Sunday, 17 November 2013

Weekly Market Summary 17/11/13

I am going to set a goal of writing a short market summary at the end of the week, focusing on certain events, notable market changes and significant stock or commodity movements in the past seven days.

Junior Mine Report 

I recommend reading PwC's latest Junior Mine October 2013 report in which John Gravelle highlights that it’s the junior mining sector that is suffering the most despite majors taking costly write-downs, suffering from weak commodity prices and a sector-wide confidence issue. 

Anyone trading AIM will notice the comparable to this ASX focused report in which PwC suggest junior markets have been plummeting since 2011 following a brief period of recovery after 2008 lows. The market valuations of the top 100 TSX listed mining companies has fallen over 40% annually for the second consecutive year. This is an accurate reflection of what has happened to valuations across AIM. 

The report makes for bleak reading with reports of cash, short-term investments and capital expenditures all down by hundreds of millions, with "explorers making up the largest share". But despite warnings from certain industry commentators such as John Kaiser, there have only been a handful of companies going under, with many able to reduce operating costs and conserve capital, 7 reportedly de-listed for adverse reasons. 

Margin Squeeze

The Footsie miners shed 2.4% to 16,131.09 in line with gold, platinum, copper and aluminium all falling. The only notable riser was iron ore. Margins are being squeezed across the board with Antofagasta suffering on its earnings update despite an increase in production. The same story was true of Vedanta Resources as revenue fell despite increased output. This is becoming a common theme amongst producers, those highly leveraged falling hardest.

One stock I like to follow, Avocet Mining (AIM:AVM) a West African gold miner completed the buy-back of a gold hedge from McQuarie Bank. They have a highly leveraged gold project at the Inata Mine in Burkina Faso which is struggling to turn a profit despite targetting 130,000 ounces this year. If they are able to survive in this climate then the chances are much improved for the likes of Amara Mining (AIM:AMA), another gold producer located in Burkina Faso. Avocet's total cash costs amounted to $1,195/oz in the third quarter whilst Amara are targetting reduced cash costs as it brings the Sega mine into production. It's total cash costs are expected to fall from $1,357/oz in the first half to below $800/oz in the second half

I've previously stated my position in Amara and still believe quarterly results (Q3) due this quarter will be considerably better than earlier in the year. To recap in Q1 2013 gross revenue of almost $14m, cash costs of $10.5m for a margin of approx $400/oz resulted in EBITDA of $3m. Amara expect costs will reduce to around $700-800/oz and with gold trading at around $1300/oz margins should be higher at $500-600/oz in Q3 results, potentially rising to $600-700/oz in Q4 results should gold bounce off the current support level.
"If we assume 15,000 ounces are produced at costs of $700/oz and a conservative gold price of $1300/oz, EBITDA of $8m is achieved per quarter. This increases to $12m if production reaches 20,000 ounces."

It seems I'm not alone in recognising Amara's potential as RDV Corporation, a majority owned private company run on behalf of the DeVos family who co-founded Amway, one of the largest U.S. private firms has taken a 21% stake through a share swap. Assets from their exploration company Amlib, including $10 million cash and a profitable drill operator are included in the deal. RDV have been actively investing in West African gold for over a decade but Amara is one of the first to bring in a major U.S. family fund. If Amara fall short of production targets only achieving 15,000 ounces and costs are reduced at a slower pace in Q3 realising a $500/oz margin they should still turn EBITDA of $6.7m

There is a concern that the gold price will fall further. Such a move would impact marginal producers and indeed is deterring investors now as gold toys with the $1,270 support level. What will cause gold to break out/down? This is a much debated topic and one that I would like to discuss another term. In the short term US jobless figures are likely to support the bearish case, the US continues to show signs of recovery. The strengthening of the US dollar alongside the monthly QE figure of $85bn has helped push US stocks to new highs. Is this the reason for gold falling? Perhaps not, but it goes some way to explaining why ETFs are being sold down on a huge scale.

What will cause a shift in sentiment? For one thing, we know the US debt ceiling is due to peak again in January so expect some market volatility. Many commentators also expect tapering of QE to begin early next year. There is an argument to be made for the physical demand which has increased yet again and is up year on year. This won't be a surprise to many, the East are buying physical. The West are still reducing according to the World Gold Councils Q3 Report, ETFs sold significantly higher than any increase in physical demand. Is there manipulation going on? Probably, and it stands to reason those selling will begin to reduce at a lower rate. US economic growth is expected to plateau at around 2% of GDP once QE draws to a close whilst their deficit reduction programme will actually begin to rise again in 2016 according to the Congressional Budget Office. This year’s lower deficit can be largely attributed to short-term economic factors rather than systemic reforms in the federal budget, for never has the deficit fallen from such a high level. The sign to look for will be an improvement in ETF positions in the next quarterly WGC report. 


