Orezone battling politics in Burkina Faso, fallen gold prices

Fate has been no friend to Ottawa-based junior-miner Orezone Gold Corp. in the past few years. First came the plummeting of the price of gold more than a year ago, forcing the company to rewrite its plan to extract the gold from its property in Bomboré, Burkina Faso more cheaply. Then came the Burkinabe political unrest and subsequent ousting of the country’s government, raising the question of whether the company will get the treatment it needs from the new government to move forward.

Both of these have affected the standing of the company’s project in the eyes of investors, as Orezone’s stock price has fallen and not come close to reaching the heights it did in 2011.

Orezone has been working since its incorporation in 2008 to get its now-flagship, 168-square-kilometre Bomboré-property into production. Home to about 1,000 people, Bomboré is a small town that is fewer than 100 kilometres away from the country’s capital, Ouagadougou. According to the company’s most recent resource estimate, beneath the property there is at least 4.5 million ounces of gold.

When the company was first devising its plan for the property, gold was trading at high prices — just shy of $2,000 per ounce at one point — and investors were more attracted to companies in the gold sector. At these high prices Orezone decided to explore a process called carbon-in-leach to get its gold out of the ground. Then the price of gold tumbled, making the carbon-in-leach process too costly. The company postponed any further exploration and evaluation and had to reassess its options.

“With lower prices it’s a little more challenging,” says Joe McCoy, vice president of administration at Orezone, before explaining that after reassessing its options the company opted for another process, called open pit heap leach, that would cost less but would also recover less gold. “Right now we’re going through the feasibility stage,” he says, which means that the company is building the financial model it needs to gather the necessary technical information about the project.

The company’s plan, containing these more specific, technical details about the project, is set to be completed in the first half of next year, at which point the company will need more financing to go forward. Orezone Gold Corp. said in its third-quarter filing this year, for the three-month period ending Sept. 30, that it has financial commitments — including feasibility work, social- and environmental-impact studies, metallurgical work, professional fees, rent, and so forth — amounting to about $1.9 million.

Sitting on roughly $6 million in cash and no long-term debt, management expects that, “in addition to using the funds currently on hand,” more “equity capital will need to be raised in order to fund operations for the next twelve months,” according to the company’s third-quarter financial statement.

Joe Mazumdar, a senior mining analyst at Cannaccord Genuinty Corp. who also covers Orezone, says the company’s shareholders may unload their shares once the company’s feasibility work is done. “(Once that happens) everybody knows they’ll have to come to the market for money,” he says. “There might be some selling backed on that.”

In the company’s third-quarter filing this year, management acknowledged that, thanks to the state of capital markets and weak investor sentiment, there is “material uncertainty” as to whether the company will get its financing on “favourable terms.”

Trading at 50 cents per share at close on Dec. 3, Orezone’s stock price has ranged from 37 cents to $1.07 over the past 52 weeks. It didn’t break the dollar-mark until National Bank Financial began covering the company at the end of August, at which time the company’s trading volume reached its highest point since the start of this year. Since then the stock price has fallen, taking a heavy hit following the political unrest in Burkina Faso.

In October mass protests kicked off in the West African country after its president Blaise Compaore wanted to amend the state’s constitutional rule on term-limits so that he could extend his 27-year rule. With demonstrators burning down buildings, among them parliament, Compaore declared a state-of-emergency and fled to the Ivory Coast. He resigned and a military leader took the reigns, announcing that he would lead a transitional government into the 2015 elections.

“With any government you want stability and a vision for the country that is consistent to what’s happening,” says McCoy. “For a company like Orezone … you want to make sure that what you were told yesterday is happening today and what’s going to happen tomorrow.”

Orezone deals with the Burkinabe government to get exploration and mining permits. The company is also at the government’s whims when it comes to rules and regulations about mining and the country’s tax-code. So a change in government can mean a change in policy, which means that an attractive project can quickly turn into an ugly one.

According to the company’s third-quarter financial statements this year, management went about renewing the exploration permit it needed for the Bomboré-property. Though management received a letter from the minister of mines in Burkina Faso indicating that its permit was renewed to February 2016, management has yet to receive the formal documents. The company also said in its third-quarter financial statements that there is “no assurance” that this documentation, which proves the permit was renewed, “will be received.”

What’s more, the company plans to apply for a mining permit by the second half of next year, at which point construction will begin. Yet, thanks to the political uncertainty in Burkina Faso, the company faces more title-risk than it did before. In its third-quarter financial statements the company said there is also “no assurance” that it “will be successful in obtaining a mining permit” once its exploration permit expires.

Still, says Mazumdar, Orezone’s management has been there for long enough to “know what’s happening.”

“Orezone is one of those companies that just didn’t just fall from the sky into Burkina Faso and decided it was a good place to be,” he says. “They have been there for a while and have sold an asset there to Iamgold…so they’re familiar with the way things work in Burkina Faso and would register with me as someone with relevant experience in that jurisdiction.”

Before Orezone started up, its chief executive officer Ron Little and vice president of exploration Pascal Marquis were at the helm of a company called Orezone Resources Inc. Struggling after the squeeze of the Great Recession, the former Orezone sold itself to another gold company called Iamgold along with its then-flagship property in Essakane, Burkina Faso. As part of the deal, however, the former Orezone’s remaining assets, including its now-flagship Bomboré-property, were distributed to a new company called Orezone Gold Corp.

Speaking about whether that could happen again, Mazumdar says that “anybody who might be thinking of taking over a company, all else being equal,” would think it “nice” if he had 1.5 million ounces of heap-leachable gold and a few million more extractable at a higher price, because he would “probably get (those latter ounces) for free.”

According to stock reports by Reuters and Morningstar Quantitative Research, Orezone’s stock price is undervalued and will be higher at the end of the year. In a report published on Nov. 21, Morningstar estimated that the fair-value of the company’s stock was 93 cents per share, 43 cents higher than the stock’s closing price on Dec. 3. In a report published on Nov. 26 Reuters computed that the mean estimate from analysts of Orezone’s 12-month price-target was $1.04 per share.