The African mining stock you should buy today

Meanwhile, there’s been a lot of bullish talk in MoneyWeek and elsewhere of late about the investing opportunities in Africa. There are certainly fortunes to be made there, particularly in the resources sector, but there are also fortunes to be lost, in which all the usual suspects from corruption to incompetence to conflict will play their part.

But there’s one country that is off the radar. It’s barely mentioned in discussions about Africa – perhaps because it is not really seen as Africa – but to me the opportunities are enormous. That country is Madagascar.

Madagascar is the fourth-largest island in the world. Its population of 15 million are among the world’s poorest. But after decades of economic stagnation and downturn, the country has sustained several years of positive real growth and low inflation, and the public deficit is under some control. The political crises which dogged the country until 2002 are seemingly over with the President focusing on business development as the way to grow the economy and improve living standards. Widespread government reforms have been made, including many in the mining sector, which have slowed illegal activities and created a positive environment for outside investment.

Many of the world's economic development programs such as USAID, the International Monetary Fund and the World Bank Group have committed to significant investments, including a five-year reform program designed to attract large-scale mining projects.

When you then realise that Madagascar is one of the most mineral-rich environments in the world, with an abundance of unexploited gemstone and gold deposits, as well as large deposits of bauxite, coal, copper, lead, manganese, nickel, platinum, titanium, zinc and zirconium, you start to get very excited.

If you want a junior mining company with huge (and fairly immediate) potential upside, there’s one company which, to my mind, is playing the Madagascan game better than anyone. That is Pan-African Mining (CA:PAF). (NB: it is listed in Canada and is not to be confused with the interesting, but altogether different Aim-listed company of the same name).

Pan-African's president, Irwin Olian, is extremely entrepreneurial. The former Harvard man got into Madagascar early, built up a huge network of contacts and, as a consequence, got first call on virtually every opportunity there. After extensive research with six geologists across the whole country, the group chose some 22 properties, staking vast swathes of land. It now has some 12,500 kilometres of diversified mineral properties in total, including gold, gemstones, coal, diamonds, uranium and nickel. It also has some exciting diamond interests in Botswana, some gold operations in Mozambique and a position in Enermad, an unlisted company exploring for oil off the coast of Madagascar.

Of those 22 first-choice properties, the company chose to focus on and develop three: a gold project in the Dabolava region, once one of Madagascar’s main gold mining centres; the Tranamaro uranium deposit; and, currently the most exciting, the Sakoa thermal coal deposit.

Like so many juniors, its stock has sold off over recent months, though its story has got better. The group has over $6m in the bank, so there are no funding problems and, with the lows looking like they’re in place at just below $2, the chart looks well set up.

With exposure to a variety of commodities in such an exciting country, Pan African is a great company to buy and hold.

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But as I mentioned before, there may be some almost-immediate upside opportunity.

Sakoa is one of the largest coal deposits in the world that is not attached to a major. It is no secret that the group has had all sorts of site visits and a lot of big players from Asia, Australia and Africa are sniffing around. With the stock looking so cheap, to my mind, Pan-African looks a prime takeover target.

The set-up looks perfect. Straits Mining recently bought a stake in Red Island, which owns the (smaller) portion of the Sakoa coal deposit not owned by Pan-African. If the same valuation criteria are used on Pan-African’s portion, my calculations give you a price somewhere between $400m-$500m. Given that Pan-African has a current market cap of just $60m, the company is a screaming buy based on this coal asset alone. But the group is receiving significant enquiries about its excellent gold and uranium assets too. And then there are the 19 other assets it hasn't developed yet, and the offshore oil, and the Botswana and Mozambique properties… did I mention them?

If you’re keen to know more then visit Pan African’s website, and you can hear its president, Irwin Olian, interviewed on my radio show here.

Turning to the wider markets…

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In London, the FTSE 100 fell 6 points to end at 5,983. Mortgage bank HBoS was among the main fallers after being downgraded by Credit Suisse, which predicts a 10% fall in UK house prices this year. The oil majors gained as oil prices hit a new record, while miners were higher on rumours that China may want to buy a stake in BHP Billiton.

Across the Channel, the Paris CAC-40 lost 37 points to end the day at 4,874. And in Frankfurt, the DAX-30 slipped 50 points to 6,721.

On Wall Street, US stocks fell as crude oil soared and logistics group UPS warned of weaker profits for the first quarter, amid a slowing economy and higher fuel costs. The Dow Jones fell 49 points to end at 12,527. The broader S&P 500 slipped 11 points, to 1,354, while the tech-heavy Nasdaq shed 26 points to close at 2,322.

In Asia, Japanese stocks fell for the third day in a row, on news that machinery orders declined in February. The Nikkei shed 166 points to close at 12,945.

Crude oil was trading at around $110.76 this morning, while Brent spot was trading at $108.18. Spot gold was trading at around $932 an ounce this morning, rallying on the back of the surge in oil prices. Platinum tracked gold higher, rising to around $2,029, while silver was trading at $18.24.

Turning to forex, sterling was trading at 1.9770 against the dollar, and at 1.2474 against the euro. The dollar was last trading at 0.6314 against the euro and 100.97 against the Japanese yen.

Later today, the Bank of England is expected to cut the base interest rate to 5%, amid fears that the UK is slipping into recession. The Bank’s decision will be announced at mid-day.

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