Anglo Asian Mining PLC (AAZ LN) 43p, mkt cap �48m � Interims in line with previous guidance

BUY � Target price 69p

�         Anglo Asian Mining announces its first half interim statement today.

�         Revenue came in at US$30.1m, down 22%yoy (H1 2011: US$38.5m) on weaker production (21,641oz vs. 28,610oz last year) due to the tough winter, partly compensated by a higher realised gold price (US$1,644/oz vs. US$1,446/oz last year).

�         We had estimated H1 revenue at US$31.7m with the inclusion of sales from the SART plant production.  Concentrate from the SART plant has yet to be sold.

�         Cash costs (including 12.75% share of the Government share of production) increased to US$767/oz due to lower gold output and no sales of copper concentrate of the SART copper concentrate. Copper concentrate sales are treated as by-product credits that decrease general cash costs of production.

�         This compares to our estimates of US$621/oz (including the effect of no sales of the SART copper concentrate) in H1 2012 and US$433/oz recorded in H1 2011.

�         EBITDA was broadly in line with our estimates at US$15.5m, down 37.5% from last year (H1e: US$14.5m).

�         Profit before tax totalled US$10.5m, down 26%yoy (H1 2011: US$14.2m). Due to higher rate of depreciation assumed, we forecast PBT of US$8.3m.

�         EPS (diluted) dropped 21%yoy to 5.80c/share (H1 2011: 7.36c/share). We estimated lower EPS of 3.93c/share.

�         Operating cash flow fell 50%yoy to US$8m on weaker sales and rising stockpiles of SART concentrate and increased ore stockpiles.

�         Funds from operations together with bank financing (US$4m drawn down in H1 on US$7.5m facility with the International Bank of Azerbaijan) and cash reserves financed US$13.5m capex (mine development + construction of the agitation leaching plant) and US$2.7m exploration.

�         Total outstanding debt totalled US$15m (FY 2011: US$13m) and cash was US$3m (FY 2011: US$10m) giving net debt of US$11.9m.

�         Gold sales (excl. the Government share) were 18,135oz, down -26%yoy (H1 2011: 24,586oz).

�         The SART plant  that extracts copper/silver/gold in the form of a copper rich concentrate from the pregnant solution produced 253t of copper, 60,519oz of silver and minimal amounts of gold (H1 2011: 261t of copper and 50,739oz of silver) during the period.

�         No copper concentrate sales were recorded during the first half of the year and stocks stood at 814t Cu and 178,000oz Ag as of end of June valued at cost at US$4.8m and with an estimated market value of more than US$10m.

�         The Company purchased and installed a dryer that should cut the moisture content in the concentrate. This will improve saleability of the concentrate as the price is calculated on the dry basis.

�         In August the Company sold 259 dry metric tonnes of copper concentrate to Glencore for US$1.4m or US$5,422/t.  Glencore is currently running smelting tests on the concentrate. If successful it may order more. The Company is constantly in talks with other potential clients trying to secure a long term contract.

�         We expect to see copper concentrate stocks sold in H2 2012 � H1 2013 in our new forecast.

�         Managements� SART productions target is for 720t of copper (FY2011: 610t) in 2012.

�         Construction of the new 100tph capacity agitation leaching plant has started and the Company has signed around US$11.2m (financed by the International Bank of Azerbaijan (IBA)) worth of contractual commitments with regards to related equipment, parts and services as of 30 June 2012.

�         Total cost is estimated at US$52m with planned commissioning in H1 next year. We have modelled the agitated tank leaching plant capex at US$60m including a factor for possible budget overruns.  It is good to see IBA support for the project providing a written commitment to fund US$60m for the project.

�         Gold and silver production form heap leach operations are forecast at 49,000-50,000oz and 26,000oz in 2012, respectively.

�         The Gosha underground mine (10-15kozpa) development is expected to start in H2 2013.

�         At Ordubad further exploration technical studies scheduled to serve as a base for a Development and Production Programme to be submitted to the Government of Azerbaijan.

Conclusion: The Company has secured financing for the construction of the agitated leach plant with the state controlled lender �IBA�.  Operations are expected to ramp up in H2 with total production moving towards management�s guidance of 49,000-51,000oz. This should cut cash costs and provide operating cash flow to cut outstanding debt.  

The team have also paid down an additional US$4.5m in the post-reporting period.  Total debt repayable in less than one year now stands at US$6.5m which should be comfortably covered by operating cash flow (before movements in working capital and tax) of around US$50m in FY 2012 (FY 2011: US$56m).

We believe the Company is on track to hit its target gold production with H2e output estimated at 29,400oz, up 36% from H1 and 3% from last year. Total production for the year is estimated at 51,000oz.

Operating cash costs are estimated to come down towards normal levels in H2 and average US$520/oz for the year.

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

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

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