Ariana Resources PLC (LON:AAU) remains the only small-cap gold mining company that carries a Panmure Gordon ‘buy’ recommendation, a status reiterated by the broker following the firm’s recent upbeat production report.
The City firm also raised its target price for Ariana shares to 2.82p, up from 2.75p previously, with the stock currently trading at 1.35p.
On November 12, Ariana revealed that it is on track to exceed this year’s target for gold production from its Kiziltepe mine in Turkey after another record quarter.
The group said income for the three months to September was US$10.1mln with 7,588 ounces of gold produced, a rise of 6% compared to the previous quarter.
In a note to clients, Panmure Gordon’s analysts noted that Ariana’s third-quarter update continued the trend of above plan production, with its full-year 2018 guidance of 20,00 ounces almost reached in nine months.
Kiziltepe is part of the group’s Red Rabbit Joint Venture with Proccea Construction Co. and is 50% owned by Ariana through its shareholding in Zenit Madencilik San. ve Tic. A.S.
The analysts pointed that Ariana’s income for the joint venture during the third quarter was US$10.12mln, at a revenue per gold ounce of $1,334 - due to silver credits.
Cash costs low
They added Ariana’s operating cash costs for the quarter were estimated at US$330 an ounce, largely due to a big 28% decline in the Turkish Lira during the period.
Importantly, the analysts said, capital loan repayments by Zenit to Turkiye Finans Katilim Bankasi A.S. have been made on their scheduled basis and reached US$13.2mln at the end of September 2018, with US$19.8mln outstanding.
They also noted that monthly intercompany loan repayments from the JV to Ariana’s wholly-owned subsidiary, Galata Madencilik San. ve Tic. Ltd. in the year to date have now reached around US$1.6mln.
Having undertaken a review of Ariana’s portfolio, after applying its new commodity forecasts, and using a 10% discount rate, the Panmure Gordon analysts’ estimate that Ariana is currently trading on a price/net asset value (P/NAV) of 0.5x.
They said: “In our view, this discount is excessive given the low-cost and profitable nature of the operations at Kiziltepe.”
The analysts added that further supporting their view is that, at their 10% cost of capital estimate, the long-term price of gold to justify the current equity valuation is below US$1,000 an ounce, whereas the yellow metal is currently valued at US$1,222 an ounce.
Exciting opportunity for investors
The Panmure Gordon analysts have, therefore, concluded that “Ariana offers an exciting opportunity for investors to gain exposure to a new and profitable gold producer, for which the benefits of a weaker host currency (Turkish Lira) have left the operation as one of the lowest cost operations globally.
“We believe the partnership with Proccea and the existing finance arrangements offers investors the confidence that future development projects will also be managed professionally with a lower risk of delays, additional capital costs, and equity dilution.”
They said: “The company’s shares, despite the wider revaluation of gold miners, remain, in our view undervalued.”
Adding that their new target price of 2.82p “offers significant upside to investors as Ariana continues to increase its production from Kiziltepe and develop its longer-term portfolio of assets.”