Buy Ariana resources at 1.55p for almost 25% upside says loyal shareholder Nigel Somerville

AIM-listed Ariana (AAU) has announced completion of an initial exploration at its Hot Gold Corridor  in north-eastern Turkey. Full marks for the name of the prospect! You can read the technical stuff of the RNS HERE, but essentially it sounds as though it thinks it has got some good readings for from copper, lead and zinc readings which leads Ariana to expect to find gold and silver and targets which are already being generated from detailed mapping.

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It sounds exciting, and potential targets for Salinbas-type epithermal mineralisation and/or systems related to copper-gold porphyries have been identified, one area prioritised for immediate work to identify possible gold-silver mineralisation, and other anomalous geochemical results show potential of additional mineralisation zones. In other words, unlike UK Oil and Gas, we have the possibility of substantial resource finds – what’s different is that certainty it is not yet reflected in the share price. From a personal perspective, essentially we might hope for good news in the months ahead but I’m not relying on it (yet).

The Hot Gold Corridor runs out of Ariana’s wholly-owned Salinbas prospect northwards a little way to the company’s Ardala and Ardala North targets, and south down towards the 4m oz Hot Maden deposit (sadly not owned by Ariana!) and the company is predicting other Salinbas-type deposits will occur within the region. Salinbas itself has already had a JORC estimate of 648,900 oz Gold and 3,274,200 Silver in the Indicated and Inferred category dating from 2015, with nearby Ardala showing a further 323,000 oz Gold in the inferred category in 2013, alongside 10,000 tonnes of Copper and 2,400 of Molybdenum. Of course, further work will be needed to confirm numbers to a greater degree of certainty but measured grades were promising.

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You have to be careful what you wish for. With government and consumer debt still rising alarmingly and economic growth pedestrian, for my money it was a matter of time before the yellow metal moved higher again. Events in Korea have brought that forward, so we have a bit of a spring in both gold and silver going on at the moment. Last seen, gold has pushed past $1350 and silver $18.1. Quite a hike, and one which Ariana will be enjoying at the moment with reference to its producing mine at Kiziltepe. Production guidance given at the end of July was for FY17 production of 10,100 – 11,900 oz of gold and 103,500 – 106,500 oz of silver. With 3,300 oz gold and 21,300 oz of silver already produced at that time, that suggests (taking the mid-range values) 7,700 oz gold and 83,700 oz silver to come by the end of December. That is 1,540 oz gold and 16,740 oz silver per month.

Factor in the recent rises of both metals, that should come to $2.38 million a month. Production expenses should come in at around $600 per oz (gold equivalent) - around $1.09 million – although a clearer idea will come with the next quarterly report (early next month). But the above suggests around $1.29 million being thrown off, with perhaps $0.92 million taken by the bank loan. So $0.37 million a month to play with for the joint venture production company. Of course, there will be costs for management and ongoing capex, but the margin for error is growing even if (as I understand) they are still a bit behind on where they want to be with the bank loan payments. Eventually, we should see some of that $0.37 million a month finding its way back to the 50-50 joint venture parters. Putting comments to Kerim Senner, I was told that Ariana was “not cashflow positive – yet”. Maybe not, but perhaps soon.

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In April 2020 the debts will be paid off. On current prices the mine would see a 50-50 split of profits result in $0.645 million a month to Ariana - $7.74 million a year for perhaps ten years plus. With a market capitalisation of £16.3 million, I still fancy this company for a decent gain on the back of this one project. But Salinbas and the Hot Gold Corridor may yet serve up a pleasant surprise. They are trying to define a series of drill targets which can be systematically tested in the future. That’s all very well, but the prospect of a sale interests me. There was some indication back in April at the UK Investor show, and it is still clearly on the agenda. I’m told that targets may prove too compelling not to be tested first by Ariana (assuming the budget is available), and a JV may also be possible. So much to wait for in terms of exploration results and with a following wind maybe even some corporate activity.

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What we need now is good production figures form Kiziltepe and associated costs per oz for the quarterly report to the end of this month. I gather early October is planned, which suggests it may be good news – we shall see. But if we get what I expect then we should see some further moves in the share price. As for Salinbas and the Hot Gold Corridor, it looks interesting but nothing is in the bag yet. The next few months just might change that, but let’s not assume it for now. After sporting some considerable egg of face having failed to take profits on the rise up to around 2.2p and watching the drift downwards culminating in a placing at jut 1.25p, I said I would have the last laugh after Tom Winnifrith’s (justifiable) reservations when he sold the shares picked up at MI at prices a little north of 1.4p. 

What I should have done was cash in at 2.2p and waited to get in again. But we are where we are and at 1.575p I sense we are on the way again. There is a bit to go yet before the smile fully breaks out, but I’m quietly confident. I still reckon it is a buy, but with the painful £2 million placing still in mind, 2p seems a good target for now. Even allowing for the spread that leaves 25% upside, assuming all goes well. 

Lessons from BNN, MySQUAR and Other Matters from Lucian Miers HERE

Filed under: Ariana Resources, AAU, shares, AIM, Nigel Somerville, Lucian Miers, Tom Winnifrith, Bearcast, Red Ra

2017-09-10 16:09:15

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