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By Nigel Somerville | Tuesday 16 October 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 Turkish gold miner Ariana Resources (AAU) has again announced record gold production from its joint-venture Kiziltepe plant, part of the Red Rabbit project, during its third quarter this year. Production is up to 7,588 ounces of gold (plus 70,346 oz of silver) for Q3 to bring the total for the year so far to 19,625 oz – as against the guidance of 20,000 oz for the full year. Way to go! If they keep that up, the total for the year will be in excess of 27,000 oz – a classic case of underpromising and overdelivering.
I had predicted back in April that the guidance figure could be easily beaten, and that now looks to be a slam-dunk certainty. Indeed, it is black and white for the company states: The Company will exceed its full year production guidance of 20,000 ounces of gold, having achieved a total of 19,625 ounces by the end of Q3.
The figure offered for the total ore processed is down on last month (46,214 tonnes vs 49,325 tonnes) but we learn that this was only to 24 September. If we assume the processing continued at the same rate for the last 6 days of September the processed ore figure comes in at 57,767 tonnes - a sharp increase on Q2 of 17%. So the increased production was not just from mining the highest grade ore: it seems that the plant is performing very robustly. My analysis had suggested 23,000 oz gold would be produced. Now I think that even if there is a problem we should see 25,000 oz and perhaps as much as 27,000. It is all good.
We are also told that the average head grade of ore processed was 4.43 grams per tonne of gold – a decline on the 4.77 grams per tonne of Q2. Meanwhile the gold recovery rates were 93.9% as against 94.3% for Q2. So this increase in production is because the plant has successfully processed more material. We will have to wait until early November for the financial effect of these numbers. Gold has been weak through Q3 (although it seems to be picking up now). On the other hand, the production costs (labour etc) is paid in Turkish Lira which fell sharply during August and seems to have settled at around $0.16-0.17 having been $0.22 or higher during Q2.
Q2 showed operating cash costs of just $371 per ounce of gold produced, against an average realised gold price of $1292 (which includes an adjustment for by-production silver). Thus, with the Lira down again I would imagine that the decline of the gold price will be easily eaten up by reduced costs - and that bodes well for Ariana’s cash balances as JV loans are repaid. We also don’t know how much debt has fallen due under loans to the JV from Turkiye Finans Bank during the quarter. But my eye is on April 2020, when the bank will have been settled and half of the free cashflow starts rolling in to Ariana. That is now less than 18 months away, and I still reckon on up to £7.7 million a year to Ariana, yet Ariana is capitalised at just £12.7 million with resources which could last another 13 years.
As we edge closer to April 2020 the prospect of dilutive placings edges away, even if Ariana decides to spend heavily on the Hot Gold Corridor around Salinbas in Eastern Turkey. Ariana may be out of favour, but its day will come. What I hope is that the management show the same patience as shareholders and don’t go on a discounted placing fest to expand. It does look as though the script is being followed. The stance remains unchanged: buy at 1.25p with a target of 2p (at least).
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