Seven hundred kilometres south of Cairo, the enormous Sukari open-pit gold mine bakes under an Egyptian sun in a corner of the Eastern Desert. It's not the easiest place to operate a mine, given the extreme temperatures, lack of infrastructure and occasional sandstorms. Access roads, water supply, generators and the mine itself all had to be built from scratch - with its owner, Centamin, investing hundreds of millions of pounds since 2007 to create the country's first large-scale modern gold mine. But with the price of gold near all-time highs, the financial rewards could be immense.
So far, it hasn't exactly been a smooth ride. Political instability in the country has sent Centamin's shares tumbling over the past year despite rising production, as the events of the Arab Spring have created fear and uncertainty around Centamin's profit-sharing agreement with the government - with murmurings from various Egyptian politicians suggesting some would like a change. Centamin's experience in the country, while not exactly typical, is not uncommon these days either as miners push the boundaries of operating jurisdictions in their search for new deposits - in particular for those large enough to justify the huge capital expenses necessary for their development.
Today, virtually every country in the world has been well traversed by geologists, leaving very few true 'frontiers' left to explore. Rising commodity prices and a scarcity of quality deposits in traditional mining-friendly areas have, however, pushed mining and mineral exploration into far more isolated and riskier jurisdictions than ever before. And yet, there remain several regions boasting immense geological potential that are still considered relatively under-explored. They just usually come with a catch. "There are only two reasons why an area hasn't been really explored," says John Wong, a senior fund manager at New City Investment Managers. "One, it's a long way from anywhere, or two, the political risk is too high."
Certainly, soaring commodity prices have helped to alter both factors. Higher forecast profit margins can often justify the extra investment needed to overcome logistical challenges, making many previously isolated or marginal projects economic. But mainly, the higher prices and corresponding investor interest help to compensate companies for the added risk of operating in emerging and often volatile jurisdictions.
A handful of countries that were considered too geopolitically unsafe a decade ago have also become more secure and mining-friendly - while many others have deteriorated despite opening their doors to miners during the latest resource boom in the hope of extracting a larger share of the profits.
Here we set out what we think are the most up-and-coming 'frontier' jurisdictions in mining today, as well as our top company picks with exposure to each region. The jurisdictions must be relatively under-explored and have great potential - both geological and financial - to yield big payoffs over the next few years as exploration heats up, major discoveries are made and junior companies get taken out. True, all these areas come with above-average geopolitical risk. But that's why they remain under-explored. We also examine a few emerging mining destinations that investors would do well to avoid for now. After all, just because commodity prices are high and a region has the right rocks, doesn't mean it will turn out to be a great place to invest in mining shares.
We should point out that our focus is primarily on gold exploration, for two reasons. One, so much of the exciting junior exploration activity today concerns the yellow metal; and two, we believe the fundamentals for investing in gold stocks are currently very strong in advance of possible further quantitative easing later this year. Prospective countries are arranged by general geographic location below.
AFRICA AND THE MIDDLE EAST:
Liberia
While Africa in general has some of the oldest and most established mining operations in the world, the small country of Liberia is lesser known as a modern mining destination. Liberia's economy has emerged strongly in recent years from a brutal civil war which raged intermittently from 1989 to 2003. The current president, Ellen Sirleaf, successfully ran for re-election in 2011 and is the first elected female head of state in Africa - she was also jointly awarded the 2011 Nobel Peace Prize for her work in women's rights.
Geologically, Liberia is prospective for iron ore, gold and diamonds, and mineral exploration has yielded outstanding success for those commodities in recent years. According to Mr Wong: "Liberia is like Burkina Faso four or five years ago. Nobody would go there, and now…" ArcelorMittal, the world's largest steelmaker, made its first iron ore shipment from the country late last year as part of a $1.5bn (£96m) investment plan. SGS Mineral Services has recently set up an assay laboratory in the country. And as for gold and diamonds, there are a handful of small companies focusing on an Archaean-age craton that has abundant occurrences of both. The country is also believed to host a portion of the Birimian greenstone belt that has made several of its neighbours - and nearby Burkina Faso - significant gold producers.
