Anglo Asian Mining (LSE:AAZ) has seen its shares soar to 48.9p over the last year, as it has cut liabilities and optimised mining and production across its portfolio of operations in Azerbaijan. With the business forecasting a significant jump in 2018 production and recently having refinanced its remaining debt, all eyes are now on its extensive, fully-funded three-year exploration programme, launched in March. We spoke to chief financial officer Bill Morgan following the release of Anglo Asian’s FY2017 results to discuss the firm’s recent progress and why he feels it is being heavily under-valued by the market.
Building up
Anglo Asian’s primary asset is Gedabek, a producing mining operation that houses a sizeable polymetallic ore deposit. It produces gold, copper, and silver from this resource across four sources, and processes on site. The most significant source of production is Gedabek’s central open pit, where more than 700,000t of ore was mined last year at an average grade of 1.18g/t of gold. The business also produces from the nearby Gadir underground mine, where it mined more than 80,000t last year at a grade of 3.56g/t of gold, and a second underground mine called Gosha.
The final source of production from Gedabak is a resource called Ugur, which contains 199,000oz of gold and 1,049,000oz of silver. Anglo Asian discovered Ugur in October 2016 and has brought it into production by the following September. It has already mined more than 230,000t of ore from Ugur’s open pit at an average grade of 3.2g/t gold, and the site contributed around c.6,000oz of gold per month in Q4 2017.
Last April saw Anglo Asian carry out a major strategic review at Gedabek to ensure sustainable long-term production following a fall-off in gold grades and an increase in copper ore production. It carried out major drilling work at the site that optimised output, revealed further mineable copper and gold ores at the open pit, and discovered an area of mineralisation beneath the open pit.
However, to carry out the work Anglo Asian had to halt mining at the open pit and Gadir in Q2 2017. Despite processing high-copper content stockpiles to mitigate its reduced operations, the firm suffered in H1 2017 after reaching profitability in 2016. It reported a drop in revenues to $29.8m from $39.3m and an overall loss of $1.3m. Morgan told us this loss was a necessary step in improving long-term performance:
‘This fall was expected because we flat-out stopped mining to enable Ugur to get into production in H2 and get the open pit mine up to scratch. The decision was highlighted beforehand and managed deliberately. Ugur is now producing and the open pit is back into a great position, so in our eyes it has been very successful.’
Anglo Asian’s efforts at Gedabek began to pay off fully in February. The business announced forecast full-year production for 2018 of between 78,000 and 84,000 gold equivalent ounces (GEOs). The mid-point for this guidance represents a 13pc increase on FY 2017 production. It further cemented its newly-strengthened growth trajectory in April, announcing output of 18,307GEOs in the first quarter of 2018, a 26pc jump on production in Q1 2017. Morgan said the anticipated production jump could be put down to mining and processing improvements at Gedabek:
‘Our output this year will be boosted by optimisation across the whole of Gedabek, a full-year of production from Ugur, and the recommencement of mining in the new open pit. We are also installing a second, dedicated crusher line for the flotation plant. When we built the plant, we only had the one line, but the new line will let us run the flotation plant for copper and gold concentrate and the leach plant for gold doré in parallel. Our work should significantly enhance our production profile.’
Digging deeper
To capitalise on the additional potential identified at Gedabek last year, Anglo Asian launched a major three-year rolling programme of geological exploration in March 2018. The plan is expected to replace mined ounces, extend Gedabek’s mine life to a minimum of 10 years and discover new deposits that are similar to Ugur.
2018 marks the first year of the programme and is expected to cost Anglo Asian $6m, funded from internal cash flow. Over the coming months, the business will carry out reserve drilling at the Gedabek open pit to identify the quantity and quality of feedstock. It will then complete underground core drilling to assess the mineralisation beneath the open pit, as well as drilling at Gadir, Ugur, and Gosha to evaluate future potential. Finally, the business will carry out an airborne EM survey over the entire Gedabek contact area to collect data about geophysical anomalies. Any prospective targets will then be followed up on the ground. Morgan tells us the programme is going well so far:
‘Gedabek is a very highly prospective territory, and we are doing a lot of geological work to find out what we have got, to see if we can find some new deposits that we can develop into mines. On the open pit we still think we have a few years of mine life, maybe four at the minimum, but we are looking to extend this by exploring what we found last year. We are also doing some exploration work near to our existing mines to see where the ore goes. We are looking at some very promising targets and have now almost tunnelled to below the open pit and underground mine, where we think there is a pretty big resource. We are doing a lot of work to try and get JORC resource done alongside exploring.’
