Ariana Resources primed and ready for a crucial phase in its development

We are now entering a crucial phase in the development of Turkey-focused Ariana Resources (LON:AAU).

Little over a year from now, the group ought to have made the transformation from explorer with bags of promise, to a grown-up gold producer capable of generating cashflow and profits.

However Ariana, led by Kerim Sener, revealed last week it already has an eye on what it will be doing two, three or four years from now.

It did so by unveiling plans to significantly increase its foot-print in western Turkey by taking part in the eagerly-anticipated licence auctions, which begin in January.

The auctions, for what are known as Group IV licences (which include gold, silver and copper), are due to commence in January and continue until May 2012. 

In all, 1,252 exploration licences will be auctioned via a consecutive closed and open bidding process. 

Ariana has identified 20 prospective target licences within its area of interest, and expects to pick up perhaps a dozen.

The company has done its homework by compiling a regional database, which was significantly enhanced during the last year following an extensive regional sampling programme across much of western Turkey. 

Now comes the tricky process of deciding how much it wants to bid for each licence.

“We are now putting together a package to determine what we might spend on those licences,” says managing director Sener.

“But we are not in the situation right now that we need all the cash available.

“What’s important now is to determine the maximum levels we are willing to bid to.”

The company has around £1.2 million on its balance sheet, while it has a £5 million equity drawdown facility. 

“That facility we can utilise as and when we need it and it is ideally suited to the auction situation. We may not need to come back to the market,” the Ariana chief reveals.

Ariana’s exploration and development activities are currently focused on a series of expanding gold projects in western Turkey.

The main area of interest is the Red Rabbit project, jointly owned by local construction firm Proccea Construction Co. 

It combines two assets - Sindirgi and Tavsan - that are 75 kilometres apart.

The main prospects are Kiziltepe, Kepez and Karakavak, which are within Sindirgi. 

This time next year the group will be on the cusp of its first gold pour at Kiziltepe.

After that the plan is to ramp up production from the mine to an annualised 20,000 ounces of gold equivalent, certainly in the first 5 years of operation.

The main pit and four smaller veins nearby are expected to produce at this rate for eight years.  However, there is upside scope to increase the rate of production or to increase the mine life in the event of new vein discoveries in the region.

The company is currently putting the final touches to an internal preliminary feasibility study for the project, and plans to publish a definitive study later in the year. 

It is expected that the capital costs will rise slightly from the scoping study figure of US$25.1 million to about US$26 million. 

However, with some further assessment and tweaking the aim is to bring the mine online for the originally budgeted US$25 million, Sener reveals.

The rising price of fuel is also expected to affect the cash costs set down in the scoping study, which were estimated at a bottom of the curve US$441 to US$472 an ounce of gold.  

Preparations are being made to submit applications for the outstanding permits needed for Kiziltepe, and they will be formally lodged at the start of next year. 

Sener isn’t anticipating hiccups, but has factored some wiggle room into what ought to be a reasonably straightforward process.

“There are certain things we can do in advance, because a lot of the project is permitted from a mining perspective,” he reveals.

“What we don’t have is a permit at this point in time for a processing plant. 

“A lot of the work we are doing on the environmental and social assessment is associated with that.

“It is very likely in the first and second quarter we will get started on aspects of the development ahead of the build commission.

“We haven’t had any difficulties in the past and the local community seems very much on side. 

“We have good support from the mayor and the two villages that will be most affected by the operation. 

“As long as we are able to keep the people onside and we don’t run into any complications with permitting then we should be alright.

“A lot of permitting issues have become simpler over the last few years so the process of getting gold mines into production is a lot more streamlined than previously.”

This drive to production doesn’t mean the company is ignoring the exploration potential of the Red Rabbit joint venture with Proccea.

The group’s plan is to lift its current JORC compliant resource from 448,000 ounces currently to around 1 million ounces across the wider Red Rabbit project area.

The company has uncovered what it thinks are subsidiaries to the main four veins at Kiziltepe.

“If we are successful in that process and do define these veins properly, then next year we’d intend to go back in and do some infill drilling and work up towards a resource,” says Sener. 

Additional prospects are located in the Sindirgi region, while it recently acquired a project from fellow AIM prospector Kefi Minerals, which lies outside the Red Rabbit JV but within the wider Red Rabbit project area. 

“This has an established vein system on it and there has been some drilling,” Sener reveals. 

“So we know there is something there. We just need to go back in, re-drill a few areas and see if we can establish an open-pittable resource at that location.” 

Partner Proccea has placed US$6.6 million on reserve to cover the initial funding of the project, which means a further US$18 million or so needs to be found to bankroll the capital programme.

Sener says that the joint venture company in Turkey is likely to debt-finance the capex costs.

“It could be done on a 50-50 equity basis. But we are unlikely to do that.” he adds.

“Our first port of call is likely to be a Turkish lending institution, or if not other international institutions.” 

The share price in the year to date is down by around 5 per cent. 

Now this isn’t bad considering some small-cap miners have seen up to 75 per cent wiped from their valuations as risk-averse investors have fled the sector.

However it is still a long way short of the 10 pence price target set by the influential mining analyst John Meyer, who works for Fairfax, the company’s broker.

He reckons Kiziltepe alone is worth around £13.5 million to Ariana, around £3 million more than the company’s current market capitalisation. 

Add in cash and exploration projects and this bumps the figure up to £24.2 million, or 10 pence.

Put it another way, the group is worth just US$36 per ounce of gold in the ground, which is at the low end of the market.

That gaping valuation chasm ought to close as the group gets closer to production.