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Ariana – a buy as we await that production RNS

By Nigel Somerville | Sunday 12 February 2017

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Ariana Resources (AAU) is on the cusp of announcing the commencement of gold and silver production from its Kiziltepe mine, part of the Red Rabbit project in Turkey. But for recent extreme weather conditions it would be there already, but the signs are that the big news of final completion and the move to production are imminent and I expect the shares to react positively when the RNS is finally released containing the word “production”.

The last update, on 31 January, said that the weather conditions were set to improve in the following 10 days and that the last bits of work were expected to be completed during this period. Might we get an RNS first thing tomorrow, then? Maybe, but if not this might present an opportunity to nip in and pick up a few shares. On a closing spread of 1.7p – 1.85p on Friday I think that there is a decent bit of upside to be had even for the short-term spiv.

The yellow metal had a good run last year, peaking at over $1350 per oz and a good many gold stocks duly raced higher, Ariana twice troubling the 2p mark. But the froth was blown off in the autumn, with a low point registered in December of around $1130 per oz and gold stocks followed suit. More recently the traditional value-store of last resort has been quietly edging northwards again, closing last week at $1233. That won’t hinder the path of Ariana’s shares.

I’ve met Ariana’s MD, Kerim Sener, several times and have always felt that he was the exception to prove Mark Twain’s rule. This last-ditch delay is proving very frustrating as I’d hoped to see the shares fly and do a spot of top-slicing by now, but I’m hoping the good news will come extremely soon so as to satisfy my spivvy inclination and leave a reasonable slug in for the longer term.

The company is capitalised at about £16 million (source: ADVFN) and with gold comfortably through the $1200 mark for now the economics of Kiziltepe, the company’s lead project, held in a 50-50 joint venture,  look compelling.

Production costs of $600 per oz are expected and with an annual run-rate of 20,000 oz gold-equivalent the target, my back-of-an-envelope suggests $12.6 million a year being thrown off at that rate – so $6.3 million to Ariana. Once other matters such as a $33 million construction finance facility have been settled that drops Ariana’s share to about £3.6 million a year on average, if one takes a ten-year view (the company is already talking about 11.5 years of mine life, with a target of 15). Of course it won’t get to that rate immediately, but one can see the potential.

Doing the maths on figures from the FY15 Annual Report my calculation is that the gold-equivalent number is based on a gold price of 60 x that of silver. We are currently on a ratio of 68.75, which might drop the overall gold-equivalent production figure of 20,000 oz a year by around 3%. So perhaps that ten-year figure to Ariana should be marked down to £3.4 million.

The catalyst for a re-rating is, of course, for the money to start to flow which will demonstrate not just the value of the project but also the credibility of the management. One would hope that it would also see the periodic issues of equity cease. Project completion and commencement of production will go a long way to achieving that.

First stop looks to be the 2p mark, but I’d be hoping for 3p before too long. I note that house broker Panmure Gordon - biased, natch - has just raised its price target to a shade over 3p. For what it is worth, you can read its latest note HERE.

At 3p the shares would be on about 8 times that £3.4 million a year from the new mine, leaving plenty of room for upside from other projects (Ariana is looking to get its production profile up towards 50,000 oz a year as a longer term target). Of course there should be a discount for the locality being Turkey, but you get the picture: I think that at Friday’s closing mid-price of 1.775p Ariana is cheap, once production is confirmed.

Although Ariana is seen as a gold play, this mine will be throwing off rather more silver than gold (hence the gold-equivalent numbers). This offers a bit of a broadening of economic circumstances under which Ariana can do well, although the economic value of the gold is by some distance the main attraction at current prices.

So my great plan? I’ve picked up a few tranches of this stock over the years at prices ranging from as high as 5p a share in the early days to more recent top-ups at under a penny. Sometimes, just occasionally, averaging down does work as my overall holding is above water - the trick being to do it with good stocks rather than, say, the likes of CloudTag (CTAG) where the eventual outcome surely has to be 0p.

I’ll be looking to offload a few at above 2p as I’ve probably got too much of this one stock and the spiv in me wants to get some cash banked. But I’ll sit and enjoy the ride with the rest, looking for 3p as an early target. Is that original 5p pie-in-the-sky? If the company finds its way up to the 50,000 oz production mark I certainly think not.

For those looking for a quick trade as well as those with a longer-term horizon I would suggest that Ariana offers an opportunity with news of moving into production imminent, if you can get in ahead of that.

At 1.85p on the offer as at Friday’s close, Ariana is a buy.

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