Auriant Mining (UPDATE) - Things Just Got Cheaper and de-risked.

2016-07-20 12:17, Edited at: 2016-07-21 09:54

This is an update to my previous post which can be found here : http://www.redeye.se/analys/userreport/auriant-mining-watch-out-here-comes-turnaround I've been investing in cheap resource stocks this year, but this one is probably the cheapest one so far. Today Auriant announced its operational update as followed: -- Gold production , including gravitational plant production, increased by 64% to 385.3 kg (12,389 oz), compared to 234.5 kg (7,539 oz) in H1 2015. -- H1 2016 gold production is ahead of our initial expectations. Based on this actual result and our expectations for production in the second half, we have adjusted Auriant's production forecast for the year to 1.1 tonne, an increase of 10% on our previous estimate. -- Tardan gravitational plant produced 87.3 kg (2,807 oz) of gold, an increase of 326% compared to H1 2015 – 20.5 kg (659 oz). -- Gold grades in the ore mined in H1 2016 were 4.42 g/t, an 80% increase on that achieved in prior period (2.46 g/t). -- The volume of gold in ore and tailings stacked on heap leach increased by 25% compared to H1 2015. Let\*s update the target price...

Introduction

Auriant Mining AB (“AUR AB”) is a Swedish junior mining company, focused on gold exploration and production in Russia. The company has two producing mines, Tardan in the Republic of Tyva, and Solcocon in the Zabaikalsky region. In addition, it has one early stage exploration property – Uzhunzhul in the Republic of Khakassia, and an advanced exploration property - Kara-Beldyr, in the Republic of Tyva, which was 100% consolidated in 2014

Auriant’s main assets comprise a number of mineral licenses held by the various subsidiaries. The licenses as at the end of December 2014 contained official Russian State Reserves Committee (GKZ) reserves of 829 500, 000troyounces (1 oz = 31.1 g) in the C1 and C2 categories and 500,000 troy ounces in NI 43-101 standard.

(http://www.auriant.se/eng/about/Company_profile/)

We will get an update regarding the reserves during Q3 with will probably conform higher grades which means greater LOM.

nvestment case

The swedish stock market ain't probably the best place to look for quality goldstocks, given the risk of overseas operations. But when gold is trading above $1300/oz it's worth to take a look.

In this investment valuation I'm gonna take a look at Auriant's current operations and production and exclude the potential of increasing production and further operations.

Auriant currenly got two valuable valuable assets, Tardan & Solcocon.

Tardan, which the company calls "a success story" is located in southern russia. The amount of gold produced has doubled in the last 4 years and TCC reduced twice. This is an affect of higher gold grades further down the mine.

Solcocon: For sale (Bonus for shareholders)

2016 outlook ( Updated )

The company is expecting 35koz (prev 32koz) produced in CY16, but this projection is based on a grade of 3,64g/t while the grade in Q1 was equal to 5,19g/t. There is still chance that we will see higher grades and further higher projections...lets wait another 3 months.

TCC is expected around $720/oz. But as gold grades are greater than forecasted we will probably whitness a TCC under $700/oz.

Further exploration is underway in greater Tardan.

Risk

• Price on Gold
• Move in US dollar
• Move in Russian rubel ( cost of labor )
• Here comes the most important factor when it comes to investing in micro caps - Dilution

The risk of unneseccary dilution during a during a project is given.

Yes, you've right this is not a project, it's a producing mine with healthy cashflows on it's way.

While signing the $20m debt deal with the biggest shareholder, the shareholder got the option to convert the debt to equity at a fixed price during the term of the debt.

"Comments regarding Proposals from Shareholders (AGM 2015 agenda)

In connection with an issue of convertibles 2015/2018, proposed by Auriant’s main shareholder, as published earlier today, Auriant would like to add the following comments.

The proposal relates to the outstanding shareholder loan given to Auriant by Golden Impala Ltd (a company that indirectly through Bertil Holding Limited owns 52.32% of shares in Auriant). The loan currently bears interest at 10% per annum. The proposed issue of the convertibles 2015/2018 concerns a portion of the principal amount of that loan, equal to 20,000,000 USD, and interest accrued on it until December 31st 2018. In connection with the proposed issue of the convertibles, interest on the full amount of the loan from Golden Impala Ltd will be decreased from 10% per annum to 2% per annum. The issuance of the convertibles is subject to approval by Annual General Meeting (please see the proposal below).

