Anglo Asian Mining plc (LON:AAZ) is the topic of conversation when Hardman and Co’s Analyst Paul Mylchreest caught up with DirectorsTalk for an exclusive interview.
Q1: Can you give us an overview of Anglo Asian Mining?
A1: AAZ is at a key moment in its evolution, having recently embarked on a strategic transformation that will see copper production explode over the medium term.
Currently, Anglo is primarily a gold producer, with silver and copper as by-products, from four mines in western Azerbaijan. Three of these mines are located at its flagship 300 sq km Gedabek concession, with a fourth in the Gosha concession, 50km to the northwest. The company refers to its mining concessions as “contract areas”.
Besides mining, Anglo has invested heavily in downstream processing facilities. These include an agitation leaching plant (at a cost of $45m), a flotation plant and a heap leaching operation. This allows the company to produce gold dore bars and copper concentrate, capturing more value in the production chain.
The question of jurisdiction cannot be over-estimated in the mining sector, and Azerbaijan has a strong track record in the resources sector, albeit more in oil and gas than mining historically. The production-sharing agreement that they have negotiated with the Government of Azerbaijan is modelled on the one that BP negotiated in its major oil and gas projects in the country.
Senior management is a mixture of Azeri, British and US nationals (including former White House chief of staff), and the Azeris have close ties to their government. The President of Azerbaijan conducted the opening ceremony of the first mine at Gedabek in 2009.
In 2022, the Company produced 57,399 gold equivalent ounces (GEOs), 75% of which was gold. Production has been declining steadily since 2018, as ore grades have declined and the current mines move into the latter stages of their useful lives. In 2023, we expect production to be slightly over 52,000 GEOs. This will mark the low point, with substantial growth kicking in over the next few years. We should also note that the company ended 2022 with a strong balance sheet – net cash of $20.3m – and paid a chunky dividend of 8.0c/share.
Q2: Can you outline the strategic transformation that they have embarked on?
A2: They are set to become a much larger mining business over the next five years, as it transforms from a small-cap gold miner into a mid-sized copper producer, with over 50,000 tonnes p.a. of copper production and gold, silver and zinc by-products. As we explain in the report, we believe that each of these metals has a positive supply and demand outlook – we say that Anglo has exposure to the “right” metals.
The key to this transformation is the award of three new contract areas to the company by the Government of Azerbaijan at…and this should be emphasised…no cost to AAZ. Each of these three contract areas contains a substantial copper deposit: Xarxar with nearly 100kt of copper resources, Garadag with 300kt and Demirli with an estimated 200k.
The first step in Anglo’s transformation is the commissioning of two new copper-gold-zinc mines, Gilar and Zafar. These projects are located close to the existing mines in the Gedabek contract area and are expected to come onstream in late 2023/early 2024.
In our report, we refer to the existing mines and these two new projects as “Baseline Gedabek”. The significance of Gilar and Zafar is that, in production terms, they will act as the “bridge” between the older mines and the three much larger copper mines. Having said that, Anglo’s production will not only stabilise, but we expect it also to rebound sharply, from 52,000 GEOs this year to more than 74,000 GEOs in 2025, before the three bigger copper mines begin coming onstream, starting in 2026. We classify these three copper projects into two categories: “Copper 1”, which incorporates Xarxar and Garadag, and “Copper 2”, which incorporates Demirli.
Q3: Can you summarise Copper 1 for us?
A3: We refer to Xarxar and Garadag as “Copper 1”, because the proximity of the two deposits means that the two mines can be developed as one integrated project. This should lead to synergies in terms of extraction, processing and logistics. Anglo purchased substantial exploration data, on Garadag in particular, from the previous concession holder of these deposits. Exploration, drilling and mine planning are well under way.
Xarxar is a copper deposit, with mineralisation beginning at a relatively shallow depth of 25-115m and extending to a depth of more than 500m. Consequently, there is potential for an open pit mine, which would have lower costs. It is the smaller of the two deposits and will be developed first. The project is being advanced on the basis of the company’s in-house estimate of 93,000 tonnes of economically extractable copper, at 0.46%. A JORC estimate will be published on the completion of the drilling programme. We estimate that the mine will come onstream in the first half of 2026, with slightly over 10,200 tonnes p.a. of copper production over seven years.
