Anglo Asian Mining PLC (LON: AAZ) – Special Dividend of USD 1.7 million paid in Q1 FY21.

Anglo Asian Mining PLC (LON: AAZ) is an FTSE AIM All-Share listed 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 FY20, the Company produced around 67,249 gold equivalent ounces (“GEOs”).

Recent Trend of Dividend Payments

The Company had paid a special dividend of US 1.5 cents per share on 11 March 2021, while the ex-dividend date was 11 February 2021.

Growth Prospects and Risk Assessment

The Company had made significant progress regarding several exploration programmes. AAZ had initial models of gold and copper mineralisation, and it had resumed drilling activity in the Avshancli mineral district. Moreover, the Company had completed significant drilling at the Gadir and Gedabek underground mines. However, the Company had not carried out any drilling activity in Ordubad due to the Covid-19 restrictions.

(Source: Company presentation)

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 performance can be significantly impacted by several risk factors. AAZ might get impacted by Gold price fluctuations and litigations. The Company is also facing operational challenges with extreme weather conditions. Furthermore, the Company is also exposed to various exploration risks as it is undergoing several drilling activities. Also, there are operational risks such as cybercrimes, availability of substantial resources, operational performance, and unfavourable exchange rate or interest rate movements.

Industry Outlook Dynamics

Global gold ETFs had demonstrated a net outflow of 107.5 tonnes during March 2021. Moreover, it had shown substantial outflow for the four months out of the last five months. The net outflow during March 2021 remained among the top 10 worst outflows historically for the second month in a row. Overall, the global Asset under management (AuM) stood at around 3,574 tonnes, similar to the levels seen during June 2020. The gold ETF holdings had dropped by approximately 9% in tonnage terms from their peak levels witnessed during November 2020.

Overall, North American funds represented almost 86% of global net outflows. As far as gold prices are concerned, Gold prices dropped by 3% at USD 1,691.1 per ounce as of 31 March 2021. The Gold prices went down 10% year-to-date till the end of March 2021. The primary reason for a decline in the gold price was higher interest rates, which would adversely impact the opportunity cost of holding Gold.

Moreover, Gold remained one of the best performing major assets during 2020, driven by high risk, low-interest rates and positive price momentum built during the second half of 2020.

There is still uncertainty about how gold prices would perform during 2021, but recovery in mine production is expected after showing a decline in 2020. Furthermore, the performance of gold is dependent on four sets of drivers – Economic expansion, Risk & Uncertainty, Opportunity Cost and Momentum. The Gold prices have tumbled recently due to rising US Treasury yields amid stimulus optimism, successful rollout of the Covid-19 vaccine and expectation of higher inflation. However, the stagnation in US Treasury yield may open the door for an increase in the gold price in the coming months.

The chart below shows the performance of Gold Future Prices over the past three years, which was trading at USD 1,776.74 per ounce on 19 April 2021, illustrating around 32.08% return in last three years.

(Source: Refinitiv, Thomson Reuters, chart created by Kalkine Group) 

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Anglo Asian Mining PLC.

Recent Developments

On 01 March 2021: The Company had updated regarding productive geological exploration activities during H2 FY20 at Gosha, Gedabek, and Ordubad contract areas. AAZ updated regarding Zafer, which is a significant discovery related to copper-gold mineral occurrence approximately 1.5 kilometres ("km") from the Company's processing facilities at Gedabek.

On 25 February 2021: AAZ announced that it had closed the discussion regarding the proposed joint venture agreement with Conroy Gold and Natural Resources PLC.

Q1 FY21 Production and Operations Review (for the three months to 31 March 2021, as on 15 April 2021)

(Source: Company presentation) 

• Anglo Asian Mining had reported gold production of 11,907 ounces and silver production of 35,365 ounces during Q1 FY21, while it was 15,867 ounces and 34,642 ounces, respectively, during Q1 FY20.
• The Company had delivered a 14% increase in copper production to 638 tonnes during Q1 FY21, while it was 559 tonnes during Q1 FY20.
• AAZ had delivered total metal production of 15,431 gold equivalent ounces (“GEO”) during Q1 FY21 as the actual price of gold remained higher than the budgeted price, which resulted in a decline in the gold equivalent value of copper.
• AAZ had a cash balance of USD 22.9 million as of 31 March 2021.
• Moreover, the Company, had an unsold inventory of USD 15.2 million as of 31 March 2021.

Financial Ratios (H1 FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 19 April 2021, at 10:35 AM GMT, AAZ shares were trading at GBX 129.45, up by 1.13% against the previous day closing price. Stock 52-week High and Low were GBX 180.57 and GBX 101.32, respectively.

From a technical standpoint, 14-day RSI (~39.99) supports the upside potential. Currently, prices are in the correction phase, and trading around the lower band of the pattern, acting as an important support for the stock. An upside move from the current levels may end the correction phase of the stock.

In the last two years, AAZ’s stock price has delivered a positive return of ~79.17%; and it has outperformed the FTSE All-Share Industrial Metals index with a return of around 15.81% and the FTSE AIM All Share index with a return of about 30.84%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company produced 67,249 gold equivalent ounces ("GEOs") for the year ended 31 December 2020. Moreover, the Company had managed to provide proper financial guidance for FY21. AAZ had forecasted gold production to be ranging from 48,000 ounces to 54,000 ounces during FY21. The lower forecast from the levels of FY20 indicated that the Company would mine only from existing Gedabek and Gadir mines in 2021. It did not consider any mining output from the Ugur facility as the operations were depleted. Moreover, Copper production was estimated to fall in the range between 2,500 tonnes and 2,800 tonnes during FY21, while it was 2,591 tonnes during FY20. However, the Company had not provided specific silver production guidance for FY21. Overall, the total metal production would fall between 64,000 GEOs and 72,000 GEOs. Meanwhile, the Company has accelerated the progress on the exploration program and would expect to reap benefits from Avshancli during FY21.

Considering the strength of the business model, decent FY21 financial guidance, improved operational conditions, robust financial position, solid liquidity position, 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 129.45 (as on 19 April 2021 at 10:35 AM GMT), with lower-double digit upside potential based on 8.98x Price/NTM Earnings (approx.) on FY21E earnings per share (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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