WAF valuation, page-186

Nice to meet you Esh.

You've clearly done some good research, certainly more than myself, hat tip to your thoroughness. Here is an article I looked up this morning to dig a little deeper having authoritatively thrown my opinion around two sails to the wind last night. 

https://www.crisisgroup.org/africa/west-africa/burkina-faso/254-social-roots-jihadist-violence-burkina-fasos-north

Map below summarises better the historical areas of violence that is centred on the northern desert areas. A couple of terrorist attacks in the capital is to be expected but realistically this is not an anti government rebellion despite what the article intimates.



Certainly there is a lot more to the situation drilling down further into ethnic, social, religious and geographical inter-relationships. I think we clearly agree that despite nuanced details the main points of support for WAF as an investment include:

• The location of Sanbrado is central to the Majority Mossi tribal lands and well separated from the troubled border regions 
• Burkina Faso has a relatively stable democracy which is rare enough in Africa and supported by the west
• Logistical routes for Sanbrado should be well free of terrorist disruption, as should acces to/from the capital
• Local security should be relatively easy and supported by locals against long range terrorism
• The government is supported by the vast majority of the people to avert falling into radical Islamic control or conflict
• Western support of the government's fight to prevent to spread of radical Islam likely reduces sovereign risk from nationalisation 
• The country risk and operating expense has increased slightly to account for terrorism risk real or perceived

WAF like all African resource companies always had a country risk discount and in my opinion that risk has not raised significantly given the serendipitous location of their deposit. If one is not comfortable with some African sovereign risk then why the heck would you invest in WAF? I really cannot see that many long term investors turning tail at a reminder of this fact, although in the short term sentiment and buying vs selling pressure is everything.

Here is my personal view of African sovereign risk and how it is best mitigated for gold miners. First make sure that all risks are low (by African standards), manageable and not likely to be fatal. For example, if Sanbrado was in the northern border region given the Islamic jihadist troubles that would be an uninvestable. Second, spread investments geographically around different countries and preferably not in countries next door to each other where they might end up in a war together. Diversifying investments geographically reduces the portfolios internal sovereign risk while preserving the extra cheap value riskier locations price at.

WAF looks a high chance of participating in M&A activity simply because the sum of the parts is worth so much more than small one project companies themselves. Isolated, each company is relatively illiquid to large investment funds, carries an all-or-nothing single country/project risk, struggles raise reasonably priced development finance, must carry the cost of the entire length and breadth of positions required to run a gold company etc. Not terribly attractive.

Put together a number of African gold projects into one company, whether or not that company has non-African projects, and the company reaches a large enough market cap and liquidity to become investable for large funds. The liquidity, financial strength, diversified sovereign/project risk across a numerous African countries , financing and operational scale economies of scale, increases profitability of what is already very profitable and under-valued single names. The assimilated gold projects quickly have their PE and other metrics raised and risk/liquidity discount dropped adding much value for all holders.

This is the compelling reason I think WAF will be picked off by one of the larger and more aggressive goldies looking to expand global market cap, size and scale into a possible gold boom. The very big boys will probably not be interested and neither will those who command a low sovereign risk premium (eg Northern Star) but there are many that are. If not soon then juniors will get together in a "merger of equals" will build scale and reduce the heavy discount single African miners suffer. The only reason for WAF to merge with another Burkina Faso miner would be for very close operational synergies, otherwise I would be looking to Ghana miners etc to diversify risk between countries. In short, I see WAF is being unfairly discounted by knee jerk reaction to country risk against the compelling value for M&A activity given it's fully funded and highly profitable project.

Sorry to digress, this has not been paid promotion haha. An interesting situation and investment to digest if not sad for those caught up in the mindless violence.

Cheers