In March 2023, Anglo stated that its current internal resource estimate for Garadag, based on its assessment of the exploration data, is 324,000 tonnes of copper, at 0.49%. It is based on geostatistical methods in line with JORC standards but requires further work to be fully classified as a JORC estimate. However, it is worth noting that it is comparable to the 1992 estimate of 318,700 tonnes under Soviet standards. We estimate that the mine will come onstream at the beginning of 2028, with approximately 26,000 tonnes p.a. of copper production over nine years.
In terms of the capital cost of these projects, the key variable is whether the company decides to process the ore via a flotation plant, or the less expensive route of bacterial leaching. A decision has yet to be taken, but we believe that flotation will be chosen, since recovery rates will be about 85%, compared with about 60% for bacterial leaching. AAZ currently estimates that the flotation route will require a capital investment of up to $140m for a flotation processing facility to bring the projects onstream, versus less than $100m for the bacterial leaching route. We are assuming a capital cost of $190m in total, of which the company will need borrowings of ca.$140m.
Q4: Copper 2 is based on the Demirli asset. It sounds more complicated. Can you explain?
A4: Demirli is different from Xarxar and Garadag, because the deposit contains significant quantities of molybdenum, as well as copper. The complications arise from its location. Paradoxically, it might be simpler and have an even higher return on Anglo’s investment than Xarxar/Garadag. Firstly, the complication is that Demirli is located in the Karabakh region. Following the end of hostilities with Armenia, Russian forces are acting as peacekeepers in this region. Under the ceasefire agreement, this is expected to continue until November 2025, unless an alternative agreement is agreed. This may or may not happen.
Secondly, and here is the upside, Demirli was awarded to Anglo at no cost, but is believed to have a fully functioning mine and processing facility that was operating as recently as December 2022, when activity was suspended. Aerial photographs from Azerbaijan’s Ministry of Foreign Affairs confirm the existence of mining and processing operations.
In the report, we quote from several media sources about Demirli. These suggest that $130m-$250m was invested at the site – a large range but nevertheless a substantial sum – and that the processing plant was opened on 26 December 2015. The resource was originally thought to contain 275,000 tonnes of copper and 3,200 tonnes of molybdenum. A resource estimate from the Soviet era put the tonnage of copper at more than 300,000 tonnes. Our assumption is that mining operations under Armenian control for at least the last seven years have reduced the resource to 198,000 tonnes of copper, at 0.43%, and 2,300 tonnes of molybdenum.
While we can’t be confident on a re-start date for Demirli, we are currently assuming the beginning of 2026, and that the mine and processing plant are relatively undamaged. Our model assumes that the re-start cost is $30.0m, although the company has emphasised that it could be substantially lower, and there is an existing workforce. Our operating assumptions are 10,500 tonnes p.a. of copper and 122 tonnes p.a. of molybdenum, with a mine life of 13 years.
Q5: Can you outline some of the key investment criteria?
A5: We wanted to establish a fair value estimate for Anglo Asian, and we felt that the best way to do this was in three parts. These are i) what we refer to as “Baseline Gedabek” – so the existing mines, along with Gilar and Zafar, ii) Copper 1, which is the integraded Xarxar and Garadag project, and iii) Demirli.
In valuing all three, we have used DCF models, and some key assumptions include a discount rate of 8%, a copper price of $8,000/tonne, a gold price of $1,900/oz, a tax rate of 32% and a $/£ rate of 1.21. The three valuations are 76p/share for Baseline Gedabek, 71p/share for Copper 1 – Xarxar and Garadag, and 67p/share for Copper 2 – Demirli. In aggregate, therefore, our fair value for Anglo Asian is 214p/share, compared with the current share price of 107p/share.
Aside from the DCF valuation, the company is currently paying a dividend of 8.0c/share, which gives a yield of just over 6.0%. Notwithstanding the need for debt finance to fund the development of Xarxar and Garadag, which we estimate at $140m, we are currently assuming that the dividend will be maintained while these investments are made. We believe that, once they are onstream, a dividend payment of 8.0c/share will be easily affordable from the company’s internal cash generation.