Top picks
■ Hummingbird Resources: This junior gold explorer only floated on the Alternative Investment Market in late 2010, but already it has built up an impressive resource of 3.8m ounces of gold at its flagship Dugbe 1 project. Recent drilling suggests it has made another significant gold discovery a few miles away from existing deposits, bringing Hummingbird one step closer to the 5m ounce level commonly thought to interest major miners or sustain a major gold mine. Analysts expect another updated resource estimate later this year. Last IC view: Buy, 80p, 10 Aug 2012.
■ Aureus Mining: Run by experienced mine finder David Reading - who previously took European Goldfields from a market capitalisation of £50m to over £1bn - Aureus has a much more advanced gold project in Liberia that hosts a high-grade gold resource of 1.7m ounces, which includes a more confidently determined gold reserve of 0.873m ounces. A bankable feasibility study is due out in September, and is expected to show robust operating margins with production of 100,000 ounces of gold a year, low cash costs, and, importantly, low initial capital costs. Last IC view: Buy, 75p, 12 March 2012.
Egypt and the Arabian-Nubian Shield
We've already mentioned Egypt's Sukari gold mine, which is expected to produce around 250,000 oz of gold this year. What we didn't mention is that Centamin is busy exploring other parts of the vast and prospective geological area Sukari sits in, known as the Arabian-Nubian Shield, a highly mineralised area spanning Egypt, Ethiopia, Eritrea, Sudan and Saudi Arabia, among other countries. While there are now large-scale mining operations in virtually all of these countries, we are of the view that the political risks in Eritrea and Sudan remain too great. However, Egypt, Ethiopia and the fledgling mining jurisdiction of Saudi Arabia strike enough of a balance between risk and reward to justify investment, given the right project or company. And while we have yet to uncover another junior mining company that meets our investment criteria in Saudi Arabia or Ethiopia, mining giants Vale and BHP Billiton are already working on projects in the latter, which is prospective for gold, potash and several base metals.
Top pick
■ Centamin: Centamin acquired privately owned Ethiopian explorer Sheba Exploration last year, gaining access to four large exploration licences boasting high-grade gold-in-soil anomalies over wide areas. The best prospect, while early-stage, has a defined 10km-long soil and rock chip gold anomaly and forms part of a major regional structure. Yet the Ethiopian assets are a sideshow for now, with all eyes on the company's main Egyptian operations: Sukari produced a record quantity of gold during the most recent quarter - a 37 per cent increase over the preceding quarter - and is on track to meet or exceed the lower end of its yearly production target. That said, political instability is still hitting sentiment, but with a newly elected Egyptian president and Sukari's strong mine performance, we expect the share price to improve over the coming months. Last IC view: Buy, 72p, 14 Aug 2012.
Democratic Republic of Congo (DRC)
The DRC boasts some of the richest and largest undeveloped mineral deposits left in the world, particularly copper and cobalt. But the political situation there continues to leave the country untouchable in terms of investment. Canadian miner First Quantum Minerals, which also trades on the London stock market, experienced a mining company's worst fear firsthand in 2009, when the Congolese government seized its Kolwezi copper project and sold it to an Israeli businessman, who later flipped it to London-listed Kazakhstani miner Eurasian Natural Resources. The latter agreed to pay First Quantum £800m for the assets earlier this year, after protracted legal proceedings.
Russia and the CIS
The past decade has seen a plethora of large, established miners with powerful political connections come out of the former Soviet Union raising money and listing on the London Stock Exchange. There has also been no shortage of the more risk-taking juniors attracted to the area's impressive and under-exploited mineral wealth, despite having to contend with the often difficult or corrupt fiscal regimes in charge there.
It becomes difficult to define which CIS countries should be considered 'frontier' destinations, though, as some, such as Kazakhstan, already have very established mining industries despite being prospective for new discoveries. Others suffer more from a lack of investment or exploration using modern techniques, and we targeted these to find the most up-and-coming areas to gain exposure to across the region.
