Avesoro Resources (LSE:ASO), the West African focused gold producer and developer, claims to have added 110,000 ounces of annual gold production with its acquisition of two mines in the last month. However, the company has received no love from the market in response to this and its shares continue to languish at just £1.75. Are liquidity fears concerning potential investors?
With the aid of a £15.2m fund raise, Avesoro bought the Youga and Balogo gold mines in Burkina Faso for £51.2m ($69.5m). The company claims the move, first announced in October during a strong period of news flow, will add 60pc to its annual gold production and make it the seventh largest producer of the precious metal on the London market. But the firm’s seemingly shiny prospects continue to be hampered by retail investors’ fears around the fact that its parent firm- Avesoro Holdings- owns nearly 73pc of its shares, raising questions around liquidity. With the firm’s strong relationship with its parent in fact offering plenty of valuable synergies, perhaps Avesoro could be in value-play territory?
Up until Q4 2017, the Avesoro’s chief asset was New Liberty, a gold mine based in Liberia with an estimated proven and probable measured and indicated mineral resource of 9.6m tonnes, containing 985,000 ounces of gold. In its results for Q3 2017, strong performance at New Liberty led Avesoro to report revenues of £18.8m ($25.5m), a 32pc increase on Q2 2017, from gold sales of 19,797 ounces, with an average realised gold price of $1,286 per ounce.
At an EBITDA margin of 21pc, this production translated to EBITDA of $4.4m, a fivefold increase on the second quarter of 2017. It also had available cash facilities of $18.2m. This was already something of a turnaround given Avesoro had been making a loss earlier in the year, but things really got interesting in the fourth quarter of 2017.
As well as two large purchases of heavy mining equipment totaling £12.6m ($17.1m) and £4.5m ($6.1m) each, Avesoro announced a £15.2m ($20m) fund raise to aid its purchase of the Youga and Balogo gold mines in Burkina Faso. It purchased these mines from its 73.5pc major shareholder Avesoro Holdings for a total of £51.2m ($69.5m), with £37.6m ($51m) of this figure being funded through consideration shares.
Avesoro Holdings – formerly known as MNG Gold – is a privately-owned gold production, development and exploration company established in 2013 by Turkish billionaire Mehmet Nazif Gunal, founder of the MNG Group. Taking the mines public brought a combined estimated proven and probable mineral reserve of 9.3m tonnes to the Avesoro Resources, containing 513,000 ounces of gold. Avesoro is yet to publish its full year results, but it has predicted that New Liberty produced between 70,000-80,000 ounces of gold over 2017 and Youga and Balogo produced 110,000 ounces.
If these estimates prove to be accurate, Avesoro’s annual production for 2017 would come in at an impressive 180,000 ounces. Avesoro’s current projects are estimated to have a total of around 2.2m ounces in combined reserves and resources.
The good news doesn’t stop there, either.
Avesoro expects further production growth next year, with combined group gold production for 2018 looking set to increase by 60pc to 110,000 ounces following December’s acquisition. At a 21pc earnings margin and an average realised gold price of $1,286 per ounce (taken from Avesoro’s last quarterly results), these 110,000 ounces translates into EBITDA for 2018 of £45.9m ($62.1m) – assuming the gold is all sold. For just one year of earnings, this represents a significant chunk of Avesoro’s current £144.77m market cap.
Why didn’t the market react more positively to London’s soon to be seventh largest gold producer?
According to Avesoro, the £51.2m ($69.5m) paid to bring over Youga and Balogo from its private owner works out at less than the mines are expected to make in just one year of operation in terms of gold produced.
At today’s gold price of £968 an ounce, the 80,000 ounces of production, which is expected to be reported at Youga and Balogo for 2017 would bring an additional £77.5m worth of gold to Avesoro if repeated next year. At an EBIDTA margin of 21pc this would translate to an additional £16.2m of earnings, and this does not even factor in expected additional production. Speaking to ValueTheMarkets.com, Nick Smith, head of investor relations at Avesoro, said: ‘The acquisition has transformed the public company from a 70,000-80,000 ounce a year gold producer to a 200,000 ounce plus a year producer.’
