ariana resources · repayments by zenit to turkiye finans katilim bankasi a.s. have been made on...
TRANSCRIPT
fn3
27 November 2018
Equity Research
Target Price: 2.82p (2.75p)
Share Price: 1.30p
Key Data Market Cap £14m
DS Mining 13,873
Sector Mining
Stock Codes ARNR.L / AAU LN
Last Published Research: 12 November 2018
Absolute & Relative Performance
— Absolute
— Relative to DS Mining
Source Datastream
Investment Research
0.93
1.13
1.33
1.53
1.73
1.93
2.13
N D J F M A M J J A S O N D J F M A M J J A S O N
Kieron Hodgson +44 (0)20 7886 2773
Panmure Gordon (UK) Limited Please refer to the important disclosures shown towards the back of this note
Panmure Gordon & Co acts as Corporate Broker in the UK to Ariana Resources
Ariana Resources d
Discounted, but for how long?
As noted before, Ariana - the only small-cap gold mining company that carries a
Panmure Buy recommendation - announced that it had met its FY2018 production
targets in just nine months. The company’s shares, despite the wider revaluation of
gold miners, remain, in our view undervalued. We have reviewed the update and
undertaken a virtual Q&A to answer some of the questions that we have received.
Q3 Operational Update – Ariana’s Q3 Operational Update continued the trend of
above plan production, resulting in FY2018 guidance of 20koz almost reached in nine
months. The production and sale of 7,588ozs in Q3 (+6% quarter on quarter) was
supported by average grades remaining above plan at 4.94g/t Au. Income for the JV
during the quarter was $10.12million, at a revenue per gold ounce of $1,334 (due to
silver credits). Operating cash costs for the quarter are estimated at $330/oz, largely
due to the decline in the Turkish Lira during the period (28%). Importantly, capital loan
repayments by Zenit to Turkiye Finans Katilim Bankasi A.S. have been made on their
scheduled basis and reached $13.2 million at the end of September 2018 with
$19.8million outstanding. Monthly intercompany loan repayments from the JV to
Ariana’s wholly owned subsidiary, Galata Madencilik San. ve Tic. Ltd. in the year to date
have now reached ~$1.6 million.
Model updated – Following the Q3 Operational Update, we have undertaken a review
of the Ariana portfolio. After applying our new commodity forecasts as per our recent
commodity sector note “The Quarterly Nugget” and using a 10% discount rate, we
estimate that Ariana is currently trading on a P/NAV of 0.5x. In our view, this discount
is excessive given the low-cost and profitable nature of the operations at Kiziltepe.
Further supporting our view is that, at our 10% cost of capital, the long-term price of
gold to justify the current equity valuation is below $1,000/oz.
Reiterate Buy recommendation with increased target price of 2.82p (2.75p) – Our
target price, normally generated by using a blended average of NAV/Share, EPS and
cash flow/share is not applicable at this time. Instead we use a risk adjusted SOTP for
each operation. Our target price of 2.82p (2.75p) offers significant upside to investors
as Ariana continues to increase its production from Kiziltepe and develop its
longer-term portfolio of assets.
Year End Sales PBTA EPS DPS ord P/E EV/EBITDA Yield
Dec (£m) (£m) (p) (p) (x) (x) (%)
2017A 0.0 0.5 0.1 0.0 26.0 14.2 0.0
2018E 2.4 1.0 0.1 0.0 14.4 12.2 0.0
2019E 0.4 (0.9) (0.1) 0.0 n/a (13.4) 0.0
2020E 2.0 0.5 0.1 0.0 26.0 20.0 0.0
Source Company Data, Panmure Gordon
Ariana Resources Company Overview
27 November 2018 2
COMPANY OVERVIEW
Ariana Resources is a gold exploration and development company with a focus on the
Western Anatolian Volcanic and Extensional (WAVE) Province in western Turkey, host to some
of the largest operational gold mines in Europe. The company’s flagship operation, the Kiziltepe
Mine, held within the Red Rabbit Gold-Silver Project in Western Turkey commenced commercial
production in March 2017. Kiziltepe has been developed within a 50:50 Joint Venture with
Proccea Construction Co.
