Panmure Gordon sees the potential for share price appreciation at Ariana Resources plc (LON:AAU) as the minerals firm commences production at Kiziltepe.
This year has seen a flurry of announcements from Ariana, which Panmure thinks may have made it difficult for investors to work out just how much progress has been made at the Kiziltepe prospect in Turkey.
In summary, “it is a lot”, Panmure’s Kieron Hodgson said. Nevertheless, Hodgson thinks the catalyst for share price appreciation will be when the company formally announces the start of production. At the moment, the weather in Turkey is being less than helpful.
“We now assume revenues in Q2FY2017, following recent weather delays. Updates, such as the forestry permit for Kizilcukur are positive. These will provide production flexibility and could extend operations at the flagship Kiziltepe Mine whilst underpinning our thesis that Kiziltepe, fed by multiple sources, can sustain materially higher rates of low cost production beyond the current mine plan. The drilling programme of 2016 will also, we believe, result in a notable increase in resources,” Hodgson said, as he increased his target price from 2.46p to 3.02p.
Ariana shares currently trade at around 1.69p.
Following the recovery in precious metals prices, the broker has recently revised its assumptions for gold and silver prices, and this has resulted in a change to Ariana’s estimated net asset value per share (NAV).
Using an 8% discount rate, Panmure calculates that the current share price is only around 53% of the NAV, down from 85% in its previous estimate.
“As Ariana moves towards long term production, improved efficiencies and a subsequent reduction in costs should be seen, underpinning the investment case. Marked to spot, and using our 8% cost of capital, the long term price of gold needed to justify the current equity valuation is around $1,100/oz,” Hodgson said.
Gold currently trades at around US$1,220 an ounce.
The price target is derived from a simple sum of the parts calculation and “offers almost 80% upside to the current market price, although the risk of further equity dilution, a common theme with small cap mining stocks, should remain a consideration”.