These figures are all subject to changes depending on outside factors, but on face value, it looks like there might be significant upside. So why did Avesoro’s shares fall from around 2p to 1.8p over the last quarter of 2017?
One challenge for retail investors has been that 72.9pc of the company is owned by Avesoro Holdings, the public company’s private affiliate. Naturally, having a large shareholder like this raises question marks around Avesoro Holdings’ liquidity, and some may question billionaire boss Gunal’s intentions for the company. But Smith argues that such a close relationship with MNG Group – which employs more than 20,000 people global, with business interests including cargo, construction, energy railways and tourism – can only be beneficial. Indeed, he argues that links with a heavyweight like MNG create synergies such as access to low-cost funding which are – and will continue to be – value-adding for shareholders, setting Avesoro apart from its gold market peers.
‘These links with MNG Group mean we can buy machinery for our mines 20-25pc cheaper than our competitors can because of the amount of machinery that MNG buys as a whole. We can leverage off the back of MNG. For example, we have got an in-house construction team and a design team which have been sourced from MNG. We can do everything internally, we do not have to hire consultant companies to manage these things, and this significantly cuts out operating costs. A mining project which would cost one of our peers around $150m may only cost us $80m. As we develop and as we bring more institutions onto the shareholder register, I think shareholders will be able to properly see the value added by the MNG relationship,’ he said.
One other factor that may be stalling interest in the stock is the number of shares issued. With 8.1bn shares now in issue, concerns of potential near-term consolidation are justifiable. It’s often the case that Market Cap valuations suffer during a share price consolidation in the immediate aftermath.
Aside from the obvious upside provided by Avesoro’s recent acquisition, the firm has already identified a number of ways it can further expand – the firm intends to double its production size over the next two and a half years. Chiefly, this growth will come through a combination of drilling for additional reserves at its existing mines and acquiring build read sites near its processing plants. In October 2017, the firm said it has substantial exploration potential, including satellite resources at two locations within 20km of the process plant at the New Liberty site. According to Avesoro, it currently has a total of 18.6m tonnes of material that is currently classified as inferred mineral resources which it plans to infill drill with a view to upgrading as much as possible to higher classification categories.
In November, Avesoro commenced a 14,000 metres diamond core drilling campaign at New Liberty. It is targeting an area containing an inferred mineral resource of some 3.5m tonnes, containing 315,000 ounces of gold. This will complete in Q1 2018 and, judging by the firm’s tone, more infills are expected to come. Smith claims the firm also has a number of additional resources in Burkina Faso which could add multiple years to the life of its mines in the country.
‘We expect both organic and acquisition growth over the next 18 months. We are effectively hoping to double our production size over the next two and a half years. One of the ways we see Avesoro differentiating itself from its peers is that we can build projects fairly cheaply. With the sites around New Liberty there will be drilling costs but there will be very little in the way of development costs to extend the mine’s life,’ he said.
The big picture
Looking at the figures, it appears that the inherent value of the mines brought over by Avesoro in December is not yet fully represented in the firm’s current £1.75 share price. Presently, it seems that fears concerning Avesoro Group’s major stake in Avesoro Resources are clouding investors’ ability to see the possible upside offered by the company’s new assets and future mining plans. If Avesoro continues to put out strong numbers, as it did in Q3 2017, then investors might better understand the shareholder value represented by its relationship with MNG and shares will begin to rise.
As Smith puts it: ‘Once we put out our 2017 production as a group, I think the market will slowly start to warm to the firm’s growth story. Once we get out Q1 and Q2 results out for 2018 – we are expecting an improvement quarter on quarter – we think people will really start to take notice.
Obviously, the company itself would say that. But that doesn’t change the fact that opportunities to buy Avesoro at its current £1.75 share price may soon cease to exist, given its plans for growth.
The author of this piece does not own shares in any of the companies covered in this article.