Additionally, multiple resource opportunities exist proximal to the Red Rabbit Gold-Silver
Project and the company has an exciting exploration portfolio in North Eastern Turkey, at the
Salinbas Project, which has already been credited with over 1Moz of indicated and inferred gold
equivalent ounces.
Location of Ariana’s primary operations
Source Ariana Resources
INVESTMENT CASE Growing resource base to support a longer-life mining plan;
Significant exploration potential;
Commercial production achieved in mid-2017;
Low cost operational profile;
Supportive and capable operational partner in Proccea.
INVESTOR CONCERNS Gold price;
Political/geographical risk;
Development/permitting delays and cost inflation;
Gold production shortfalls.
Ariana Resources Q3 Operational update
27 November 2018 3
Q3 OPERATIONAL UPDATE
Ariana announced its Q3 operational update on 12 November confirming year-to-date
production continues to run ahead of prior guidance. Accordingly, we have increased our
production target for FY2018 and modestly increased FY2019 and FY2020, given the
consistent production witnessed to-date at the Red Rabbit Joint Venture. We have
summarised the recent production results and offered our thoughts as to relevant
questions that should be asked by investors.
Unit Q3 2018 Q3 2017 PG Est
Open Pit – ore mined Tonnes 60,000 55,800 50,000
Process plant throughput Tonnes 46,214 35,049 45,000
Plant feed grade g/t Au 4.43 3.46 3.90
Metallurgical recovery rate % 93.9 94.5 92.0
Gold produced Troy Ounces 7,588 3,762 5,366
Silver produced Troy Ounces 70,346 15,985 30,382
Source Ariana Resources, Panmure Gordon
Ariana’s latest update on 12 November continued a trend of outperformance vs market
expectations that has been a theme for 2018. However, in our view, the shares have
failed to keep apace of the positive developments at Ariana. As a result, we will attempt
to provide a brief virtual Q&A to cover what we believe the salient points are for
investors to consider:
Many small mining companies fail to meet their financial obligations, why is Ariana different
and why does it matter?
The Kiziltepe operation benefits from low total cash costs (TCC) and All-in Sustaining costs
(AISC). We estimate $421/oz and $595/oz in FY2018, rising to $457/oz and $674/oz in
FY2019. But the key to our confidence, at such an early stage of operation and the key to
shareholder returns, is in the All-in cost of production - inclusive of loan repayment
obligations and administrative costs. Inclusive of all these costs, we estimate the all-in cost
of production at Kiziltepe in FY2019 - in a year that loan repayments peak at ~$12m before
falling to ~$8m in FY2020 - to be ~$1,150/oz. This is key for us, as the operations cost
structure remains below the current spot gold price and materially below the silver credit
adjusted average price of $1,334/oz.
How can the operations at Kiziltepe “beat the production fade”?
We believe Ariana offers investors two distinctly beneficial strategies here.
Firstly, processing capacity is an area we believe that can significantly improve returns for
shareholders. The company has indicated its intention to increase production beyond the
original mine plan and we believe that with some relatively low-cost modular
improvements, such as an additional ball mill, output could increase between 50-100%
from current rates offering a material increase in production, project economics and cash
distributions to the Plc. We estimate that at a cost of c$1m for an additional ball mill, the
invested capital would be recovered in less than 18 months.
All-in costs, inclusive of debt repayments
are set to remain below the spot price of
gold at ~$1,150/oz in FY2019
We estimate for an investment of $1m, an
additional ball mill and associated
infrastructure would recoup its
investment within 18 months.