Armenia
Tiny Armenia is one of the safest CIS countries for investment, relatively speaking. In a 2011 world index of economic freedom, Armenia was ranked 36th in the world and 19th among the 43 countries in Europe. The country is democratic, is experiencing economic growth and has fairly liberal markets and low taxes. While the true extent of prospects for gold and other precious metals is relatively unknown - and with only a handful of international exploration and mining companies active in the country - we expect activity there to heat up after a construction decision is made on Armenia's most advanced gold project, Amulsar.
Top pick
■ Lydian International: Canada-listed Lydian started drilling Amulsar in 2006 and has since delineated a 3.2m ounce gold deposit across all resource categories. Remarkably, the deposit is still open in all directions, and Lydian is currently working toward delivering a bankable feasibility study for the project this summer. Providing an extra vote of confidence in the country, the company's major shareholders are the International Finance Corporation, part of the World Bank, and The European Bank for Reconstruction and Development.
The stock is also a top share recommendation of one of North America's most respected newsletter writers, geologist Brent Cook, of Exploration Insights. He writes: "In all, Amulsar continues to be one of the best [meaning profitable] mid-sized gold deposits I know. It is still relatively unknown… and lacks a retail buzz. The deposit's location in Armenia also creates a perception problem that I think is unwarranted and will eventually be overcome. The government of Armenia is pro-mining and pushing LYD to get the deposit into production." Last IC view: none.
Kyrgyzstan - the next Mongolia?
Kyrgyzstan, or the Kyrgyz Republic, is certainly no stranger to mining. The massive Kumtor mine, operated by Canadian miner Centerra, has been producing gold steadily for nearly 15 years. But in spring 2010, the former president of Kyrgyzstan was overthrown and a new leader was elected. While critics suggest the new president is more of the same, a few important changes have been initiated. Most relevant to mining, the parliament has recently approved changes to the mining code and tax regime, instituting a large sliding-scale revenue tax on mining revenues while abolishing corporate tax. This has been designed to discourage corruption and increase the state's share of profits. While the political risks in Kyrgyzstan are perhaps the highest of any 'frontier' country listed here, the geological potential for large gold and copper deposits is huge - some in the industry call it the next Mongolia - and several companies have recently delineated multimillion ounce gold systems. South African gold producer Gold Fields also gave the country a vote of confidence in July by paying a joint-venture partner $10m for the remaining 40 per cent interest in its Talas gold-copper-molybdenum project.
Top pick
■ Chaarat Gold: Admittedly, shares in Chaarat are volatile. In 2009 and 2010, the company's share price rose 212 and 125 per cent, respectively, while in 2011 they retreated by more than 63 per cent. But Chaarat has control of a 5.59m oz gold deposit in Kyrgzstan and has a number of earlier-stage prospects throughout the country. And while the government's latest changes to the mining laws could be seen as a tax grab, companies like Chaarat benefit in some ways from the decision as there is now increased clarity on regulations. The company has started the initial stages of construction at Chaarat - it raised most of the money needed to build the mine in 2011 - and hopes to start small- to medium-scale production by late 2013. Last IC view: Company to watch, 50p, 20 December 2010.
Russia
Mining the vast hinterlands of Russia has been - and still is - traditionally left to the Russians, and yet of late the country has been experiencing growing western interest. Modern exploration techniques, coupled with a surge in commodity prices and a slight opening up of the economy, have led many Russian miners to list in London and several international senior gold producers to acquire operations there. In terms of mineral exploration, the country remains under-explored and presents major exploration upside in a variety of metals, especially the Russian Far East. The trick is finding the right investment vehicle.
Top pick
■ Highland Gold: After missing production targets last year and seeing a strategic investor sell a large minority stake, shares of mid-tier gold miner Highland Gold have slumped to value territory - priced 20 per cent below book value on a miserly five times 2012 earnings estimates. This is despite generally strong performance from three mines in Russia and a large pipeline of development and exploration prospects at various stages of advancement – including one highly prospective, multimillion ounce gold deposit in neighbouring Kyrgyzstan. And while we aren't necessarily betting on Highland to outperform its peers over the long run, its oversold shares appear to be in the early stages of recovering lost ground. We anticipate a re-rating over the next six months. Last IC view: Buy, 116p, 10 Aug 2012.
