Tardan CIL >60% complete

Auriant Mining 19 December 2018 Update
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Auriant Mining

Tardan CIL >60% complete

Q3 results

Metals & mining

19 December 2018

Price

SEK2.14

Market cap

SEK211m

SEK8.9898/US$

Net debt (US$m) at end-September 2018

70.7

Shares in issue (000s)

98,649

Free float

33%

Code

AUR

Primary exchange

Nasdaq First North Premier

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.4

(5.7)

2.9

Rel (local)

6.0

6.5

11.5

52-week high/low

SEK2.5

SEK1.9

Business description

Auriant is a Swedish gold company, focusing on exploration and production in Russia. It has two producing mines (Tardan in Tyva and Solcocon in Zabaikalsky), one advanced exploration property (Kara-Beldyr in Tyva) and one early-stage exploration property (Uzhunzhul in Khakassia).

Next events

Q418 results

28 February 2019

Q119 results

May 2019

Tardan CIL first production

July 2019

Analyst

Charles Gibson

+44 (0)20 3077 5724

Auriant Mining is a research client of Edison Investment Research Limited

Auriant’s Q318 results were characterised by a resumption of mining at Tardan, with 65kt of ore mined at an average grade of 2.79g/t to produce 96kg (3,087oz) gold during the quarter. As a result, the company expects Tardan to produce 380kg (12,217oz) in FY18, which implies production of 173.8kg (5,588oz) in Q418, 8.6% above its earlier guidance of 350kg (11,252oz). However, heavy rainfall in July led to widespread flooding in the Zabaikalsky region, so production at Solcocon in FY18 is now expected to be 73–75kg (2,347–2,411oz) versus earlier guidance of 150kg (4,823oz). As a result, we have updated our forecasts to reflect revised production guidance as well as a lower gold price in H218 versus H118.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

43.4

7.8

36.4

0.0

0.7

N/A

12/17

33.5

(3.1)

(5.8)

0.0

N/A

N/A

12/18e

18.3

(11.2)

(11.1)

0.0

N/A

N/A

12/19e

45.1

9.7

7.6

0.0

3.1

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

FY19 guidance

In addition to FY18, Auriant has also provided guidance for FY19, including its expectation of production of 570kg (18,326oz) from the Tardan CIL project, 400–450kg (12,860–14,468oz) from the Tardan heap leach operation and 90kg (2,894oz) from Solcocon. The revised guidance has caused us to adjust our forecasts slightly for FY19 to reflect higher output overall, albeit at a lower margin to reflect the lower proportion of output from the CIL plant.

Progress on Tardan CIL project

The Tardan CIL project is reported to be running slightly behind schedule, but still c 60% complete, and is expected to enter production in July 2019. As at end November, the metal frame was reported to be >80% complete, the foundations for heavy equipment 100% complete, the supplementary buildings 90% complete, the coal heating station 100% complete and a new high voltage line 100% complete.

Valuation: US$0.82/SEK7.37 with 89% upside

Assuming an incremental US$13.8m equity fund raising at the prevailing share price in FY19 (to bring the total to US$17.2m gross including the warrant exercise in March 2018), we estimate that Auriant is capable of generating average cash flows of US$37.3m, average earnings of US$31.2m and average EPS of 20.0 cents per annum in the 12-year period of FY22–33 (inclusive). This will allow it to pay maximum average potential dividends to shareholders in the order of 24.0c per share in the period FY25–33 (inclusive). Discounted at our customary 10% discount rate, such a stream of dividends has a value of US$0.82/share, rising to US$1.55/share (SEK7.37, rising to SEK13.93) on the cusp of the company’s first substantive dividend in FY25.

Q3 results summary

Auriant’s Q318 results were characterised by a resumption of mining at Tardan, with 65kt of ore mined at an average grade of 2.79g/t to produce 96kg (3,087oz) gold during the period. As a result, the company expects that production for Tardan during FY18 will be 380kg (12,217oz), which implies production of 173.8kg (5,588oz) in Q418 and is 8.6% above its earlier guidance of 350kg (11,252oz). At the same time, heavy rainfall in July led to widespread flooding in the Zabaikalsky region, which disrupted operations at Solcocon. Although output of 46.6kg (1,498oz) during the quarter was above that of 41.2kg (1,325oz) in the corresponding quarter in 2017, and despite the fact that mining continued into October, the company now expects production from Solcocon to be 73–75kg (2,347–2,411oz) in FY18, compared with its earlier guidance of 150kg (4,823oz). As a result, our expectations for Auriant’s results for FY18 have been updated, as shown in Exhibit 1. This also reflects the decline in the gold price from an average of US$1,317/oz in H118 to US$1,212/oz in Q318 and US$1,219/oz to date in Q418.