Ariana Resources Q3 Operational update
27 November 2018 4
Secondly, Kiziltepe, in our view, has the potential to become a significant “hub” for multiple
sources of ore, extending the life of the operation and returns for shareholders. To this
end, management, whilst still working through the appropriate processes at Arzu North,
Banu, Derya, Kepez and Kizilcukur, retain the option within the portfolio to include
production from additional sources of ore from freehold land (non-forestry) such as Banu
and Kepez West which could be expedited in the event of any delays to permitting. These
additional freehold areas could offer an incremental three years of production on top of
the current mine plan and act as a contingency to the permitting process. We await the
economics of these satellite pits but believe that due to similar geological settings the
incremental costs of extraction will be associated with the haulage of ore. Therefore,
operational costs will likely to be similar to that of operations at Arzu South.
What about the low-grade material being stockpiled as part of normal operations
Interestingly, another incremental option to “beat the fade” is the possibility of
establishing a low-grade (<1.0g/t) leaching operation. We would anticipate this would only
become a viable option once operations at Arzu South cease in 2021. We envisage a
leaching operation targeting production of 5koz pa at a TCC of ~$500/oz for several years.
Grades have been strong, but is this it?
Current grades are in excess of the average reserve grade of 3.11g/t, with the processed
grade of 4.94g/t in Q3 FY2018. In our model update, we increased average grades by 10%
to 4.4g/t for FY2018 and retain an average of 4.0g/t in FY2019. We anticipate this to
moderate and revert to reserves during FY2020 and FY2021 but remain mindful that this
decline may be deferred further, thereby improving production rates in the short term.
Any further concerns regarding permitting
The joint venture operations currently have several permit applications in process and
some have been received in during the past year. In one case expedited forestry permits
were secured with the assistance of the provincial roads authority, for construction to
commence on the road diversion in August. Other applications currently in process include
Arzu North, Derya and Kepez. Given the operational status of the mine we do not expect
that forestry permits will be delayed unduly despite that fact that a new commission for
permitting is being formed at the Presidential office. Applications made by the company
for its Salinbas project are known to have been accepted in Ankara already and have now
been relayed back to local forestry.
Incremental satellite pits will extend and
enhance the overall economics of the Red
Rabbit JV
Whilst near term grades are expected to
remain above reserve, leach operations
may be considered longer term.
Ariana has benefitted from expedited
permit applications
Ariana Resources Q3 Operational update
27 November 2018 5
What other changes have you made to the financial model?
As per our Quarterly commodity publication “the Quarterly Nugget” we publish our new
commodity forecasts (see underlying assumptions). We have adjusted our forecasts to
incorporate the average Q3 2018 price of $1,213/oz. vs our initial estimate of $1,250/oz.
As a result, our forecasts for 2018 now assume an average gold price of $1,275/oz. from
$1,290/oz. previously. We believe the current period will likely encompass the lowest
average prices before recovering moderately through Q4 and holding a higher level in
2019. After previously stating the summer months offered profit-taking opportunities, we
move to a more constructive view for the remainder of the year and next. That said, we
have taken a more conservative view on our silver forecasts, reducing our long-term
average to $15/oz from $17/oz.
Importantly for Ariana, we have adjusted our gold/silver ratio to 80 from 70, reflecting
current market conditions. This has undoubtedly detracted from the strong operational
results seen in FY2018 and potential upgrades, as well as reducing our Kiziltepe life of Mine
NPV by 5%.
Underlying gold and silver forecasts
updated as per our quarterly commodity
publication
Ariana Resources What is Ariana Worth?
27 November 2018 6
WHAT IS ARIANA WORTH?
In line with our stated objectives to offer a consistent approach to appraising our gold
equity sector coverage, as per our underlying commodity opinions and appropriate risk
premiums applied to gold equity companies, our key objective is to ascertain whether or
not a valuation anomaly is presenting itself and whether investors can benefit.
In addition to incorporating our new commodity price forecasts, we have undertaken a review
of Ariana’s portfolio of assets. Using a 10% discount rate, we estimate Ariana is currently trading
on a P/NAV of 0.5x. This discount to our normalised intuitive multiple of 1.0x NAV (assuming
our NPV estimates incorporate the changes in production, future production efficiencies and
any change in costs) looks anomalous given the low-cost nature of the operations at Kiziltepe
and the potential for incrementally high margin production growth.
