Anglo Asian Mining PLC (LON: AAZ) – Strong first-half and third-quarter performance despite Covid-19 disruptions

Anglo Asian Mining PLC (LON: AAZ) is a FTSE AIM All-Share quoted Company, which is engaged in the production of gold, copper, and silver in Central Asia with a broad portfolio of production and exploration assets in Azerbaijan. The Company’s main operating location is the Gedabek contract area, comprising 300 square kilometre area in the Lesser Caucasus mountains in western Azerbaijan. Further, it has a second underground mine, Gosha, which is 50 kilometres from Gedabek. Ore mined at Gosha is processed at Anglo Asian's Gedabek plant. During FY19, the Company produced 81,399 gold equivalent ounces. The Company has also announced to enter a joint venture with Conroy Gold and Natural resources PLC, to explore and develop various gold properties in The Republic of Ireland and Northern Ireland.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

Anglo Asian Mining is on track to achieve turnover for FY20 of over US$100 million, despite the restrictions imposed due to the COVID-19 pandemic. Moreover, the year ended with a peace treaty in place between Azerbaijan and Armenia with the support from international peacekeepers. Despite all headwinds, the Company continued its operation and significantly strengthened balance sheet, whilst still paying dividends to shareholders.

As per JORC’s (Joint Ore Reserves Committee) estimated for Gedabek open pit and Gadir underground mines, Gadir underground mine amount to 49,000 ounces of gold and 191 tonnes of copper. Moreover, the Company’s ore reserves remaining in the open-pit mine amount to 284,000 ounces of gold and 26,000 tonnes of copper. The current mine life of the Gedabek open pit is now eight years.

Overall, AAZ is actively seeking to exploit its first-mover advantage in Azerbaijan and looking for properties in other jurisdictions to fulfil its expansion ambitions and become a mid-tier gold and copper metal production entity.

However, the Company is also exposed to various risk and uncertainties. It is exposed to financial risk with fluctuations in Gold price and exchange rates. Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.

Industry Outlook Dynamics

In November 2020, gold-backed ETFs and similar products reflected first net outflows in the past 12 months and second-largest monthly outflows ever. As the gold price has its worst monthly move of -6.3% to US$1,763/oz, Gold ETF holdings also plunged 107 tonnes in November. The Gold prices lingered below US$1,900 per oz since lack of additional US fiscal stimulus kept the US dollar firm. However, the Covid-19 pandemic has led to unparalleled money printing and low-interest rates globally, which shall put gold on track for registering its best year in a decade as it appeals investors as a hedge against currency debasement and inflation. In Q3 FY20, global Gold demand dipped by 19% year-on-year to 892 tonnes, as consumer sentiments remained depressed. This represented the lowest quarterly demand since Q3 2009. The YTD demand was 2,972 tonnes, which was 10% lower against the same period in 2019.

The chart below shows the performance of Gold Future Prices over the past 3 years, which was trading at US$1,928.95/oz on 4 January 2021, reflecting around 37.07% growth over the last 3 years.

 (Source: Refinitiv, chart created by Kalkine Group)

In terms of growth catalysts, the uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil. Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources. Furthermore, central banks have been adding to the gold reserves since the financial crisis. Presently, the official reserves are more than 5,000 tonnes higher than they were in 2009. The central banks own nearly 35,000 tonnes of Gold, equivalent to ~17% of worldwide above-ground stocks.

However, the scale and continually evolving nature of coronavirus pandemic are causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations during H1 2020. With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars. Moreover, the supply from gold producers can decline as only US$4.4 billion was spent on exploration in 2019 against US$11.8 billion in 2012. Consequently, there were only three gold discoveries in 2019 as compared to 42 major gold discoveries in 2000. In short, there would be less gold, if a lesser amount is invested on exploration. Also, the allocation to gold could go down if real interest rates rise dramatically.

Gold Outlook

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment. However, as the gold prices and uncertainty have the inverse correlation, there is a risk that lower uncertainty with lockdown easing might cause gold prices to consolidate around US$1,800 to US$2,000/oz.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Anglo Asian Mining Plc

Recent Developments

On 18 December 2020: The Company announced the appointment of Michael Charles Sununu, as a Non-Executive Director, with an immediate effect.

On 27 October 2020: The Company stated that Natural Resources of Azerbaijan and Ministry of Ecology has confirmed the Zangilan district is under the control of Azerbaijan, which contains the Company’s Vejnaly contract area.

On 20 October 2020: Anglo Asian Mining has confirmed the payment of 2020 interim dividend, which was US$0.045 per ordinary share (3.4651 pence per ordinary share).