Exhibit 1: Auriant results, Q118–Q418e, by quarter (US$000s*)

Q118

Q218

Q318

Q418e

FY18e
(current)

FY18e
(previous)

FY19e
(current)

FY19e
(previous)

Tardan heap leach production (kg)

70.6

39.7

96.0

173.8

380.1

329.0

450.0

153.0

Tardan CIL production (kg)

0.0

0.0

0.0

0.0

0.0

0.0

570.0

842.0

Tardan production (kg)

70.6

39.7

96.0

173.8

380.1

329.0

1,020.0

995.0

Solcocon production (kg)

0.0

16.1

46.6

10.3

73.0

150.0

90.0

0.0

Gold price (US$/oz)

1,335

1,318

1,212

1,225

1,291

1,320

1,263

1,263

Revenue

2,327

3,606

5,108

7,250

18,291

20,346

45,070

40,403

Cost of sales

-2,641

-4,371

-5,035

-6,237

-18,284

-14,447

-22,557

-17,389

Gross profit

-314

-765

73

1,013

7

5,899

22,513

23,014

Depreciation

-1,083

-844

-1,310

-1,510

-4,747

-4,632

-4,239

-4,239

General & administration

-678

-829

-496

-668

-2,671

-2,500

-2,500

-2,500

Other operating income

50

189

97

0

336

0

0

0

Other operating expenses

-68

-390

257

-116

-317

-466

-317

-466

Impairments etc

0

0

0

0

0

0

EBIT

-2,093

-2,639

-1,379

-1,281

-7,392

-1,699

15,457

15,809

Interest income

5

0

0

0

5

0

Interest expense

-940

-1,015

-875

-943

-3,773

-5,616

Net interest

-935

-1,015

-875

-943

-3,768

-5,616

-5,748

-4,681

Forex gain/(loss)

-225

-1,043

-82

0

-1,350

0

Profit before income tax expense

-3,253

-4,697

-2,336

-2,224

-12,510

-7,315

9,709

11,128

Tax

608

671

536

445

2,260

0

0

0

Marginal tax rate

18.7

14.3

22.9

20.0

0.0

0.0

0.0

Profit after tax

-2,645

-4,026

-1,800

-1,779

-10,250

-7,315

9,709

11,128

Minority interest

0

0

0

0

0

0

0

0

Do. (%)

0

0

0

0

0

0

0

0

Profit attributable to shareholders

-2,645

-4,026

-1,800

-1,779

-10,250

-7,315

9,709

11,128

Dividend

0

0

0

0

0

0

0

0

Retained earnings

-2,645

-4,026

-1,800

-1,779

-10,250

-7,315

9,709

11,128

Average no. shares (000's)

74,847.182

98,648.502

98,648.502

98,648.502

92,698.172

130,840.845

127,586.031

168,968.882

Derivatives (000's)

0.000

692.500

692.500

692.500

692.500

692.500

692.500

692.500

Fully diluted no. shares (000's)

74,847.182

99,341.002

99,341.002

99,341.002

93,390.672

131,533.345

128,278.531

169,661.382

EPS (US$/sh)

-0.035

-0.041

-0.018

-0.018

-0.111

-0.056

0.076

0.066

Diluted EPS (US$/sh)

-0.035

-0.041

-0.018

-0.018

-0.110

-0.056

0.076

0.066

Source: Edison Investment Research, Auriant Mining. Note: *Unless otherwise indicated.

In part the increase in our forecast for ‘cost of sales’ may be attributed to the flooding in Zabaikalsky, although at least US$2.1m of the increase may also be attributed to changes in ‘work in progress’ in H118.

In addition to its guidance for FY18, Auriant has also provided guidance for FY19, including its expectation of production of 570kg (18,326oz) from the Tardan CIL project, 400–450kg (12,860–14,468oz) from the Tardan heap leach operation and 90kg (2,894oz) from Solcocon. The slightly revised guidance has caused us to slightly adjust our forecasts for FY19 to reflect higher output overall, albeit at a lower margin to reflect the lower proportion of output from the CIL plant, compared with previously. As a result, we have reduced our forecast for profit attributable to shareholders by 12.8% in FY19 (see Exhibit 1), although this is more than offset by a lower anticipated weighted average number of shares in issue in the period (see Financials, below), owing to the effect of a higher prevailing Auriant share price applied to future financing assumptions, such that our forecast for EPS is now 15.2% higher than at the time of our Outlook note in early March.

