Company: Banro (BAA-T)
Closing Price & 52-Week Hi/Low (09/10/09): $2.58 ($0.80-$3.90)
Country: Democratic Republic of the Congo
Ounces: 4.54 million
Kaiser’s Rank: 7 (of 7, the other six appear in the September edition of Mining Markets)
The skinny: Banro (BAA-T) is working on a bankable feasibility study for its Twangiza project in the Democratic Republic of Congo (DRC) that hosts a proven and probable reserve of 4.54 million oz. gold based on a 0.5-gram-per-tonne cutoff grade.
The reserve consists of 82.4 million tonnes grading 1.71 grams gold per tonne divided between the Main and North zones, with the Main zone hosting 85% of the gold.
The deposit occurs in a steep ridge — flanked by fast-moving rivers — that have been
interpreted as the hinge of an anticlinal fold involving a package of sediments and porphyry sills. The combined zones have a strike of 3.5 km and widths up to 200 metres.
Structures and shears in the limbs of the fold served as feeders for gold-bearing fluids, which found a useful deposition host in the network of fractured and reactive sills in the hinge of the fold, and to a lesser degree in the carbonaceous mudstones.
Gold occurs in free form and in association with pyrite and arsenopyrite that makes part of the deposit refractory. About 1.2 million oz. are in oxidized material where about 90-91% of the gold could be recovered.
Transitional sill material would yield 364,000 oz., but recovery in the transitional mudstone mineralization would reach only 64%, or roughly 348,000 oz.
Most of the Twangiza deposit’s gold resides in primary mineralization, with the sill material yielding 895,000 oz. at a 74.9% recovery; while the mudstone material would yield 910,000 oz. at a 72.2% recovery.
Overall, Banro would recover 3.5 million oz. or about 77% of the overall reserve. Because the fresh sill and mudstone ore have lower grades of 1.26 and 1.62 grams gold per tonne, respectively, than the 2 to 2.1 grams in the oxides, Banro plans to look for additional oxide zones whose ore could be trucked to a plant in order to maintain the 5-million-tonne-per-year mining rate for oxides (about 13,000 tonnes per day), which would drop to 3.5 million tonnes annually once only the sulphides are left (any sulphide ore excavated during the oxide processing phase would be stockpiled).
To deal with the refractory nature of the rest of the deposit, Banro proposes to produce a sulphide concentrate through flotation, fine grind the concentrate, and process it using the Leachox method before recovering the gold through conventional cyanidation.
A feasibility update published in June 2009 projects capital costs at US$377 million for a 21-year mine life, which yields a 27.6% internal rate of return and a $575 million net present value at US$950 gold, using a 5% discount rate.
The capital cost excludes the $134 million cost of building a run-of-river 30 megawatt hydro-electric facility on the Ulindi River, which would be operated independently, though Banro plans to cover 50% of the cost.
The Twangiza project, however, faces a number of hurdles that threaten to delay mine approval and deter debt financing.
The viability of the project hinges on a 10-year tax holiday granted in early 1997. Banro acquired the project in 1996 when it purchased a private company, which had been involved with Twangiza since 1957.
When Laurent Kabila came to power after Congo strongman Mobutu’s death, he expropriated the Twangiza project in mid-1998. Banro pursued arbitration and in 2002 had title restored with the zero royalty, an exemption from import duty, and a 10-year tax holiday intact.
Recently, however, the title was revised to include a 1% gross royalty and a 4% net profits interest allocated to the local government.
Given the lingering generosity of the tax regime, this revision of the title terms may be just the first of many revisions, especially if a sharply higher gold price improves the economics of the project.
Banro’s feasibility study indicates that very little has been accomplished so far with regard to producing Environmental and Social Impact Studies.
Securing environmental permits and a social licence for both the mine and the power project may not be as easy as one might expect for a country notorious for corruption.
A study showed that 1,860 households comprising 11,532 individuals, mostly farmers or artisanal miners, residing between the Twangiza and Lulimbohwe rivers would be affected by the project. Of these, 1,257 households would need to be resettled.
The risk of social conflict arising from involuntary resettlement is exacerbated by a longstanding local power struggle over chieftainship succession and a lack of influence by regional and central authorities.
