Introduction A few weeks ago, I said Banro (NYSEMKT:BAA), which is operating two gold mines in the Democratic Republic of Congo, could be an interesting contrarian investment. I know I always focus on companies operating in safe and reliable regions, but Banro's future actually looks pretty good - that is, if the DRC doesn't ruin this party. In this article I will have a look at the most recent production update to check if the company is still on track to meet my expectations. Good production results at both Twangiza and Namoya indicate the company is doing well The gold production at the Twangiza and Namoya mines came in at 44,850 ounces of gold, to which the Twangiza mine was the main contributor with a total production of just over 34,000 ounces of gold, in line with its production rate in the first quarter.
Source: company presentation I'm particularly pleased with the results at the Twangiza mine. Banro has been trying to debottleneck the production process there by blending the oxide ore with non-oxide material. This means that the higher grade ore from the Twangiza mine has been blended with lower grade ore to deliver a lower-grade but profitable head grade to the processing plant. Twangiza has now produced just over 70,000 ounces of gold in the first half of the financial year, and this is considerably higher than the 9,000 ounces per month (or less than 55,000 ounces for the entire year) Banro was expecting to produce. This is fantastic, and the company has now increased its production guidance for 2015 to 115,000-125,000 ounces of gold, resulting in an expected gold production of 45,000-55,000 ounces for the second half of this year.
Source: company presentation At Namoya the production rate increased to 10,525 ounces of gold compared to 9,254 ounces in the first quarter of this year. That's quite a nice 13.7% production increase but there will be more to come. The production results at Namoya are directly correlated to a) the amount of ore stacked and b) the average grade of the ore stacked. The average grade of the stacked ore did decrease in the second quarter of this year to 1.53 g/t (from 1.97 g/t in Q1), but as the total amount of ore stacked increased by almost 30%, the grade drop will - over time- be compensated by the higher amount of tonnes on the lead pad. Is there a specific explanation for the performance? At Twangiza, you'd expect the gold production to go down quite a lot as the average grade dropped by quite a substantial amount from 3.21 g/t to 3.01 g/t. The fact the production drop remained limited to roughly 5% was due to the fact the average recovery rate increased to 82.2%, and this 2% increase is actually quite important in the greater scheme of things, as it means the company's blending strategy is starting to pay off. At Namoya, it's of utmost importance to increase the stacking rate as fast as possible, and whereas the company stacked just 255,000 tonnes of ore in Q1 2015, this already increased to 330,000 tonnes in Q2. This is a nice increase of 30%, but it gets even better than what the headlines would make you think. In fact, the stacking levels in April were horribly low (less than 60,000 tonnes), but the company was able to compensate for this by a very strong May and June month as in excess of 140,000 tonnes were stacked in June.
Source: company presentation But there's more! The average stacking rate in H2 June and early July was 5,000 tonnes per day, and this should increase to 6,000 tonnes per day by the end of this month. This means that if I'd use a stacking rate of 155,000 tonnes for July, 186,000 tonnes for August and 180,000 tonnes for September, the total amount of ore stacked should increase to in excess of half a million tonnes, another 50%+ jump, and this should result in a much higher production rate from Q4 on. Investment thesis Yes, Banro Gold is still on track, and even though you might not be blown away by the Q2 production numbers (although they are pretty good!), I think the Namoya mine will start to surprise from the fourth quarter on, as then the gold will be recovered from the ore which is being stacked right now. The second half of this year will be incredibly important for Banro, as I would expect a lot of positive cash flow being generated. I hope the cash will be spent wisely on both increasing the operational efficiency at both Twangiza and Namoya, and to pay the company's outstanding debt down as fast as humanly possible. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BAA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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