As was published earlier today, Auriant’s main shareholder proposed the issue of convertibles 2015/2018 with the following main terms:

• - It is proposed that the Annual General Meeting resolves that the company via setoff raise a convertible loan in a nominal amount not exceeding USD 20,000,000 through a private placement in respect of no more than 45,078,664 convertibles, entailing an increase in the share capital of not more than SEK 5,450,759 at full conversion whereof SEK 5,071,347 relates to conversion of the nominal amount of the convertibles and SEK 379,412 relates to potential conversion of interest
• - the nominal amount of the convertible shall be app. USD 0.444 (20 000 000 ÷ 45,078,664) or multiples thereof. The loan carries an annual interest rate of two (2) per cent. The subscription price for the convertibles shall be equal to the nominal amount of the convertibles.
• - conversion into shares may take place during the period commencing from the date of registration at the Swedish Companies Registration Office of the resolution regarding the issue up to and including December 31st 2018 at a conversion price of SEK 3.7002 per share. Conversion shall take place at an exchange rate of SEK 8.34 per USD 1."
• - conversion can be made at a predetermined SEK 3.7002 per share conversion price and 8.34 SEK/USD exchange rate
• - the right to subscribe for the convertibles shall vest in Golden Impala Limited

• - on a fully diluted basis maximum share of the votes owned by Golden Impala ltd. will be

  equal to 87.2% of total amount of shares issued

• - the dilution for current shareholders assuming full conversion with accrued interest will

  not exceed 73.1% to current level

  After receiving the approval by AGM Golden Impala will have a right to convert this amount (incl. accrued interest) into shares within the term of the convertibles at its discretion at any time.

The proposal is subject to a decision by the AGM to reduce the share capital and adjust the articles of association in accordance therewith.

Current shareholders structure of Auriant Mining AB remains unaffected. "

Do a payoff scheme and use the two alternatives and you will notice that the conversion is not the best option for the shareholder.

Valuation (Updated)

Share price: 11,45kr/sh

Shares outstanding: 17 802 429

Market cap: = 205Msek

Net cash: 13Msek

Net Debt: 570Msek

Production CY16: 35koz ( Updated)

TCC CY16: $680/oz (Own projection based on higher grades. prev $720/oz)

Anticipated average goldprice for CY is 1300, to be conservative.

1300 - 680 = $620/oz in cash produced per oz

620 * 35 000 = $21.7M

Current USD/SEK rate = 8.6

21.7 * 8.6 = 186Msek

This cashflow equals .91 the current market cap.

As gold is a currency and not a product the business is very simple to understand and you should't pay less for ABC mining if they have the same quality, minelife, production, cost etc as CDE mining.

Therefore I would like to value this stock based on a cashflow multiple equal it's peers.

Semafo which had a cashflow of $147m in 2015 was valued at $800-900m before the goldrush which is a muliple of approx. x6 times operating cashflow. Same is true for other peers.

186Msek * 6 = 1116Msek.

Not done, we need to discount some risks.

First off the company got a load of debt which equals 4.6 times equity but with a cashflow of +150m the company can manage to cover the expenses and amotize quickly and hopefolly the bad asset can help us on the way.

I'm using a 20% discount accounting for the debt and russian risk and the lifemine which is less than 5 yrs with current reserves ( just being conservative)

1116 * 0.80 = 892Msek

Per share ( Updated)

Current price: 11.35kr/sh

720msek/17802429 = 50kr/sh

Total return to target price = 341%

Catalyst

We may need some kind of catalyst to set things in motion.

Our first catalyst is the gold price, which is behaving as it should and is expected to go higher, so should the stock price.

Sale of the "badass-et". With goldprice above $1300/oz many projects and assets have positive NPV's and are worth paying some dollars for. There is no doubt that gold miners are looking everywhere to expand production and future cashflows to investors right now.

Operational reports and Q's. It fell in line with our expectations and proves that Tardan is a world class asset.

The market cap is now over 205msek which means that some small merchant bank and analyst will start to look at the stock and give it a buy rating. (We hope so)