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Anglo Asian Mining PLC (AAZ LN) 43.5p, mkt cap ?48m - IBA loans enable construction of new recovery plant

BUY - Target price 69p

• Anglo Asian Mining have announced a new loan agreement with the International Bank of Azerbaijan (IBA).
• The for $10.5m loan will be used to fund the initial stages of construction of the new agitation plant.
• The new plant with an estimated capex of around US$52m is expected to improve gold recoveries for oxide and sulphide materials to 85% and 69% respectively.
• There is an existing facility of US$7.5m already with the IBA of which the company has drawn down US$5.9m.
• Anglo Asian also have a letter of intent with the IBA for the provision of a further US$42m in funding which would give them total facilities with the IBA of $60m.
• The loan which attracts a 12% rate on drawn down sums is repayable on a quarterly basis - the loan can be drawn down in tranches of up to $1.5m.
• The loan will be repayable within 36 months of drawdown in equal quarterly instalments two years from drawdown of each tranche with no early repayment penalties.
• Cash flow generation should cover the loan repayments.  The company saw  operating cash flow $38m last year.
• The loan being made available to the company covers the full capex estimate for the plant. The new agitation leach process is expected to be commissioned in H1 2013 and is planned to improve recoveries to 85% and 69% from 60-65% seen currently.  
• Working capital: the agitation leach plant should also allow the company to cut back substantially on its working capital due to the rapid processing of ore through the plant.  The current leach pad process construction and leaching process takes months for the construction of the pad and for the recovery of gold through the process.  While gold continues to flow from the leach pads the eventual recovery rates are relatively low and significant gold remains within the ore on the heap.
• Gosha project:  Approval for the development and production program was received in April.  We look forward to further progress in the future development of this new mine.

Conclusion:  The new agitation leach plant is an important project for Anglo Asian.  Recovery rates are improved which should lower cash costs and improve cash generation.  The plant may also enable the reprocessing of tailings at low cost at a later stage to enable mining of potential ore underneath the current leach pads.  The mine continues to expand in scale and in the size of its gold resource.   We are pleased to see ongoing support from the International Bank of Azerbaijan, indicating good relations with the Azerbaijan government.

We expect the company's interim results to be reported next week.

* Fairfax acts as nomad and broker to Anglo Asian Mining. 

* Fairfax analysts visited the Gedabek gold mine in Azerbaijan last year.

** We highly recommend visiting the Gedabek gold mine site and if you are fortunate enough to visit the region the vegetables are the best in the world.

⁺Fairfax employees may have previously held, or currently hold, shares in the companies mentioned in this note.

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