- Amara (AIM:AMA)
I'm expecting a significant improvement in quarterly earnings as well as a more robust balance sheets thanks to the deal with Amlib for $10m additional cash. Any weakness in the price of gold is unlikely to reduce the impact reduced costs and increased production will bring. 
Target 18-20p before January 2014.

- W Resources (AIM:WRES)
Exciting quarter for W Resources as it nears completion in constructing its tailings processing facilities. The pre-concentration plant was expected to be complete in October and according to the company things are progressing on time and on budget. They will begin producing tailings from next month for a period of approximately 3 years at which point they should be in a positive to bring their flagship La Parilla Mine into production. 
Target 1.2-1.3p before January 2014.

- Tertiary Minerals (AIM:TYM)
Volumes have been increasing in recent weeks and the share price peaked at around 8p in anticipation of drilling results and resource classification due early next year. They recently completed a financing deal with YAGM. The MB Nevada project is expected to weigh in larger than the Storuman project which is currently Tertiary's most advanced deposit as historical drill data and two phases of drill-work is compiled into a JORC resource. Now I am no chartist but even I can tell the stock is in an uptrend so I would suggest interest will continue to grow as we approach the second set of drill results, followed by a brief period of consolidation as we await the JORC resource early next year before further gains as value is recognised.
Target 11-12p before March 2014.

Hopefully anyone following will be able to see how accurate these targets are. My strategy is threefold in this current climate - analysis of trends, volumes and catalysts. Ignore the 'company potential' if any of these factors change for the worse and take profits. 


Friday, 8 November 2013

Amara Mining - Speculative Deal Increases Cash Reserves

Like many of the small publicly traded gold stocks Amara Mining (AIM:AMA) has been at the mercy of the markets ever since they turned sour in 2011. Coupled with a falling gold price Amara has suffered it's fair share of set backs leaving investors with losses and good deal less hair! The share price has fallen from 120p less than two years ago to below 15p today, capitalising the company at a little over £24 million. But the winds have now shifted favourably.

West African Projects operated by Amara Mining

Organic Growth Projects

Amara Mining has been developing 3 core projects using cash-flow primarily from its producing Kalsaka mine to fund resource exploration and definition. 

Fieldwork was curbed earlier in 2013 in light of the falling gold price, reducing margins and resulting cash-flows however despite gold trading near it's base Amara are once again looking to expand their operations, here's a brief overview.

- Kalsaka/Sega project in Burkina Faso (78%)
Short term cash-flow is being generated from the Kalsaka gold mine (53koz produced in 2012), though this is now nearing the end of its mine life and is to be supplemented by the nearby Sega deposit. The recent acquisition of the neighbouring Sega project located 20km north of Kalsaka hosts an Indicated Resource of 450,366oz (8.3Mt at 1.69 g/t) and an Inferred Resource of 147,344oz (2.9Mt at 1.58g/t). Production of 147,000 higher grade ounces are expected, extending the Kalsaka Life of Mine (LOM) to Q1 2015. Mining of the higher grade Sega ore began in Q3 2013, the result of a re-optimised mine plan to reduce risk and lower cash costs. The acquisition of Sega has not diminished the focus on exploration however as the company continue to target additional ounces at the nearby Yako, Zoungwa and Rondo prospects to increase the LOM.

- Baomahun project in Sierra Leone (100%)
The 'stand-out' project, expected to deliver significant cashflow from H2 2015 onwards when it will commence production. Amara has completed the Feasibility Study which estimated reserves of 1.21 million ounces (23.3Mt at 1.62g/t) at a gold price of US$1,100oz in July 2013 and resources of 2.78 million ounces with 2.24 million ounces (38.4Mt at 1.82g/t) in the Indicated category and the balance inferred (6.6Mt at 2.52g/t for 540koz)
Production of 148,550 ounces of gold per annum is anticipated over the first six years of production at head grades with a mine life of at least 11 years.  Underground and additional open pit mining potential exists with grades shown to increase at depth and further deposits identified.