Tardan CIL progress update

As implied by its reduced production forecast for FY19, the Tardan CIL project is reported to be running slightly behind schedule. Nevertheless, it has been passed by the State Ecological Expertise, which means the plant complies with Russian Federation environmental protection standards. As of early December, the project was reported to be c 60% complete, including the metal frame (>80% complete), the foundations for heavy equipment (100% complete), the supplementary buildings (90% complete), the coal heating station (100% complete) and a new high voltage line (100% complete), such that it is now expected to enter production in July 2019 (versus late Q119/early Q219 previously).

Financials

Auriant had net debt of US$70.7m at end-September 2018 (versus net debt of US$70.2m at end-December 2017) after having raised US$3.2m (net) via the exercise of warrants at SEK2.50/sh in March. In November 2018, it also reached a further agreement with Golden Impala (a vehicle of its majority shareholder) for a new revolving bridging loan facility of US$3m to provide short-term working capital during the low production season (Q418–Q119, inclusive) and to secure continuous funding of the CIL project). Assuming it raises an additional US$13.8m in cash (to bring the total to US$17.2m gross, as per our Outlook note in March) via an equity funding at the prevailing share price of SEK2.14/sh in early FY19, all other things being equal, we would then anticipate Auriant’s net debt to evolve as shown in Exhibit 2, before being eliminated in FY25:

Exhibit 2: Auriant forecast net debt evolution, FY17–FY24e (US$m)

End-year

FY17

FY18e

FY19e

FY20e

FY21e

FY22e

FY23e

FY24e

Net debt (current)

70.2

71.8

55.3

71.2

108.9

87.2

43.6

2.1

Net debt (previous)

70.2

58.5

44.9

60.8

97.8

75.3

31.0

0.0

Source: Edison Investment Research

Note the forecast increase in net debt between FY19-21 as Kara-Beldyr is brought into production. At its maximum of US$108.9m, our estimate of Auriant’s maximum net debt requirement at end-FY21 equates to a leverage ratio (net debt/[net debt+equity]) of 92.0%.

Valuation

In common with its standard practice, our valuation of Auriant has been performed via the discounting of maximum potential future dividends at a discount rate of 10%, assuming all excess cash generated is distributed to shareholders only after all debt has been repaid.

On the basis that management executes the Tardan CIL and the Kara-Beldyr projects according to plan, we estimate that Auriant is capable of generating average cash-flows of US$37.3m, average earnings of US$31.2m and average EPS of 20.0 cents (versus 16.7c previously) in the 12-year period from FY22–33 (inclusive), thus allowing it to pay maximum potential dividends to shareholders in the order of 24.0c per share (versus 20.6c/sh previously) in the period FY25–33 (inclusive). Discounted at our customary 10% discount rate, such a stream of dividends has a value of US$0.82 per share (cf US$0.72/sh previously), as shown in Exhibit 3 below, rising to US$1.55/share in FY25 (cf US$1.29/share previously) on the cusp of the company’s first substantive potential dividend in FY25:

Exhibit 3: Auriant forecast EPS and maximum potential DPS, FY15–FY33e

Source: Edison Investment Research

Exhibit 4: Financial summary

US$'000s

2015

2016

2017

2018e

2019e

2020e

2021e

2022e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

33,429

43,380

33,532

18,291

45,070

45,077

46,005

124,600

Cost of Sales

(19,360)

(19,391)

(25,061)

(18,284)

(22,557)

(20,569)

(37,298)

(68,470)

Gross Profit

14,069

23,989

8,471

7

22,513

24,508

8,707

56,130

EBITDA

 

 

10,242

21,987

8,846

(2,645)

19,696

21,191

5,390

52,813

Operating Profit (before amort. and except.)

