AIM-listed gold producer in Turkey Ariana Resources (AAU) has offered up production guidance for its part-owned Kiziltepe plant as part of the three-way joint venture with Proccea and Ozaltin. We are promised 19,000 oz of gold this year, but read through the numbers and the future looks bright.
Following the corporate action to bring in Ozaltin to the joint venture, and fill its coffers with $37.75 million in the process – of which around half (after taxes and expenses) is to be handed out as a special dividend, Ariana tells us that this year’s target is 19,000 oz of gold. But given that the higher grade Arzu South pit has – for the time being – been exhausted of proved up gold and mining has transferred to Arzu North and Derya (both lower grade), to be promising the same level of production this year seems good going. The key to this is of course the expanded processing capacity currently being installed. The plan is that the increased capacity will reach 500,000 tonnes per year once the expansion is complete, which is expected early in Q3 (a slight delay) but we are also told that the plan is to process 325,000 tonnes this year. If we assume similar gold grades for next year compared to this year, that would imply gold production of 29,000 oz next year – of which 23.5%, or 6,800 oz - goes to Ariana.
Cash costs per oz produced are expected to head up towards $650 in the longer term, which at the current gold price suggests a margin easily of $1000 per oz, which in turn suggests that Ariana will be earning around $6.8 million a year (around £5 million) from Kiziltepe in terms of an operating profit…..plus the by-product of silver. Bearing that in mind, on a market capitalisation of £48 million and with £25 million in the bank, if we strip out the cash then Ariana is being valued on the basis of Kiziltepe alone at £23 million – a PE of less than five. In my view, that is already cheap. But there is still news of the new Tavsan plant to come which will bring in another 30,000 oz gold to the JV and one hopes some considerable excitement to come from Eastern Turkey at Salinbas which already has a 50,000 oz gold plant pencilled in.
The slightly bad news is that the production expansion involved another bank loan, but we are told that 25% of the total (including interest) of $6.6 million has already been repaid and the remaining $5 million is repayable over the next nine quarters, which hardly seems a huge imposition. The original construction loan was fully paid off last year, leaving a working capital loan which is now about 70% repaid, with the remaining $3.1 million due by October. The extra borrowing might be a little disappointing, but it does indicate that the JV’s banking relationships are strong which augers well for the financing of the Tavsan plant and eventually Salinbas. On the other hand, there is also the prospect of possible upside to this year’s 19,000 oz target from recent exploration outside the Arzu North mining reserve, where we are told of significant additional mineralisation which could have a positive impact on the mining schedule, which is nominally targeting circa 19,000 oz gold in 2021. In other words, watch this space for an upgrade. And although the oil price has been moving upwards, we are also told that the Turkish Lira has continued its decline against the US dollar and that dollar-based unit costs are still falling. This is a very strong announcement and whilst Ariana’s shares are up modestly on the news, I suggest there is plenty more to come over the coming months even if the gold price does not go on another bull-run. At 4.55p and at up to 5.5p the stance on these shares (which I own) remains BUY with a target of 7.5p for starters.
Filed under: Ariana Resources, 88 Energy, Eurasia Mining, [email protected] Capital, LPA Group, Tesla
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