- Yaoure Gold Project in Côte d’Ivoir (90%)
Amara's early stage exploratory project has a resource estimate of 0.3 million Indicated ounces (8.0Mt at 1.31g/t) and 1.7 million Inferred ounces (34.6Mt at 1.52g/t) as of March 2013. Yaoure (previously Angovia) is a former producer previously operated by Compagnie Minière d’Afrique (CMA), which produced 1.9 million tonnes of ore with an average grade of 3.9 g/t gold over five years, but was closed in 2003 due to the prevailing gold price. Amara acquired it in 2004 and had commissioned it by September 2009. The existing mine infrastructure and nearby tarred roads make it an ideal location for a CIL/CIP operation. 

Merger Acquisition of Amlib

Amara Mining has now effectively carried through a merger acquisition of Amlib Holdings via a share purchase agreement. The terms see Amara gain $10 million cash which Amara intend to use for development at Baomahun and exploration at Yaoure (near term focus unchanged). 

Amara will also acquire ADSL, the cash generating drilling contractor. Amara stand to save $3m in exploratory costs at Yaoure in 2014 as a result whilst netting additional revenue from third party drill contracts. They generated $1.3m unaudited pre-tax profit in 11 months to 31 Aug 2013 and are the owners of 5 rigs, plus a fleet of support vehicles.

Amara will gain three exploration licences in Liberia: Cestos, Kle Kle and Zwedru. The Cestos Project licence area is 1,870km2 and the most advanced of the three. To date a strike length of 85km has been established, similar in geological appearance to the Ashanti gold belt (>100Moz resources). Initial drilling completed on 2 prospects – Innis and Numon South revealed results including 31.00m at 1.20g/t and 24.43m at 3.14g/t.

The majority shareholder in Amlib, RDV has been invested since 1999 and will own 20.8-22.8% of Amara following the transaction, their shares are subject to a 12 month lock-in period and orderly market arrangements for a further 12 months meaning the effects of dilution won't be felt for at least 12 months. The agreement will be satisfied through the purchase of $11.0 million worth of shares to be issued, 51,846,782 to be precise which results in 30% dilution for holders. However as RDV's stake is illiquid, the dilutionary effects are limited.

Financial Assessment 

An adjusted pre-tax loss of $4.63 million was recorded in H1 2013 largely due to falling revenue as a result of declining gold sales (27,699 ounces to 14,514 ounces in the same period). This was despite an average realised gold price of $1,518 per ounce. Margins were squeezed further as cash costs increased to $1,357 per ounce during the period. All in sustaining cash costs represented an additional $126/oz ($18m) which was used to fund capital and exploration costs. It was well known Kalsaka output would fall, the reduced plant availability, lock-up of gold in circuit, combined with lower grade ore all added to the poor set of results.
"The overall group result was impacted by a high depreciation charge at Kalsaka as it nears the end of its life."

However Amara have been busy improving infrastructure for future production. They recently upgraded the crushing circuit which will process some of the higher grade ore that has been stockpiled during previous quarters and also material from Sega. Haul road construction has been completed, blast hole drilling at Sega commenced and trucking of Sega material begun.

Production Plan Re-Optimised

As a response to falling gold prices, the mine plan for Sega was re-optimised at a gold price of US$1,100 per ounce in Q2 2013. Higher grade material will be processed early in the mine life ( 2.41g/t grade) reducing cash costs to circa $700/oz. This is a stark contrast to the Kalsaka average head grade of 1.13g/t during the first half with cash costs of $1,357/oz. Sega is now expected to produce a total of 97,000 ounces until the end of 2014 however there is the potential to extend production by resulting to the original project parameters in the event the gold price recovers.

Production Figures

Amara has reaffirmed production guidance of 50-60,000 ounces despite falling sales in Q2 2013 of 8,600 ounces to 5,900 ounces. This was largely a result of stockpiling gold bullion in response to the falling gold price with sales totalling 14,500 ounces of the 19,000 ounces produced in H1 2013. The markets are awaiting confirmation as to whether Amara are still on track to increase sales to 15-20,000 ounces in the final two quarters. 

In Q1 2013 gross revenue of almost $14m, cash costs of $10.5m for a margin of approx $400/oz resulted in EBITDA of $3m. This $400/oz margin should be achievable if we assume conservative cost reductions to $900/oz and a conservative gold price of $1300/oz.

Amara are expecting costs to reduce to around $700/oz however and expecting 15-20,000 ounces production. If we assume 15,000 ounces are produced at costs of $700/oz and a conservative gold price of $1300/oz, EBITDA of $8m is achieved per quarter. This increases to $12m if production reaches 20,000 ounces.

