Papillon up but struggling

West African gold developer Papillon Resources has been producing some of the most stunning results of any gold company in the world, but it has taken the announcement of another company to produce a 26 per cent bounce in its stock price since May 20.

West African gold developer Papillon Resources has been producing some of the most stunning results of any gold company in the world, but it has taken the announcement of another company to produce a 26 per cent bounce in its stock price since May 20.

On that day, London-based Randgold Resources, which has a market cap of close to $US7 billion, said it had established a $US200 million credit facility "for general corporate purposes". Randgold also happens to be Africa's biggest gold miner.

Investors have obviously interpreted this as "game on" for Randgold to start acquiring assets on the cheap in Africa, and it is not surprising that attention has focused on Papillon (ASX code PIR) with its world-class Fekola gold project in Mali. Prior to the announcement, Randgold had struck a deal with the Malian government to waive royalty payments at one of its depleting mine assets to encourage continued production at the site.

There is no doubt Papillon is cheap at 83¢ a share. In late March, investors, both big and small, put their hands in their pockets, allowing Papillon to raise just under $53 million at $1.34 a share. Under the Radar is not aware of any other gold company achieving this feat in recent times.

But still, it is struggling. Even after the recent bounce, at 85¢ its stock has more than halved in the past six months, having gone close to $2 a share in October last year.

Not only has the stock been hit by a falling gold price, but there has also been a civil war in Mali. But in Fekola, Papillon has one of the best deposits in the world, according to Trent Allen, who works for Blue Ocean Equities: "[Fekola] has scale, grade and the metallurgy seems to be favourable, plus it looks very mineable. For a company like Randgold that's already in Mali, these positives could outweigh any political and operational risks."

In mid-May it published drill results showing mineralisation extending beyond its existing 4.2 million ounce resource. The results included a 105-metre intersection containing a grade of 4.3 grams of gold at a depth of 310 metres.

But Mali's situation remains difficult. Following the fall of Muammar Gaddafi in October 2011, Mali transformed from a peaceful state into a desert haven for an array of violent militia and criminal groups. Then in March 2012, the army seized power from long-time president Amadou Toumani Toure and declared the nation's borders closed.

Things have calmed down significantly in Mali since then due to successful French-led military intervention. But there are still significant rumblings as Mali's army moves into a showdown with Tuareg separatists and the National Movement for the Liberation of Azawad. Obviously, the situation is very complicated, which underlines the risk involved in any investment in an African miner.

Richard Hemming edits the newsletter Under the Radar Report: Small Caps.

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