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.
AIM-listed gold and silver in Turkey play Ariana Resources (AAU) has announced the first gold/silver pour at its new joint venture Kiziltepe plant in Turkey. It has been a long road but this marks the moment when Ariana completes the transition from explorer to producer – cracking news for head honcho Kerim Sener and his team. So what now?
The market reaction was rather muted, perhaps playing out the old adage that it is better to travel than to arrive. But I’m not sure that the market has really worked out the destination.
Having suggested the shares as a short-term play ahead of first production just last month at 1.85p offer I continue to see value here. The shares closed on Friday at 1.95p, valuing the company at £17.5 million (source: ADVFN) which seems modest even in the face of just this first project getting off the ground. My view is that we should see further upside in the as the market digests the news that Ariana is now a producer. Apart from the maths on the Kiziltepe plant there is a pipeline of other projects to consider. In the light of the company’s success at turning its first pipe-dream into reality, plans to see production at Tasvan and Salinbas in the fullness of time should have more credibility.
Kiziltepe is (roughly) 50-50 owned with Proccea via a joint-venture company. It has about $33 million of bank debt to pay off over the next three years as well as smaller loans from the joint venture partners Ariana and Proccea which I gather are not dissimilar to each other. The bank debt repayment schedule will be top of the list in terms of handing out the loot from the new plant, with any spare cash paying down the loans from the JV partners. There is also a net smelter royalty of up to 2.5% payable to Franco Nevada Corporation. After that it is a straight 51:49% split (in favour of Ariana).
The company has a formal 8-year life but exploration is expected to bring this upwards sharply, with recent talk of taking that up to 11.5 years, and perhaps 15 years in the end. But let’s just consider 8 years of 20,000 oz gold-equivalent per annum with costs of $600 per oz. If we take a gold price of $1240 that suggests a $640 margin. Knock off the (up to) 2.5% royalty and the margin comes down to $609 per oz - $12.18 million annualised, or $97.44 million over 8 years.
Knock off the $33 million of bank debt payable and we are down to $64.44 million. Given that the loans from the JV partners are not dissimilar that suggests cashflow to Ariana of in the region of $32-33 million over 8 years – around £26 million.
If the life of mine figure heads up to 15 years then we are looking at something like £66 million to Ariana – less additional exploration costs, granted, and there are bound to be some additional plant costs but against the £17.5 million market capitalisation Ariana looks cheap in my book just on the basis of this one project.
Ariana has further projects in the pipeline which it hopes will see the company move to a 50,000 oz per year profile. The Tasvan project is another JV and Salinbas is (pro tem) wholly owned. There is also a more recent foray into the world of lithium (although perhaps unfairly I find that hard to get excited about given that lithium seems to be the ramp du jour on AIM).
From a longer term perspective, therefore, there is plenty of upside on offer here. If Kiziltepe brings in anything like £66 million to Ariana over the next 15 years (3.8 times Ariana’s current market capitalisation) Ariana looks cheap. And there are the bonuses of other projects in the pipeline.
We are told that between now and April 2020 Kiziltepe will be paying down its major loan from Turkiye Finans and that any excess cash will then pay down loans from the JV partners. After that Ariana gets 51%. We already know that the bank debt involves payments totalling $33 million under a pre-determined schedule.
With Kiziltepe generating perhaps $12.2 million a year (once full production is achieved, and at current gold prices) that doesn’t leave an awful lot of cash left over for the JV partners – perhaps half a million pounds to Ariana per year if all goes well. So the cash bonanza won’t kick in until the bank has been paid off. Mr Market is not a patient investor - his loss, my gain.
As a general point, we have seen how overindebtedness can destroy companies – one only need look at the oil/gas plays which have fallen by the wayside in recent times. The cash coming in from Kiziltepe may be relatively small for the first three years, but seeing all the debt paid off quickly strikes me as very sensible.
One might also want to take a view on the gold price. It has been quietly improving, bar the odd wobble, for some while now and I find it hard not to see upside risk. That would release further cash to Ariana, with a $10 rise in the gold price resulting in about £150,000 of free cash for the JV partners to split. Clearly a $100 improvement would make a substantial improvement for Ariana’s cashflow. Of course, the converse is true….oh, the joys of operational gearing!
I note that house broker Panmure Gordon (ahead of the Bob Diamond takeover) reiterated its “buy” stance. It’s last number for a share price target was just north of 3p – take that with whatever size pinch of salt you wish, as it is hardly independent. But I would imagine Friday’s news will see that number cranked a little higher in due course.
Ariana has now shown that it is more than just a pipe-dream company sporting a hole in the ground with a liar at the top, to paraphrase the comment attributed to Mark Twain. It has delivered its first working mine which to my mind leaves the shares looking cheap on its own. The other projects are essentially in for free.
At some point the market will wake up to the delivery, start to price in the other projects and take some account of the asset base which has been patiently built up – not to mention future cashflows. The opportunity for the patient is clear.
As we await updates regarding production ramp-up to the target annual rate of 20,000 oz gold-equivalent (through Q2, so perhaps with a following wind reaching the full rate in June) I continue to believe that there is further short-term upside. Panmure may be looking for 3p but I’ll settle for 2.25p for a chunk of mine as I look to take a bit of cash off the table and leave some in for the ride.
In the short term I think we should see some further gains as the market digests Friday’s news, having had the weekend to think about it.
Having stated my intention to take some off the table at 2.25p (I’ve not sold any yet) I’ll stick to that for the purposes of the recommendation, meaning that anyone who got in 1.85p would then see just over a 20% gain in a short space of time – assuming the shares get there. I’m sure they will.
With the shares finishing last week at 2p to buy, the stance for the time being is hold with a view to banking some gains at 2.25p – which is what I’ll be doing.
Ariana will be one of more than 120 companies exhibiting at the UK Investor Show next Saturday, ready to be grilled and quizzed by investors. Tickets are running out fast, but you can grab one of the last ones for free by clicking HERE and ordering an Investor Class seat using the promotional code UK6.
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