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Given that the company is now producing gold, I’ve been somewhat surprised by the lacklustre response that the market has given Ariana Resources (AAU) since that news came.
The Turkish gold miner announced at the end of March that the first gold pour had been achieved at its Kiziltepe mine, part of the Red Rabbit project area which includes a number of other exploration licences in which Ariana holds up to 100%.
Ariana has managed to bring Kiziltepe to production and has still retained a 50% stake, following a deal with Proccea Construction, and under the terms of the loans which were in place to finance this joint venture, they should be re-paid within three years. In addition to that, any loans made by Ariana and Proccea to the JV company will also be re-paid out of any excess profit, and once that has happened then future profits will be split 51:49 in favour of Ariana.
To me this seems to be the only thing that may be putting investors off, as Ariana isn’t going to see large levels of profit initially. But given that the company is actively looking to increase reserves and sees a mine life of around ten years, then I still think the company has plenty of potential as a longer term investment if you are prepared to be patient.
This first pour produced 5.25kg of gold equivalent and the mine is expected to be operating at full capacity at any time now, at which point it will be producing 20,000 ounces per annum. Based on the existing reserves estimates, that will last for eight years (not including the higher reserves figures which the company is expecting, and extended mine life as a result), and during that time it will produce 160,000 ounces of gold equivalent.
Once the company is in a position where all the debts have been repaid - including the loan to itself to fund the joint venture, which stood at over £3.2 million as at the last interims and I would imagine is higher now – and given a cash cost of production of around $600/oz, then the company should be in a very good position. At current gold prices that would result in an operating profit of in the region of $7 million net to Ariana.
To put that into context, the market cap of the company is only just over £14 million currently, so basically is pricing in a couple of years of the profit-share from production (post loan repayments) plus the loan repayment, assuming of course that the gold price doesn’t collapse.
Obviously it will take a while for this cash to start flowing into Ariana and it could well be that investors are waiting for that to happen, but once we are anywhere close to that point I doubt there will be an opportunity to buy at anywhere close to the current share price of 1.75p.
There may also be some concerns about the current cash position of the company, but given that admin costs in the last interims were only running at around £60,000 per month, and £900,000 was raised in January specifically for other projects and for working capital, I wouldn’t expect any sort of fundraising. If that was needed for work on the other projects – such as the recent Karakavak drilling, also on Red Rabbit – then it might be possible for the company to borrow money against future gold sales anyway, rather than an equity raise.
Other than the fact that these shares are unlikely to rocket overnight, which unfortunately seems to be what many are looking for on AIM these days, I can’t really see a lot here not to like at the current valuation, and think that it offers decent risk versus reward, even if you are just neutral on gold prices in the coming years from the current level.
Plus, aside from Kiziltepe the company also has other prospects going forwards, albeit at much earlier stages, but there is plenty of potential upside in the share price from those as well.
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