Update for JORC Mineral Resources and Reserves (as on 2 November 2020)

In the Gedabek open pit, the Company’s total Mineral Resources stood at 735,000 ounces of gold and 69,100 tonnes of copper. In Gadir Underground Mine, its total Mineral Resources was 267,000 ounces of gold and 2,183 tonnes of copper. In the Gedabek Open Pit and Gadir Underground Mine, the ore reserves were 333,000 ounces of gold and 26,191 tonnes of copper.

Trading Update (with respect to Guidance for Turnover and Production, as on 24 November 2020)

• FY20 production guidance will be in the range of 68,000 to 72,000 gold equivalent ounces.
• Anglo Asian Mining has confirmed that it is still on track to attain turnover for FY20 of more than US$100 million.
• In Gedabek, the Company's operations are operating normally, and no physical damage seen.
• The year is ending with a peace treaty in place between Azerbaijan and Armenia with international peace-keepers helping maintain the agreement.
• Overall, the Company seems to be well-positioned with a significantly strengthened balance sheet and still paying dividends to shareholders.

Q3 FY20 Production and Operations Update (for the three months to 30 September 2020, as on 14 October 2020)

• Anglo Asian saw a significant improvement in Q3 2020 production, with an increase of 25% quarter-on-quarter in gold equivalent ounces.
• In Q3 FY20, AAZ has a significant increase in the average price of gold bullion sold to US$1,947 per ounce as compared with the previous period (H1 FY20: US$1,649 per ounce).
• On 30 September 2020, the cash and cash equivalents stood at US$21.4 million, with cash generation of $9.5 million.
• The sale of gold at refiner delayed until early October 2020, which provides the advantage of anticipated higher metal prices.
• In September 2020, the Company delivered 6,335 ounces of gold to the refiner, when the gold price was below US$1,900.
• It is also taking various measures to increase production in the second half of 2020.

Financial and Operational Highlights (for the six-months to 30 June 2020 (H1 FY20), as on 23 September 2020)

(Source: Company Website)

• The Company has reported another encouraging half-year performance, with an increase in total revenues of 6% year-on-year (YoY), profit before taxation of 14.6% YoY and free cash flow of 34% YoY.
• In H1 FY20, the total reportable production was 32,501 gold equivalent ounces, with gold production of 27,922 ounces, copper production of 1,207 tonnes and silver production of 58,529 ounces.
• All-in sustaining cost (AISC) of gold production in the first half of 2020 increased to US$743 per ounce (H1 FY19: US$603 per ounce), due to fixed cost impact of lower production.
• On 30 June 2020, the Company witnessed a strong balance sheet, with cash of US$29.2 million and the significant milestone achieved of no debt.
• Moreover, the fundamentals of the Company are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

On 4 January 2021 (before the market close, at 8:15 AM GMT), Anglo Asian Mining PLC shares were trading at GBX 128.00, down by 2.66% against the previous day closing price. Stock 52-week High was GBX 175.00 and Low of GBX 68.65, respectively.

From a technical perspective, 20-day SMA (126.70) and 20-day EMA (126.80) is currently supporting an upside move, which means the stock price could increase in the short term.

In the last two years, Anglo Asian Mining PLC’s stock return has outperformed the benchmark index and the sector as it has delivered a positive ~50.11% return as compared to ~27.37% return of FTSE AIM All-Share Mining index and ~34.75% return of FTSE AIM All-Share Index.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook

During Q3 FY20, production was increased by 27% to 18,190 gold equivalent ounces compared to the previous quarter, which shows that actions taken in the H1 FY20 are now taking effect. The Company is on track to meet its production and revenue guidance, while it is encouraged by the solid gold market fundamentals. The Company has been recovering well from Covid-19 pandemic and the conflict between Azerbaijan and Armenia has also reached a peace treaty. The total production target was maintained at between 75,000 and 80,000 gold equivalent ounces (GEOs) with FY20 revenue of US $100 million in revenue. Moreover, the joint venture with Conroy Gold and Natural Resources PLC shall expand the jurisdiction for the Company’s business.

(Source: Presentation, Company Website)

However, as Gold has moved sharply higher in the past few months, the price may experience some consolidation in the near term. Nevertheless, if quantitative easing and other factors encourage investors to treat Gold as money, the potential for Gold price outperformance is extremely high over the next five to ten years. Therefore, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

Considering a strong performance in Q3, revised FY 2020 production guidance, paying dividends to shareholders, extended Production Sharing Agreement, operational conditions improving towards normal levels, robust financial position, solid liquidity position and strong balance sheet, higher profitability margins, targeting a turnover of over 100 million dollars in FY20, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Anglo Asian Mining at the current price of GBX 128.00 (as on 4 January 2021, before the market close at 8:15 AM GMT), with lower-double digit upside potential based on 3.91x EV/NTM EBITDA (approx.) on FY20E EBITDA (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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