Resource speculators like exploration companies run by teams that have had success in the past who are exploring in highly prospective areas. The problem is that this preference leads to exploration stocks with this perceived quality being bid up to lofty valuations that appear to be pricing in meaningful resource expansion. The 2016 run-up in gold stocks has seen a lot of this. This shouldn't necessarily be a deterrent for investors, but by the same token it begs the question: Are there any cheap exploration companies out there run by world-class exploration teams?
We believe that Sarama Resources Ltd. (SWA:TSX.V) is such a company. Sarama Resources is a stock that we recommended to subscribers back in April, and while shares have risen the value proposition remains compelling. Meanwhile, Sarama's management team is top notch, boasting several individuals—including CEO/major shareholder Andrew Dinning—from Moto Goldmines Ltd., whose 22 million ounce Kibali project was acquired by AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) and the notoriously discerning Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE).
Sarama is now focused on a handful of contiguous projects in the Birimian Greenstone Belt in West Africa. The Birimian Greenstone Belt is rapidly becoming one of the most desirable places to explore and mine in the world, and several projects are being developed or have been recently developed in this area. Most notably:
- Roxgold Inc.'s (ROG:TSX.V) Yaramoko project
- Endeavour Mining Corp.'s (EDV:TSX; EVR:ASX) Hounde project
- Orezone Gold Corp.'s (ORE:TSX) Bombore project
- SEMAFO Inc.'s (SMF:TSX; SMF:OMX) Mana project
Sarama is involved with three projects in the area, each of which contains an NI 43-101 resource estimate giving the company nearly 2 million attributable gold ounces.
- South Hounde JV with Acacia Mining Plc (ACA:LSE)
- Karankasso JV with Savary Gold Corp. (SCA.TSX.V)
- Bondi, recently acquired from Orezone
At the current valuation the stock trades at ~US$8/oz. Long-term, Sarama envisions expanding the resources at its three projects so that it has appeal as a district for a larger partner/acquirer. Some potential suitors include:
- Endeavour Mining, which is developing the Hounde project in the area and which is a shareholder in Savary Gold.
- Acacia Mining, which is Sarama's JV partner in the South Hounde project and is also a partner in the Central Hounde project with Thor Explorations Ltd. (THX:TSX.V).
- SEMAFO, whose Mana project is nearby and shares similarities with the South Hounde project.
Acacia is the most likely suitor, as it will soon own 50% of the South Hounde Project—the biggest and most advanced of these three—and can obtain up to 75% of the project by meeting certain terms, including financing $7 million worth of exploration over the next two years. Acacia also has a JV with Sarama's neighbor to the northeast—Thor Explorations—on that company's Central Hounde Project. Sarama states that it hopes to find an "Acacia-sized" deposit capable of producing at least 200,000 ounces of gold per year.
There is already a sufficient amount of gold on these projects, and on South Hounde individually, to support a mine, and management's "worst case scenario" is that it finds nothing else and develops a small heap-leach operation that mines near-surface oxide ore from Bondi and South Hounde. However, management believes that it has yet to find the feeder zone to the gold mineralization it has to this point delineated, and the team's understanding of the area's complex geology is in its infancy. Should it better define the structure and/or find this feeder zone, the South Hounde deposit can potentially grow by multiples and appeal to major producers.
The downside to this optionality is that Sarama's exploration efforts and drill results are relatively boring, lacking high-grade intercepts and are rather focused on highlighting structural features of the deposit. In fact, it seems that the market missed a key development from the latest drill results, which is that the MC Zone of the South Hounde Deposit potentially hosts high-grade mineralization at depth, thereby increasing the odds that Sarama will find an "Acacia-sized" deposit. There probably isn't enough here yet for management to meaningfully increase the size of the estimated resource, and the market might not figure out its significance until more advancements are made.
Fortunately there is downside protection considering the size of the already delineated resource, and there is the potential for the market to begin to price in the company's highly accomplished management team. With this protection, not to mention leverage to a gold bull market, the cost of waiting for market-moving developments is worth the potential reward.
Ben Kramer-Miller is the chief analyst at miningWEALTH. He is well respected for his unique ability to find under-the-radar precious metals opportunities, as well as for his extensive research into rare earth elements and other critical materials. His research has been featured by Nasdaq, Kitco, Mining.com, The Financial Post, The Globe and Mail, Investing News Network and RealClearDefense, among others.
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