The programme will also focus on Ordubad, a contract area owned by Anglo Asian in South West Azerbaijan. Ordubad hosts significant gold and gold-copper targets assessed by previous exploration, and this year will see Anglo Asian carry out an initial surface programme to evaluate these opportunities. Anglo Asian hopes to identify porphyry-style mineralisation at Ordubad and examine the site’s relationship with known gold deposits in the surrounding area. Depending on the results, an aerial EM survey and follow-up drilling programme could take place in the future. Morgan tells us that while Ordubad is not Anglo Asian’s core focus at present, it could play a significant part in the firm’s future:
‘We don’t do any production here; it is just an exploration site at the moment. However, we will be doing quite a lot of work here as we think it is highly prospective. It might take us a few years to get any production, but if you look at the mine life at Gedabek, then this is not a problem. We think Ordubad will start kicking in further down the line and are very excited to see how it develops following this initial period of exploration.
Cutting debt
Thanks to its improving operations, Anglo Asian’s reliance on debt is also decreasing. As of 31 March 2018, the business had net liabilities of $10.4m, down 71pc from $35m as at 1 January 2017. A significant move here came in February when the company entered into a syndicated, two-year term loan facility with Pasha Bank Azerbaijan. The facility can reach up to $15m, has a 7pc fixed annual interest rate, and an arrangement fee of 0.25pc.
Anglo Asian has used the facility to repay $13.5m worth of loans to Amsterdam Trade Bank, Gazprombank, Yapi Credit Bank and its chief executive Reza Vaziri (which it subsequently repaid in full in April). Although it will still owe the money to Pasha, obviously, the 7pc interest rate is more favourable than what was charged by previous creditors.
Indeed, Anglo Asian says principal debt repayment this year will fall to $5.1m, which it says will ‘release capital’ of $8.4m to support expansion and optimisation initiatives at Gedabek. Anglo Asian has previously reported that its internal cash flow will fully fund the entire Gedabek exploration programme, so it is currently unclear to what degree it is utilising this $8.4m in its work.
The firm has not indicated that its cash balance – which stood at $8.6m gross as at 31 March – is a cause for concern, with few red flags that a raise is on the way. For example, Anglo Asian’s results for 2017, released this week, show total operating expenses of c.$6m, and Morgan even told us the firm expects to be net cash positive soon, as debt continues to fall.
Despite Anglo Asian’s shares have risen from 16.8p to 48.9p over the last year, giving the firm a market cap of £54m and an enterprise value of c.£44.6m based on net current assets of $12.6m (£9.4m) in its latest results. However, Morgan does not think the market is acknowledging operational and financial progress:
‘One way to look at this is that four years ago we had over $50m worth of debt and we are soon going to be net cash positive. This change means that regardless of what has happened across our operations, our market cap should have increased by $50m over that period purely by having paid all of this debt off. The reality is that our market cap is only just beginning to rise to reflect the fact that we are paying all of this debt off. It has not yet been increased beyond this, meaning the market is essentially saying the value of the business is unchanged over this period. The reality is that over those four years we have added two new mines, completely turned the business around, added processing plants, and vastly improved our prospects. The market is not currently ascribing value to these points, and some of our investors understand that well.’
Keep an eye out
Morgan’s final point is a good one, and it will be interesting to see if the bull-run in the Anglo Asian’s shares over the last year continues as exploration progresses and the company once again approaches profitability. What is clear is that Anglo Asian is in a transformational period and it has plenty of potential share price catalysts on the horizon as it delivers newsflow from its exploratory work at both Gedabek and Ordubad.
