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After my mea culpa of June 20th we have had further news. It has taken a bit of time to digest, but overall it looks positive to me, if rather laced with jam-tomorrow. With the share price finally off its low point of just 1.25p, let’s look through the detail.
The first point is that the gold price has been heading higher. For those into squiggles in the sand (and I’m not, for the avoidance of doubt), I gather that $1300 would mark a bull point. But for the fact that the US$ has been weak against all-comers, I might have been interested, but at least it has been rising at last (North Korea seemingly the catalyst).
More importantly the quarterly operational update to 30 June gave some numbers for July which caught my eye. This is a 20,000 oz (gold equivalent) per year operation, so we should be expecting numbers of 1,666 gold equivalent per month. July actually saw 1,370 oz of gold and 6,780 of silver. The gold-equivalent figures were offered on the basis of one sixtieth of the silver in the company’s FY15 report, which puts the number for July at around 1483 oz of gold equivalent. Not quite on target, but we were told that the operation transitioned in to commercial production during July. In other words, for part of the month it was not yet at commercial levels.
Guidance for the rest of 2017 is 10,100 - 11,900 oz of gold and 103,500 – 106,500 oz of silver. That offers us (at the mean rates) gold equivalent figures of 12,750 oz. Given totals so far of 3,300 oz gold and 21,300 oz silver, giving us a gold equivalent of 3,655. Thus for the five remaining months of the year we are to expect 9,095 oz - about 1,819 oz per month, 9.2% higher than forecast.
We are told that the grades of ore mined came in a 4g/t gold and 40g/t silver, and this level is expected to be maintained for 6 months. Meanwhile ore production is being increased to 17,000 tonnes per month, and a further hike to 22,000 by late summer.
That is pretty good news, although there are some flies in the ointment such as the gold price being rather more than 60 x silver. It also looks as though the company has made a point of processing higher grade ore, I imagine in part because cashflow has been delayed by bad weather at the start of the year and there are bank debts to pay down.
That brings up the thorny issue of the placing in late June. Looking back on the RNS, I note the statement that:
The net Proceeds will be used, in part, for working capital support of its joint venture operating company, Zenit Madencilik San. ve Tic. A.S., a 50:50 partnership between Ariana and Proccea Construction Co., prior to the Kiziltepe operation achieving commercial production. The Proceeds will also be directed towards the continued exploration and development of the Company's portfolio of advanced assets in Turkey, including Salinbas and Tavsan.
It seems likely to me that much of the cash raised went to paying down the debt. Indeed, if we look at the table provided by the company of gold and silver sold, we see 2,861 oz gold at $1,247.75 and 19,372 oz silver at $17.04. That comes to $3,899,911 and we are not given production costs. Yet the JV company repaid $4.2 million to Turkiye Finans Bankasi….someone has had to bankroll that.
The reason for the lack of production costs is that it has been in ramp-up and therefore not really a good measure of costs going forwards. I would hope the next quarterly report to be a bit more forthcoming on that score, but the lack of figures leaves one with a question or two.
So where are we now? Forward forecasts for the rest of this year suggest (at $1288 gold and $17.1 silver) monthly turnover of around $2.27 million. Production costs of around $600 per oz would knock off maybe $1.1 million. The company tells us that major loan repayments are scheduled to complete by April 2020 and we know it was a 3 year deal. That in turn suggests that the $33m facility is costing around $0.92m a month, leaving perhaps $0.25 million over each month.
Much depends, then, on production costs, production levels and the gold price but there seems to be a bit of room for manoeuvre. Of course, after April 2020 the debt should have gone and then the cash really starts to flow. Current ore grades are expected for the next six months, but potential increased ore production of perhaps third over planned rates should mitigate. As such, we might expect to see Ariana clocking up something like $7 million (£5.4 million) a year and the life of mine is expected to be up to 12-15 years in the longer term.
At the current 1.375p Ariana is valued at £14.5 million. There seems to be an awful lot of upside there if the company can deliver on $600 per ounce or less – and no more nasty surprises!
Tom Winnifrith may be not so convinced (he sold his shares bought at UKI this year, ignoring my advice, at levels higher than this), but I still think – despite the last few months – I’ll have the last laugh.
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