Cash Position

Amara has seen it's cash & cash equivalents position reduce from over $32 million by Q4 2012 to $23.7 million by Q1 2013 down further to a little over $18 million at the end of Q2 2013. Of the $23.7m, cash comprised $18.2 million and $5.5 million in gold bullion. Due to an additional $4 million worth of gold bullion being stockpiled in Q2 they retained approximately $9 million of gold which helped offset the falling cash figure.
 “During Q2 2013 the gold price was highly volatile… as a result, Amara chose to sell a limited amount of gold, representing only 59% of gold produced in the period, with a higher amount of bullion held in stock"
Following the recent acquisition of Amlib, cash & cash equivalents have increased to $28 million. If Q3 2013 results are as expected, Amara should now be increasing it's cash position and output in Q4 2013 is likely to be higher still as any issues are ironed out.

Strategic Partnership with Samsung

In 2012 Amara came to agreement with Samsung, receiving $20 million by loan and supplying Samsung with gold bullion. The deal has much greater significance for Amara beyond the initial loan however as it paves the way for a much larger financing deal as part of the development of the Baomahun mine.
“The larger benefit is that Amara has forged a relationship with a global conglomerate that is a large gold consumer. The implications for this are great and reduce Amara’s overall funding risk as well as a secure gold supply for Samsung."

 Near-Term Catalysts

- Third quarter results from the Sega deposit are expected to significantly improve cash-flow and are due by the end of Q4 2013. 

- Following in-fill drilling completed at Yaoure during H1 2013, a resource update and a preliminary economic assessment (PEA) are expected by the end of Q4 2013.

- The results of the optimisation works to the Baomahun project are due by the end of Q4 2013. Within the results should be a case for a smaller, higher grade pit and plant, the underground mine potential and the hydro-electric power study. 

- According to Tom Winnifrith there is the potential to farm out Yaoure. A cash payment would aid in the development of Baomahun.


Whilst Sega is economic at current gold prices and indeed down to $1100/oz, Amara are highly leveraged due to overall group costs. The life of mine has been reduced to fifteen months however there is potential for the operating life to be extended should the gold price strengthen, with lower-grade resources becoming economic again. Exploration continues but at a reduced rate due to the current climate.
"Amara could have a break in production of at least 12 months in 2015 between the ending of operations at Kalsaka Sega and the commencement of mining at the planned Baomahun project in Sierra Leone”. 
As things stand the Baomahun project economics remain far from convincing, with a NPV of $127 million based on a gold price of $1350/oz and a discount rate of 8%. With the gold price hovering precariously over $1300/oz the economics seem less than robust. Amara are conducting studies into a smaller, high grade operation and also underground mining options.

Looking Forward

Amara have demonstated that they will pursue alternative funding options to equity raises through the deal with Samsung ($20m) and now Amlib ($10m). These deals not only strengthen Amara's financial position but also their shareholder base through RDV holding a considerable stake. This latest deal is a fantastic result and much preferred to a placing.

After its period of transition, Amara is well positioned to take advantage of production at it's new high grade Sega deposit. The market has yet to assess the impact it has had on results but if my calculations are correct Amara will return to profitability and ramp up production in Q4 2013.

According to Broker Mirabaud Securities (prior to Amlib deal) production is due to rise to 70,000 ounces in 2014 and has placed a 32p per share valuation on total cash cost of under $800 per ounce. Its modelling assumes a gold price declining from current spot levels to a long-term price assumption of $1,200 per ounce by mid-2016.
“With Sega’s higher grades fuelling substantially stronger margins in 2014, the more so with the re-optimised mine plan, we remain of the view that Amara should be able to meet corporate level expenses, including debt repayments to Samsung ($10m due in H2 2013, and $10m due in 2014), while continuing to evaluate its other projects.”

There are a number of near term catalysts including a resource update and PEA for Yaoure project of which only 40% of the project has been drilled out. Amara will likely step up its exploration across the portfolio following the increase in cash reserves, focusing on extending the Sega life of mine and further resource defintion at Baomahun and Yaoure. Yaoure could open up strategic opportunities in the short term to help fund Baomahun which will go ahead regardless of gold price movement. Should gold recover the original Sega PEA will be adopted once again, the current 97koz production schedule over 15 month will extend to 163koz over 21 months. 

I am holding Amara shares at 14.25p and will reassess progress made during H2 2013 early next year. Short term target of 25p.