Investing in ASX miners: The high-stakes game of African projects

West African Resources (ASX: WAF) is the latest Africa-based name to experience a tumultuous week, with a 19.5% selloff on Monday followed by a 7.5% rebound on Tuesday. The volatility stemmed from reports that Burkina Faso planned to revoke mining permits from foreign companies.

Burkina Faso's military leader Ibrahim Traore stated, "We know how to mine our gold, and I don't understand why we're letting multinationals do it. In fact, we're going to withdraw mining permits."

WAF, which operates two projects in the region – the Sanbrado Gold Mine and the Kiaka Gold Project – clarified that the President's comments were "directed to those companies operating in violation of Burkina Faso's laws."

The company assured investors that operations at Sanbrado and construction at Kiaka were progressing uninterrupted, reiterating its full-year guidance of 190-210,000 ounces of gold.

Attractive Valuations

Africa-based miners typically trade at substantial discounts compared to peers in tier-one jurisdictions like Australia and Canada. Let's compare West African Resources with gold peers Northern Star (ASX: NST) and Evolution Mining (ASX: EVN) using EV/EBITDA multiples from Macquarie (as at August 2024).

Source: Macquarie August 2024

To add some perspective, WAF's Kiaka Gold project, set to come online in 2025, is expected to double the company's gold production from approximately 209,000 ounces in 2024 to over 400,000 ounces by 2026.

Justifiable Discounts

The lower valuations reflect potential sovereign, geopolitical, and operating risks. Companies in these regions are vulnerable to sudden changes, such as military coups, government free-carry interests or increased mining taxes.

Leo Lithium (ASX: LLL) exemplifies how quickly situations can deteriorate. Developing the world's fifth-largest spodumene deposit in Mali, the company faced a two-month trading suspension in July 2023. Upon resuming trading, its stock crashed 50% as the local government halted plans to ship its first ore. Mali also adopted a new mining code, increasing the government's stake in resource projects to 20%.

Given the challenging circumstances, Leo Lithium has now opted to sell its remaining 40% stake in the project to its joint-venture partner Gangfeng for US$342 million.

"After careful evaluation, the Board believes the Proposed Transaction provides Shareholders with certainty of value and the lowest risk profile of the options available," noted a recent company presentation.

Recent Developments in Burkina Faso

In early August, Burkina Faso introduced a new mining code, increasing the state's free-carried equity interest from 10% to 15% and proposing to reduce initial mining permit tenures from 20 to 10 years.

While WAF assured investors that the new code would only apply to new projects and pending applications, the news still drove its shares down 10.8% on August 8, 2024.

Potential for Outperformance

Despite these concerns, WAF has consistently met production guidance and offers stronger growth prospects than many Australian peers. During commodity price rallies, these discounted stocks often outperform as market focus shifts from risks to earnings potential.

Gold has been one of the best-performing commodities in the past year, up 40% to record levels. WAF has emerged as a top performer among large-cap gold stocks, with its twelve-month gain now at 106% (down from 160% due to recent concerns).

West African Resources (green), Perseus Mining (red), Northern Star (orange) and Newmont (blue) chart | Source: TradingView

This pattern of outperformance during sector rallies is not unique to WAF.

Leo Lithium experienced a similar trajectory, rallying almost 170% between April and July 2023. This performance far outpaced peers like Pilbara Minerals and IGO. But those gains vapourised after its challenges with the Mali government.

Leo Lithium (blue), Pilbara Minerals (red), IGO (orange) and Liontown (green) chart | Source: TradingView

Overall, Africa-based miners offer significant upside potential. However, they are also perpetually vulnerable to sudden, often unpredictable setbacks. These stocks aren't an easy hold as a single headline can send share prices plummeting. As the saying goes, you have to "risk it for the biscuit."