Assuming no significant exploration success in the short term and subsequent capital
expenditure requirements, we estimate that at our 10% cost of capital, the long-term price of
gold to justify the current equity valuation is below $1,000/oz, underpinning our positive view
on Ariana.
In light of the diverse range of views on both appropriate risks and longer-term gold prices, we
have provided a share price matrix for investors to apply their own variables and derive an
appropriate target price for Ariana (p/share).
Ariana valuation matrix
Gold price 1,000 1,100 1,200 1,300 1,400 1,500
Discount rate 12% 1.91 2.29 2.66 3.04 3.42 3.79
11% 1.94 2.34 2.74 3.14 3.53 3.93
1x NAV 10% 1.97 2.40 2.82 3.24 3.66 4.08
9% 2.01 2.46 2.90 3.35 3.79 4.23
8% 2.05 2.52 2.99 3.46 3.93 4.40
Source Company, Panmure Gordon
We conclude that Ariana offers an exciting opportunity for investors to gain exposure to a new
and profitable gold producer, for which the benefits of a weaker host currency (Turkish Lira)
have left the operation as one of the lowest cost operations globally. We believe the partnership
with Proccea and the existing finance arrangements offers investors the confidence that future
development projects will also be managed professionally with a lower risk of delays, additional
capital costs, and equity dilution.
Ariana, we believe trades at an
undeserved discount to intuitive
valuations
Kiziltepe production/cost profile (koz & $/oz) Ariana long term production profile (koz)
Source Company, Panmure Gordon Source Company, Panmure Gordon
0
1
2
3
4
5
6
7
8
9
0
200
400
600
800
1,000
1,200
Total AuEq produced Total Cash Costs AISC
0
5
10
15
20
25
30
35
2017 2018 2019 2020 2021 2022
Kiziltepe Tavsan
Ariana Resources Underlying Assumptions
27 November 2018 7
UNDERLYING ASSUMPTIONS
The principal assumptions behind our valuation of Ariana are as follows:
Commodity price forecasts - Quarterly
New Previous
Q2 Q3 Q4 Q2 Q3 Q4
Gold 1,306 1,213 1,250 1,306 1,250 1,275
Silver 16.5 15.0 15.0 16.5 16.0 16.0
Consensus
Gold 1,306 1,213 1,250 1,306 1,297 1,290
Silver 16.5 15.0 15.5 16.5 16.5 16.5
Source Panmure Gordon
Commodity price forecasts - Annual
New Previous
2018 2019 2020 2018 2019 2020
Gold 1,275 1,250 1,200 1,290 1,250 1,200
Silver 16.1 15.0 15.0 16.4 17.0 17.0
Consensus
Gold 1,275 1,270 1,262 1,306 1,323 1,305
Silver 16.2 16.2 17.0 16.4 17.1 17.5
Source Panmure Gordon
Operational assumptions
New Previous
2018 2019 2020 2018 2019 2020
Process plant throughput (kt) 183.5 180.0 180.0 165.0 180.0 180.0.
Plant feed grade (g/t) 4.4 4.0 3.0 4.0 4.0 3.0
Metallurgical recovery rate (%) 93.1 92.0 92.0 92.0 92.0 92.0
Gold produced (koz) 24.4 21.3 16.0 20.1 21.0 15.0
Silver produced (koz) 195.8 202.6 202.6 150.0 150.0 150.0
Sales (koz/GE) 26.8 23.8 18.5 21.9 22.8 22.9
Total cash cost (US$/oz.) 421 457 513 575 588 616
All-in sustaining costs (US$/oz.) 595 674 795 749 734 849
Source Panmure Gordon
Ariana Resources Changes to our Estimates
27 November 2018 8
CHANGES TO OUR ESTIMATES
Summary of changes
New Previous
2018 2019 2020 2018 2019 2020
Sales (£m) 2.4 0.4 2.0 0.0 0.0 Na
PBTA (£m) 1.0 -0.9 0.5 (0.8) (0.8) Na
EPS (p) 0.1 -0.1 0.1 (0.1) (0.1) Na
DPS Ord (p) 0.0 0.0 0.0 0.0 0.0 Na
Source Panmure Gordon
We have provided a summary of changes to our long-term estimates. The main changes
made are:
Incorporation of new commodity price forecasts as per our “Quarterly Nugget” publication;
Updated production, cost and FX forecasts;
Gold/Silver ratio raised to 80 from 70.
