Ariana's Red Rabbit partnership the key to getting the shares moving higher

The stock market can be fickle. Just ask Ariana Resources boss Dr Kerim Sener about its unpredictability.

October 28 is a case in point. Ariana (LON:AAU) unveiled a 25 per cent upgrade to the resource at the company’s Kiziltepe project in Turkey’s Sindirgi gold corridor, yet the reaction was perverse. 

The shares fell 10 per cent on the day and have ping-ponged up and down ever since.

Sener is bemused by the reaction of investors. For as we shall see the group is progressively de-risking Kiziltepe, which is now one leg of the company’s Red Rabbit joint venture with Turkish construction firm Proccea. 

Ariana has also mapped a clear path to production by the “back end of 2012”.

The latest batch of regulatory announcements showed that Sener recently topped up his holding in the company, underlining his confidence in the business.

Meanwhile, Starvest, run by the veteran mining investor Bruce Rowan, bought 500,000 shares last week. This took its stake to just over 6 per cent of Ariana, while providing an independent endorsement of Ariana’s strategy. 

Sener recently hosted a two-day field trip to Kiziltepe with the aim of bringing investors, analysts and potential project financiers up to speed with the latest developments.

Specifically, they heard first-hand how the rather colourfully named Red Rabbit partnership with local construction firm Proccea will work over the next two years.

“The idea was to introduce people to the joint venture and to hear not just from us but our partners Proccea,” Sener told Proactive Investors.

But what exactly is Red Rabbit? 

Well, it brings together the Kiziltepe prospect with Proccea’s Tavsan gold area.

Together they have a resource of 450,000 ounces of gold and gold equivalent, though the target is to take that figure to at least 500,000 ounces. From that they hope to produce around 30,000 ounces per annum over a five year period.

Proccea has committed to spending US$8 million to earn a 50 per cent stake in the joint venture company. 

Phase one of the project will be overseen by Ariana, which will include the feasibility study and environmental permitting process. 

Once this is completed the project will then be handed over to Proccea, which will supervise the construction of the gold plant.

“The reason we took on Proccea as a project partner is not just because the company has financial clout, but because of their specific skill base which is the design, manufacture and commission of gold plants,” Sener said.

In fact the pair got to know each other last year when Ariana’s first gold production was processed at the Eti Gumus facility built by the Turkish construction firm.

“It blossomed from there,” Sener said. “They wanted to get into the mining business – and not just as a contractor – and we wanted a partner with Proccea’s skill-set.”

The feasibility study and environmental assessment of Red Rabbit are already underway, while the pair is leaving around three months for the permitting process.

It means construction of the plant should begin in the early part of 2012, and Sener reckons it will take “six-to-eight months” to complete the plant. So we ought to see the first production from Kiziltepe in the third quarter of the same year.

Before that the Red Rabbit joint venture company must find US$17-18 million to construct the plant. And it is looking to Turkish banks as a possible source of project financing. 

“Finance coming from the western world will always see Turkish risk factors and so there will be a risk premium added to the cost of that finance,” the Ariana managing director said.

“With a Turkish bank this will not be the case. So there is every possibility that the Turkish financing route will be cheaper. 

“Turkish banks have less familiarity with gold projects. But there is a growing interest in gold in Turkey and using Turkish capital to fund these projects. 

“Another upside of using Turkish capital is that this will then, to all intents and purposes, be a Turkish project.”

A scoping study has already revealed that the cash costs of production will be in the region of US$350-400 an ounce. The difficulty is predicting the price of the precious metal, which in turn will dictate the design of the mine. 

“With the resource estimate we have got at the moment we ran the Whittle pit optimisation at US$800 gold and US$14 silver,” Sener said. 

“Based on the latest consensus forecasts we are actually looking at a gold price well in excess of US$800 and probably closer to US$950 an ounce. 

“Whether we design an open pit at that level is another question. You want to build in an element of conservatism building an open pit.” 

While the joint venture company develops the Red Rabbit project, Ariana is already scouting for opportunities in Western Turkey that could eventually be fed into it to expand the resource base to one million ounces. 

Sener has his eye on the upcoming licence auction, which kicks off in January next year.

“Once we have established a gold plant that will form a natural hub to what we are doing,” the Ariana managing director says. 

“But well in advance of establishing a gold plant we are undertaking an intense exploration programme for additional resources.

“We have earmarked a number of areas within Western Turkey we want to go after. 

“But we are waiting for the auction process to start following the release of the latest regulations. 

“The process will start in January. And because we have undertaken this process of targeting we are hoping we can pounce on a number of key licence areas.

“We can then sell resource opportunities into the joint venture at three times the exploration cost. But even if we complete such a sale we would still, through the JV company, own a 50 per cent interest in the area.”

In the meantime, Sener is left to ponder the current share price which, at just a smidgeon below 4p a share, gives Ariana a market cap of around £9 million.

That valuation barely recognises the progress the company has made in the past year, or the fact that Ariana could very well be producing gold in less than two years from now.

And it completely overlooks the alliance with Proccea – a strong local partner with deep pockets.

“We’ve got a solid resource in Turkey. It has gone through scoping and is moving into feasibility that is fully funded by a partner,” Sener says.

“That project partner is not just providing cash. We did the deal with them because of their skill set of designing and manufacturing gold plants.

“But with a partner such as Proccea....beyond Kiziltepe, beyond Red Rabbit we can really take this places. Not just in Turkey but within the region.”