company needs to clear thick jungle cover to transport its single drill rig around. Management is, nevertheless, upbeat. Executive vice-chairman Brad Mills says it may take two to three months to test the first target, Djadom South, but enticing geophysical anomalies suggest it and two other targets have the potential to contain a billion tonne deposit each. The anomalies are even bigger than the ones at Binga, according to Mr Mills.

There is also a technical concern that 74 per cent of the company's shares are tightly held by management and seed investors. Many have been locked up for the past year, but they will become free trading on 9 January 2013. That could put the stock under selling pressure in the new year.