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By Nigel Somerville, the Deputy Sheriff of AIM | Tuesday 13 March 2018
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 Ariana Resources (AAU) has released production guidance at its JV operation at Kiziltepe in Turkey for 2018. The big headline is that the forecast gold production has been upped to 20,000 oz, but there are a few more interesting nuggets to be found.
The original plan was that Kiziltepe would produce 20,000 “gold-equivalent” per year, which included silver. Now the plan is to produce 20,000 of actual gold this year – and we are told that this is 21% up on the feasibility plan for the second year of production.
That is a very decent upgrade, and should lead to a bit more cash becoming available to Ariana by way of loan repayments from the JV company. Better still, we are told that repayments have now commenced (in instalments) during this quarter, although we are not given a quantum for those payments, but at least cash is now flowing to Ariana rather than the other way around.
I would hope the company will flesh that out when it produces the quarterly report for the period to the end of March: I’d like to know how much cash! Is it enough to cover plc costs? Is it enough to cover ongoing work at Salinbas?.
We are also told that the JV continues to target increases in production and life of mine. I would expect the life of mine to eventually hit something of the order of 15 years, but there isn’t any great rush for that right now and Ariana understandably seems in no hurry – there are plenty of years’ supply already in the can and more pressing needs to address. But they are still looking for increases in production and that is of interest, as it would allow more cash to flow back to Ariana sooner.
Ariana’s shares ticked up a noggin on the news, but I believe they still fail to discount where the company is. Part of that will, I have no doubt, be fears of a fundraising. But we have already had indications that Ariana can be self-funding – the fly in the ointment is what the board decides to do with its Hot Gold Corridor project around Salinbas.
We will have to wait and see what happens there: might they JV the project out, or perhaps even accept a bid? Or will Ariana go it alone (for the time being) and up the exploration spend to a point where it needs to tap the market for more funds? That last possibility is, I fear, why the shares have yet to price in the fact that Kiziltepe will – in just over two year – be generating pots of cash for Ariana, having paid off the bank loans.
It might appear a simplistic view, but if Ariana really wants to go it alone at Salinbas I would prefer to wait for Kiziltepe to fund it rather than get done over once again by a dilutive super cut-price placing. My view is firmly that this would see Ariana re-rated quite sharply as fears of dilution are blown away.
On the other hand, if exploration really shows promise, you would want the project to go as fast as possible. I’m glad its not my decision!
Of course, a rabbit could be pulled from the hat in the form of a partner – which could provide the cash to accelerate the work, but leave the bucket shops out of the equation.
For the time being, Ariana’s equity is worth just £14.3 million, but will be getting something of the order of £5 million a year from 2020 for possibly 12 years (no doubt less a bit for repairs and maintenance and expansion, but you get the picture). That looks extremely cheap – even after you have included outstanding warrants/options. Salinbas offer (for me, for now) a speculative wildcard on top.
Ariana’s boss, Kerim Senner, is ambitious and will want to get on with Salinbas. But he is no fool and won’t want to push Salinbas if it does not make shareholders money. What price a couple of year’s patience?!
Ariana is still a BUY: I believe patience will be well rewarded here.
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