I recommended AIM listed Turkey based gold mine developer Ariana Resources (LSE:AAU) on t1ps.com in August 2011 at 4.5p. The shares are now 1.6p and so clearly I have not exactly covered myself in glory. I met up for lunch with CEO Kerim Sener last week for a catch up. Is this a busted flush or could it be a great recovery play for 2013. It is an interesting case study. There are three problems but three assets, let me explain
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The assets start with a 12.5% stake in Tigris Resources. This is a private company run by the well regarded team behind Lydian International. Its last fund raise valued the Ariana stake at c£700,000. It clearly wishes to IPO (probably in Canada) and you would hope for a big uplift when that happens. But market conditions right now are dire.
Secondly the company has a jv with Eldorado Gold in North Eastern Turkey. Eldorado pays for all its costs and drilling is underway. Ariana has a 49% stake in this venture which has spent (Eldorado funding) $4.5 million to date and will spend $1.8 million over the next year. Eldorado funds all costs up to a Definitive Feasibility Study at which point the Ariana holding drops to 20%. Drilling has returned impressive grades (including 55m at 78.8 g/t at Salinbas) and the company is targeting 1m oz deposits. We shall see.
But the flagship project is the Red Rabbit mine which has a JORC resource of 448,000 oz but the whole area is mineralised and Ariana reckons that the ultimate deposit could be much larger. However based on the initial maths it reckons that it could, for $30 million, construct a mine which would produce 21,000 oz per annum over 8 years. The company will operates Red Rabbit in a 50/50 partnership with the giant Turkish construction firm Proccea.
The upside on Red Rabbit is that for the essentially the same capital cost the mine could produce 30,000 oz per annum over 12-15 years if there is additional gold along strike at the main site and at satellite deposits nearby. All the indications are that there is.
The problems. First up is that the Turkish Government introduced a new procedure for gaining construction permits across all industries earlier this year. This has lead to real delays in getting the final permits needed for Red Rabbit construction to begin. Sener says R is in “List 4” which is being considered now. He is sure permits will be given fairly soon. We shall see.
Secondly, to fund its share of mine development Ariana needs c $11 million. Actually this is probably the least of its problems. Proccea should essentially underwrite this and Turkish banks will lend. This is surmountable.
Thirdly the real problem is cash. Were the company to get its permit tomorrow it could probably be producing by Christmas 2013. But it will run out of cash at some stage next Spring. That is not because it has bloated PLC costs. To his credit Sener has never regarded this as a lifestyle business. He has a decent equity stake and I note that Michael de Villiers, another key director, bought shares the other day. Total PLC costs are just £300,000 a year. But Ariana has a $2 million loan which it must start to repay later this year. Quite clearly the company needs to raise £1 million.
And this is the problem. With a market capitalisation of c£5 million AIM is pretty much closed for fund raisings. Ariana needs an external investor to take a strategic stake. Clearly there are a number of Chinese and other groups who are looking. It could also sell its Tigris shares and perhaps do a small placing but why give away “the family silver” when it will be worth a stack more post IPO?
So what is Ariana’s 50% of Red Rabbit worth? On its base case model assuming 8 tears LOM and cash costs of just under $700 oz then – at $1500 gold – Ariana’s share of the free cashflow is $8.8 million a year. Use a $1700 gold price and 50% of 30,000 oz and that increases to $15 million a year plausibly over a lot more than 8 years.
Ariana has issue shares – like all juniors – quite a lot and some folks seem to think this is simply to amass more acreage. But on the “next to basis” acreage around Red Rabbit is worth picking up as it can theoretically enhance the economics of the project materially.
So are the shares a buy or a sell? There are obvious hurdles but Sener has faced greater problems before. He is not an overpaid flash City git. He is a battler and I sense he will pull through. Clearly there are risks but the upside potential is clear. Good news on the permit issue would see the shares jump sharply. On balance I’d have this one down as a small speculative buy – worth a modest flutter.
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Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
Tom’s premium share website The Nifty Fifty was launched on October 28th 2012. Having created and run the t1ps website for 12 year his average gain per tip there was 42.7% (over 241 tips) with an average holding period of 36 months. His new website promises more of the same.
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