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Anglo Asian Mining* (AAZ LN) 34.5p/s, mkt cap ?38.3m - Profits show strong growth on low cost production

BUY - Target price 70p/s (from 72p/s)

• Anglo Asian today reports strong profit growth in its annual results for last year.
• Sales rose 16% to US$83.8m versus our US$83.5m forecast on higher realised gold prices.  The average realised gold price rose 27% to US$$1,573/oz.
• Gross profit grew 37% to US$43.0m (vs. US$40.2m estimated).
• Operating cash costs increased 25% but remain relatively low by industry standards to US$448/oz.  If we strip out the government's share of gold without cost then cash operating costs rise to US$513/oz eg accounting for the state's 12.75% share of production. This is broadly in line with our estimates of US$430/oz and US$493/oz, respectively.
• PBT surged by 60% to US$31..6m (vs. US$30.1m estimated) taking EPS up by 22% to 16.9c/share (vs. 16.0c/share estimated).
• Gold production of 57,068oz compared with 67,267oz in 2010. Silver output was 39,086oz versus 43,356oz in 2010 as previously announced.
• Anglo Asian plans to pour 54,000oz of gold in 2012..
• Gold production was lower than seen in 2010 due to a lower grade of processed ore - 3.29g/t (2011) vs 4.33g/t (2010) - as Anglo Asian worked through the transitional ore, in line with the mine plan.
• In addition, channelling at one of the cells - eg where solution channels into streams within the heap leach without picking up much gold - extreme winter temperatures this year also slowed the leaching process reducing production towards the year end.
• In response the team increased waste removal to mine more oxide ore and reduced the size of crushed material to improve its leaching.
• Average recoveries for the year stood at 64.3%, up from 59.4% in 2010, reaching 77.4% in Q4.
• Anglo Asian is ready to start construction of the new US$52m agitation leach plant with the first round of financing of US$7.5m secured with the International Bank of Azerbaijan last week.  Total capex is estimated at US$52m. Agitation leaching should lift recovery rates to 85% for oxide ore and 69% for sulphide material, while the Company is carrying additional tests to see if recoveries can be further improved. The plant commissioning is expected in H2 2013.
• The SART plant, which recovers copper in high grade concentrate form, gained pace through the year producing some 1,037t of copper concentrate, up from 316t in 2010, containing 611t of copper, 134koz of silver and 0.2koz of gold. Production beat the team's internal target of 525t of copper in concentrate.
• Anglo Asian sold US$5m worth of copper concentrate in FY2011 and currently holds a stockpile of concentrate containing 743t of copper, 162koz of silver and 200oz of gold, equivalent to more than US$11m at 2011 market prices and assuming 90% payability.
• In 2012 SART is forecast to produce 833t of concentrate containing 500t of copper, 102koz of silver and 0.1koz of gold. A decline is attributed to a lower grade solution flowing into the system. Construction of the agitated leach plant and its integration into the processing route should significantly lift the SART throughput and the grade of the solution starting from 2014.
• Exploration:  Gedabek measured & indicated JORC resources rose 49.7% to 1.05moz of gold in April
• The team started a 24,567m drilling programme at Gedabek in Q1 and is planning to announce the JORC compliant reserve in Q2.
• Gosha: Anglo Asian has received government approval for a Development and Production Programme at Gosha and is currently preparing a plan of works and should update the market on its progress in due course. Gosha is set to become the first underground mine in Azerbaijan producing 10,000-15,000oz of gold per annum with a mine life of 5 years.
• Further exploration programme is planned at the Ordubad license area after the Notice of Discovery submission with the government in April 2012.
• Cash:  The company holds US$9.9m of cash and total debt was US$13.0m as of Dec 2011.
• Target price:  We marginally reduce our valuation to 70p/s from 72p/s due to our lower average gold forecast for 2012.  Our gold price forecast is reduced to US$1,600/oz from US$1,800/oz for this year.

Conclusion:  Anglo Asian has produced solid results with significant earnings growth and relatively low operating costs of US$450-500/oz for the FSU.  Steady cash flow from operations should allow the Company to repay outstanding debt ahead of schedule and to finance an extensive exploration programme across the Gedabek, Gosha and Ordubad license areas.  

The Gedabek gold resource now looks far larger than had been forecast and the mine is sure to extend well beyond its original six year mine life.

The construction of agitation leach plant is a major step forward and should raise gold production to 75-80kozpa through better recovery rates and effectively raising capacity.  The effect should also reduce unit production costs when the plant is complete next year.

We reiterate our BUY recommendation on the stock

*Fairfax acts as Nomad and broker to Anglo Asian Mining

** Fairfax analysts visited the Gedabek goldmine last year in Azerbaijan. 

18/05/12

Anglo Asian Mining* (AAZ LN) 34p/s, mkt cap ?37m - US$7.5m loan agreement signed with the International Bank of Azerbaijan

• Anglo Asian Mining has announced it has agreed a US$7.5m loan with the International Bank of Azerbaijan.
• The money enables the Company to accelerate construction of the agitation leaching plant.
• The management team is currently in talks to secure the remainder of debt funding required to build the plant and should update the market in due course.
• Total capex for plant is budgeted at US$52m.
• The loan is to be repaid in 12 equal quarterly instalments two years after first funds are drawn down.
• Interest is 12% (in line with our estimates).
• The plant should lift recovery rates to 85% for oxide ore from current c. 70% and to 69% for sulphide material.
• Plant commissioning is scheduled for H2 2013.

*Fairfax acts as Nomad and broker to Anglo Asian Mining

** Fairfax analysts visited the Gedabek goldmine last year in Azerbaijan. 

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