Anglo Asian Mining - a golden buy?

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Shares in Anglo Asian Mining (AAZ) had recently risen materially, to approaching 75p. They then though slipped back – but recent news looked to have justified the earlier move and more and with gold now starting to motor thanks to stockmarket and bond market jitters... The company is a gold, silver and copper production, development and exploration company operating in Azerbaijan. Its primary operating site is Gedabek, located in a 300 square kilometre contract area in the Lower Caucasus mountains in western Azerbaijan on the Tethyan Tectonic Belt. It is the location of the group's main gold, silver and copper open pit mine; the Ugur open pit mine, underground mine Gadir and processing facilities. A second underground mine, Gosha, is 50 kilometres from Gedabek, with ore mined there processed at Gedabek, and an early stage exploration project, Ordubad, is located in Nakhchivan, South West Azerbaijan.

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CEO Reza Vaziri has been actively involved in business in Azerbaijan since just after its independence and since Anglo Asian’s subsidiary signed a Production Sharing Agreement with the Government has been focused on developing the company. His remuneration in 2017 totalled $662,567 and he has 32,796,830 shares in the company. Another significant boardroom shareholder is non-executive John Sununu, with 10,734,540 shares. He has both industry and government experience – including having served three terms as the Governor of New Hampshire before President George H W Bush appointed him chief of staff. His remuneration from the company last year was $76,342. Chairman Khosrow Zamani has over 30 years of experience in investment and project finance and banking in emerging markets, including having been director of the southern Europe and central Asia department of the private sector lending arm of the World Bank, the International Finance Corporation. His remuneration last year was $127,761 and he has 1,418,352 shares in the company.

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September-announced results for the first half of 2018 showed a swing to a more than $8 million pre-tax profit (H1 2017: $1.3 million loss) on revenue 34% higher at $40 million. This was with increased selling prices (average gold price $1,318 per ounce, average copper price $6,924 per metric tonne) and a 22% year-on-year increase to 37,349 gold equivalent ounces of production “due to mining from the new Ugur open-pit mine and the successful implementation of operational initiatives at the existing Gedabek open-pit and Gadir underground mines”. After particularly a working capital inflow, net debt was reduced by $15.2 million to $2.9 million. Net current assets increased by $11.8 million to $24.4 million, with non-current liabilities $4.8 million increased to $36.4 million. Noting a move into a net cash position after the period-end, a maiden dividend of $0.03 per share was also announced. The results have now been followed by a third quarter update – emphasising “a 28 per cent quarter-on-quarter and a 38 per cent year-on-year increase to 24,412 gold equivalent ounces” and “net cash of $2.8 million at end of September”.

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There is obvious risk in the company currently producing all its products at Gedabek. It though notes close monitoring and robust procedures and that Azerbaijan is outward-looking and desirous of attracting direct foreign investment and that it maintains very close links with all relevant authorities. There is also commodity price risk, though macro conditions sees us positive on this and the company also emphasises robust cost controls and for the half-year “all in sustaining cost of production per ounce of gold (including the Government of Azerbaijan's share) of $543 per ounce, a decrease of 4 per cent. compared to H1 2017 of $564 per ounce... cost of production in the lower quartile of comparable companies ideally positions us to trade satisfactorily through periods of lower metal prices”.

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The company noted the maiden dividend “is both to reward our shareholders and to demonstrate the board's confidence in the future”, though also that “there has been a decrease in the price of both gold and copper since the end of June”. However, as noted above, we are positive looking ahead – also noting optimisation initiatives such as “a second crusher line commenced operation in July 2018. The new crusher, together with the already upgraded grinding circuit, removes a large processing bottleneck”. The latest results also saw the company emphasise “updated JORC (2012) mineral resource for the Gedabek open pit published with over one million ounces of gold to provide further mine life of around five to six years” and “3 year geological exploration programme identified further mineralisation at Gedabek with an airborne geophysical survey to be carried out over the entire Gedabek contract area”. Additionally, house broker SP Angel is looking for continued increased production over the next year and had recently arrived at net asset values of $133 million and $136 million via discounted cash flow (at 8%) and EV/EBITDA multiples for junior/medium sized gold producers. Those presently equate to 88p-90p per current share – and though some scepticism needs to be attached to house broker views, here valuation is also likely supported by a target of “a distribution to shareholders each year comprising approximately 25 per cent of the group's free cash flow”. This thus has the potential to make this a significant dividend payer. Having been recommended at a 63p offer price, our N50 stance is buy at up to 70p, though targeting 85p+ (and more if gold really zooms).

This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website - where this was one of 5 new share tips which went live the week before last - click HERE

Filed under: Anglo Asian Mining, Purplebricks, Neil Woodford, gold, Plus500, Whitbread, Flowtech Fluidpower

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