Ariana Resources Valuation Summary
27 November 2018 9
VALUATION SUMMARY
Our target price, normally generated by using a blended average of NAV per share, earnings
per share and cash flow per share is not applicable at this time, given the relatively early
nature of production from Ariana. Instead, we apply a simple sum of the parts NPV for each
operation. At our applied discount rate of 10%, we believe, represents a fair assessment of
the risk factors influencing Ariana, through the resource exploration phase, project delivery
and production, all whilst satisfying outstanding debt commitments within the
joint venture.
In conclusion, we set a new target price of 2.82p (2.75p) and we continue to see further
value opportunities, not accounted for at this time, in the company’s extensive exploration
portfolio, although the route to the monetisation of these assets, is likely to be some
time away.
We also maintain our 25% discount on the mark to market value of the company’s external
investments, allowing for liquidity shocks should Ariana need to realise these investments;
however, these holdings are now largely immaterial.
Valuation Summary
$m Value Ownership Attributable value Value per share
Kiziltepe 35.3 50% 17.6 1.66
Tavşan 14.9 50% 7.4 0.70
Salinbaş 14.2 100% 14.2 1.34
Total 64.3 39.3 3.7
Exploration / Other - 100% - -
External investments 0.05 75% 0.04 0.00
Net cash FY+1 1.0 100% 1.0 0.10
Total 65.4 3.80
GBPUSD X Rate 1.35 1.35
Shares in issue (m) 1,059.7 1,059.7
NAV (£) 48.4 2.82
1.0x NAV 2.82
1.5x NAV 4.20
Target price (1x NAV) 2.82
Source Company, Panmure Gordon
Ariana Resources The Numbers
27 November 2018 10
THE NUMBERS
Turnover and operating margin
Source Panmure Gordon, Company
EPS normalised
Source Panmure Gordon, Company
FCF yield & net cash (Pre-Special divi)
Source Panmure Gordon, Company
Bull Points
Low cost operational profile
Long life resource base
Prospective exploration pipeline
Bear Points
Risk of production shortfalls
Weakness in gold price
Delays to permitting process
Profit & Loss Account (£m) Year to December 2016 2017 2018 2019 2020 2021
Sales 0.0 0.0 2.4 0.4 2.0 2.4
Cost of sales 0.0 0.0 0.0 0.0 0.0 0.0
Gross profit 0.0 0.0 2.4 0.4 2.0 2.4
Administrative expenses -1.0 0.8 -1.4 -1.3 -1.4 -1.5
Other operating expenses 0.0 0.0 0.0 0.0 0.0 0.0
EBITDA -1.0 0.8 1.0 -0.9 0.5 0.9
Depreciation & amortisation 0.0 -0.4 0.0 0.0 0.0 0.0
Operating profit -1.0 0.5 1.0 -0.9 0.5 0.9
Associates & other income 15.3 0.0 0.0 0.0 0.0 0.0
Finance costs 0.0 0.0 0.0 0.0 0.0 0.0
PBT normalised 14.2 0.5 1.0 -0.9 0.5 0.9
Abnormal items 0.0 0.0 0.0 0.0 0.0 0.0
PBT reported 14.2 0.5 1.0 -0.9 0.5 0.9
Taxation -0.5 0.0 0.0 0.0 -0.0 -0.0
Minorities & preference dividends 0.0 0.0 0.0 0.0 0.0 0.0
Profit attributable to shareholders 13.7 0.5 1.0 -0.9 0.5 0.8
Source Company, Panmure Gordon
Summary Cash Flow Statement (£m) Year to December 2016 2017 2018 2019 2020 2021
Operating profit 14.2 0.5 1.0 -0.9 0.5 0.2