919

15,416

2,487

(7,392)

15,457

17,312

1,840

42,699

Intangible Amortisation

0

0

0

0

0

0

0

1

Exceptionals

(14,216)

0

(104)

0

0

0

0

0

Other

0

0

1,027

(1,350)

0

0

0

0

Operating Profit

(13,297)

15,416

3,410

(8,742)

15,457

17,312

1,840

42,700

Net Interest

(7,081)

(7,577)

(5,567)

(3,768)

(5,748)

(4,422)

(5,696)

(8,710)

Profit Before Tax (norm)

 

 

(6,162)

7,839

(3,080)

(11,160)

9,709

12,890

(3,856)

33,989

Profit Before Tax (FRS 3)

 

 

(20,378)

7,839

(2,157)

(12,510)

9,709

12,890

(3,856)

33,990

Tax

(1,116)

(1,355)

(28)

2,260

0

0

0

0

Profit After Tax (norm)

(7,278)

6,484

(2,081)

(10,250)

9,709

12,890

(3,856)

33,989

Profit After Tax (FRS 3)

(21,494)

6,484

(2,185)

(10,250)

9,709

12,890

(3,856)

33,990

Average Number of Shares Outstanding (m)

17.8

17.8

35.6

92.7

127.6

156.5

156.5

156.5

EPS - normalised (c)

 

 

(40.9)

36.4

(5.8)

(11.1)

7.6

8.2

(2.5)

21.7

EPS - normalised and fully diluted (c)

 

(35.8)

35.1

(5.7)

(11.0)

7.6

8.2

(2.5)

21.6

EPS - (IFRS) (c)

 

 

(120.7)

36.4

(6.1)

(11.1)

7.6

8.2

(2.5)

21.7

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

42.1

55.3

25.3

0.0

50.0

54.4

18.9

45.0

EBITDA Margin (%)

30.6

50.7

26.4

-14.5

43.7

47.0

11.7

42.4

Operating Margin (before GW and except.) (%)

2.7

35.5

7.4

-40.4

34.3

38.4

4.0

34.3

BALANCE SHEET

Fixed Assets

 

 

56,192

53,684

49,397

53,688

58,637

87,296

122,284

119,709

Intangible Assets

32,197

32,638

30,183

31,221

32,259

33,297

34,335

35,373

Tangible Assets

23,995

21,046

19,214

22,467

26,378

53,999

87,949

84,336

Investments

0

0

0

0

0

0

0

0

Current Assets

 

 

10,460

17,062

19,102

8,125

23,521

11,443

11,648

29,054

Stocks

4,833

7,883

7,425

3,658

7,512

7,513

7,668

20,767

Debtors

2,272

186

5,148

3,007

2,470

2,470

2,521

6,827

Cash

43

4,173

5,069

0

12,079

0

0

0

Other

3,312

4,820

1,460

1,460

1,460

1,460

1,460

1,460

Current Liabilities

 

 

(36,001)

(34,149)

(6,179)

(4,250)

(3,429)

(3,266)

(4,641)

(7,203)

Creditors

(5,901)

(3,537)

(2,005)

(2,076)

(3,429)

(3,266)

(4,641)

(7,203)

Short term borrowings

(30,100)

(30,612)

(4,174)

(2,174)

0

0

0

0

Long Term Liabilities

 

 

(70,307)

(66,995)

(82,054)

(80,627)

(78,306)

(82,160)

(119,835)

(98,114)

Long term borrowings

(61,366)

(58,117)

(71,098)

(69,671)

(67,350)

(71,204)

(108,879)

(87,158)

Other long term liabilities

(8,941)

(8,878)

(10,956)

(10,956)

(10,956)

(10,956)

(10,956)

(10,956)

Net Assets

 

 

(39,656)

(30,398)

(19,734)

(23,064)

423

13,313

9,457

43,446

CASH FLOW

Operating Cash Flow

 

 

6,347

19,359

9,751

1,984

17,733

21,026

6,559

37,969

Net Interest

(7,081)

(7,577)

(5,567)

(3,768)

(5,748)

(4,422)

(5,696)

(8,710)

Tax

(13)

(27)

(79)

2,260

0

0

0

0

Capex

(118)

(2,391)

(3,025)

(9,038)

(9,188)

(32,538)

(38,538)

(7,538)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

49

(10)

5,424

3,173

13,777

0

0

0

Dividends

0

0

0

0

0

0

0

0

Net Cash Flow

(816)

9,354

6,504

(5,390)

16,574

(15,934)

(37,675)

21,721

Opening net debt/(cash)

 

 

90,607

91,423

84,556

70,203

71,845

55,271

71,204

108,879

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

0

(2,487)

7,849

3,748

0

0

(0)

0

Closing net debt/(cash)

 

 

91,423

84,556

70,203

71,845

55,271

71,204

108,879

87,158

Source: Company sources, Edison Investment Research

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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New Zealand

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United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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