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Ariana – company chat clearing up a few misunderstandings

By Nigel Somerville | Thursday 16 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.

I said at the weekend that having several times met Kerim Sener, MD at AIM-listed Ariana Resources (AAU), I felt that he was the exception to prove Mark Twain’s rule. In recommending Ariana (1.85p on the offer at the time, so I’m happy to see the shares now on a spread of 2p -  2.15p) my view was that plant completion, production and therefore cashflow were imminent. We’ve had the completion RNS and we now await the paperwork to allow everything to roll. But who gets first dibs at the bunce?

The maths, at the target 20,000 oz gold-equivalent and with $600 production costs and a gold price above $1200 looks very good indeed. Ariana owns 50% of the JV which holds the new plant, alongside Proccea. But there are some bills to pay – a $33 million construction finance facility.

My back-of-an-envelope was that on a ten-year view, Ariana should see something of the order of $34 million from the project, but I have been asked about some additional lending. ShareProphets readers have a very healthy cynicism when it comes to being told the truth: if the RNS is in any way slightly woolly or not exactly specific or qualified in any way, you can bet your boots that there is something you are not being told.

After scouring RNSs and the last Annual Report I still hadn’t turned up any reason why Ariana would not see the sort of amounts I had calculated. That, of course, is not enough. Was the company hiding something? I asked the company.

I am told that the $33 million finance repayments are the direct responsibility of the JV, and that whilst there is no recourse to Ariana itself the assets held in the JV including freehold land and the shares of the JV held by both Ariana and Proccea are on the line.

But then I am told that Proccea provided additional funding to the JV over and above the originally agreed $8 million. Oh, so the cynics are right – Proccea gets first dibs?

Not so fast: Ariana has also lobbed in more by way of exploration spending, and I am told that the resulting loans to the JV by Ariana and Proccea are “not dissimilar” and that it is the intention of the two partners to repay those loans on an equal basis as soon as the free cashflow required is in place.

In other words yes, Proccea is due some loan repayments – but then so is Ariana, and the amounts are of a similar magnitude.

The exact timing of that will obviously depend on commissioning and ramp-up of plant operations as well as the ore grades used (and thus production costs), sale prices achieved and repayments scheduled on the $33 million facility. But there is no reason not to expect Ariana to be on the receiving end of cashflow from the mine from day one.

Further, I am told that once the loans to the JV partners have been sorted they intend to adopt a dividend policy which will then see cash flowing into Ariana’s subsidiary in Turkey (Galata Madencilik).

All we need now is the paperwork to be completed and we are off to the races. I continue to think that if you can get in at under 2p both short-term spivs and longer-term investors will do well. With the shares now through that 2p mark my stance is hold although some may take a more positive view as/when production gets underway, completing the company's journey from explorer to producer.

Just for clarity of disclosure, I still intend to take a bit off the table at above 2p in order to trim an overly-large holding (for me) and bank a bit of profit, but have not done so yet. With news of three rounds of sign-off to come (the first of which I’m expecting very soon indeed) followed by news of the first pour and the gold price still eking marginally higher I reckon there remains a bit more short-term gain to go for here, with an eye cast for the 2.25p mark before trimming back my exposure. After that I’ll be looking for that house broker target of 3p but with a longer-term target of 50,000 oz production there looks to be plenty of longer-term upside to be had on top.

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