Furthermore, the rivers downstream from the deposit are the subject of artisanal mining operations where 345 pit bosses control 1,725 workers recovering gold, tin, tungsten and tantalum, all of which flows into the black market.
These alluvial deposits appear to be unrelated to the Twangiza mineralization, which post-dates the wave of granite intrusions whose eroded bounty has become the focus of widespread illegal mining in eastern Congo that has fallen under the control of various warlords and rebel militias.
There is no evidence that the artisanal operations in the vicinity of Twangiza have fallen under such criminal or guerilla control, but shutting them down would be a difficult task, especially because, in the words of the feasibility study, “local government authorities are deeply involved in the artisanal mining set-up and are apparently undeterred by legalities.”
Given the attention illegal mining activity in eastern Congo is gaining in international circles as a replay of the conflicts in Sierra Leone and Angola, the risk is high that Banro’s Twangiza project will become a target for NGO agitation.
This would make it harder for Banro to achieve a social licence for a displacement of locals whose scale far exceeds that of signature NGO causes such as Tambo Grande and Rosia Montana . Once the NGO’s come they will also discover that Twangiza represents a potential environmental timebomb enhanced by the high seismic risk of the region.
Although Banro’s mining activities will be engineered to meet international discharge standards, they are expected to disrupt the riverbeds that are already contaminated with heavy metals such lead and chromium as well as arsenic, and are suspected of harbouring mercury accumulated through decades of artisanal mining in the area.
The feasibility study, which dismissively describes this mountainous, tropical region as already so badly degraded by human activity that there is not much worth conserving, merely mentions that the acid rock drainage potential of the Twangiza mine waste and tailings will need to be assessed.
The study, however, does note that the water intake for the proposed Ulindi power project will be located in a “pristine montane forest” and that the power plant will impact local fish-farming operations.
Power is a critical issue for Twangiza because of its remote location — 41 km southwest of Bukavu as the crow flies, or 85 km by a road, which will need to be upgraded.
Bukavu has an airport, but it takes two hours by dirt road to travel from airport to town. A shorter one-hour drive exists between the Kemembe airport in Rwanda and Bukavu.
After studying several access routes for construction materials and future needs, Banro decided on a route that passes through Kenya, Uganda and Rwanda.
Given the high cost of transporting diesel fuel by road and the political risk that the borders between these nations may not always be open, development of the hydro-electric power plant is critical to the viability of Twangiza.
The elephant in the room, however, is the security risk associated with any project located in North and South Kivu, the provinces in eastern Congo north and south of Kivu Lake, which straddles the border with Rwanda.
This region is arguably the most chaotic, violent and brutal corner of the world where government military, rebel militia and outright criminal groups clash in pursuit of a complex range of ethnic, political and commercial goals.
The conflict has its roots in the ethnic rivalry between the Hutu and Tutsis, which exploded in 1994 when the Hutu in Rwanda mounted a genocidal attack on the Tutsis.
During the past few years the Hutu-Tutsi violence has been focused in North Kivu, enabling Banro to conduct an extensive infill drilling campaign at Twangiza.
In January 2009, it appeared that a ceasefire was in the works when the Congolese and Rwandan armies agreed to collaborate in an effort to shut down the various militia. Rwanda arrested Tutsi warlord Laurent Nkunda, only to replace him with another war criminal sought by the Hague.
Since then all semblance of order has disappeared as splinter groups have multiplied and the Congolese army has spun out of control perpetrating its own acts of violence. Since 1996 it is estimated that 2.4 million people have died, many of them through starvation and disease.
How does this affect Banro? The loss of political purpose has transformed the conflict largely into a battle for control of artisanal mining operations.
If this struggle spreads into South Kivu province where Banro’s Twangiza project is, Banro will have little chance of acquiring debt financing, and even if it finds equity financing as it did with the recent $100 million private placement, it may prove difficult to collect the environmental baseline data needed for an environmental and social impact study, let alone to build a mine.
Kaiser’s comments: Banro’s Twangiza project is my last choice because the US$55 per ounce value (market cap in mid-August divided by net recoverable ounces at Twangiza) is high and I am concerned that the project will become entangled in the political instability of the Kivu region in the DRC.
Look for John Kaiser’s ratings and analysis on six other mammoth gold deposits in the September 2009 issue of Mining Markets, which will be inserted into the Sept. 28 issue of The Northern Miner.