Operating profit discontinued 0.0 0.0 0.0 0.0 0.0 0.0
Depreciation & amortisation 0.0 0.4 0.0 0.0 0.0 0.0
Other non-cash movements -15.1 -1.1 -0.6 0.7 0.7 0.0
Change in working capital -0.4 -1.2 -0.4 0.0 0.0 0.0
Other cash movements 0.0 0.0 0.0 0.0 0.0 0.0
Operating cash flow -1.3 -1.5 -0.1 -0.2 1.3 0.2
Taxation paid -0.1 -0.4 0.0 0.0 -0.0 -0.0
Net Investment Income & Other Funding 0.0 0.5 0.1 0.0 0.0 0.0
Capital expenditure (net) -0.1 -0.0 0.0 0.0 0.0 0.0
Free cash flow -1.4 -1.4 -0.0 -0.2 1.3 0.2
(Acquisitions)/disposals 0.0 0.0 0.0 0.0 0.0 0.0
Dividends paid 0.0 0.0 0.0 0.0 0.0 0.0
Shares issued/(repurchased) 1.5 2.8 0.0 0.0 0.0 0.0
Other financing 0.0 0.0 0.0 0.0 0.0 0.0
Movement in net cash/(debt) 0.1 1.4 -0.0 -0.2 1.3 0.2
Net Cash/(Debt) 0.4 1.9 1.9 1.7 3.0 3.1
Source Company, Panmure Gordon
Balance Sheet (£m) Year to December 2016 2017 2018 2019 2020 2021
Goodwill and intangibles 17.7 18.9 16.5 16.5 16.5 16.5
Tangible fixed assets 0.3 0.3 0.3 0.3 0.3 0.3
Working capital 0.9 2.5 1.9 1.2 0.4 -0.3
Assets employed 18.9 21.7 18.7 18.0 17.2 16.5
Other assets/(liabilities) 4.3 1.1 1.6 1.6 1.6 1.6
Net cash/(debt) 0.4 1.9 1.9 1.7 3.0 3.1
Provisions -2.1 -2.4 -2.2 -2.2 -2.2 -1.2
Net Assets (REPORTED) 21.6 22.3 19.9 19.0 19.6 20.0
Shareholders Funds 15.6 18.0 21.9 20.8 20.8 24.9
Minority Interests 4.3 3.3 3.6 0.0 0.0 0.0
Source Company, Panmure Gordon
-250.0
-200.0
-150.0
-100.0
-50.0
0.0
50.0
100.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2016 2017 2018 2019 2020 2021
Turnover (LHS) Margin (RHS)
-10%
-5%
0%
5%
10%
2017 2018 2019 2020 2021
0.4
1.9 1.9 1.7
3.0 3.1
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2016 2017 2018 2019 2020 2021
Fre
e ca
sh f
low
yie
ld
Ne
t C
ash
/(D
ebt)
Net Cash/(Debt) Free cash flow yield
27 November 2018 11
164
164
164
164
165
165 w
165
165
166
166
166
166
166 w0
0.5
1
1.5
2
2.5
3
3.5
08-Jul-13 09-May-14 12-Mar-15 13-Jan-16 15-Nov-16 18-Sep-17 20/07/2018
Ariana Resources - ARNR.L
Buy Sell Hold Closing price Target price
Distribution of investment ratings for equity research (as of 24 Oct 18) Rating: GUIDELINE (return targets may be modified by risk or liquidity issues)
Overall Global Distribution (Banking Client*) Buy Total return of >10% in next 12 months
Buy Hold Sell Hold Total return >-10% and <+10% in next 12 months
66% (47%) 27% (8%) 7% (0%) Sell Total return <-10% in next 12 months
* Indicates the percentage of each category in the overall distribution that were banking and/or corporate broking clients
Panmure Gordon is a market maker in this company, has in the previous 12 months made agreements with this company for investment banking services and will be
compensated by the company for these services. This investment research has been prepared in accordance with COBS 12.2 & 12.4 on behalf of Panmure Gordon
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Ariana Resources
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