SMALL CAP IDEAS: Ariana Resources looks set to benefit from gold price rise

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Ariana Resources does not expect disruption to production from its Kiziltepe mine


The gold price has hit record highs in several currencies in recent days, including the pound, Canadian dollar, South African rand, and Australian dollar. 

It has also recovered much of the ground lost in US dollar terms when investors sold heavily to cover losses elsewhere in the market. That selling is now abating, and the buyers are coming in for gold again, seeking the traditional safe haven.

This means that companies that find and produce gold are set to benefit too, a process which is already getting underway.

Ariana Resources does not expect disruption to production from its Kiziltepe mine

For those that are able to continue production and development work, a high gold price combined with ongoing low fuel prices means that the opportunities for wider margins are considerable.

Among those companies who have already made this explicit is Ariana Resources, which said on March 19 that while precautionary measures have been taken against the spread of coronavirus at its operations, no disruption to production from its Kiziltepe mine is expected.

Indeed, Ariana has recently reiterated its guidance for production of 18,000 ounces of gold equivalent this year.

Separately, but as clear proof of concept to any investors that are still sceptical, the company has just taken delivery of a maiden £1.6million dividend from its local operating subsidiary Galata Madencilik. 

That dividend related to the 2019 operational year, so, with operations now well up and running, it is reasonable to expect that 2020 will generate a similar payout at some point further down the line.

The company’s plans were well laid out in the operational update released to the market in the middle of March, in which point Ariana spoke of monthly ore production rates of around 20,000 tonnes, a total annual throughput of ore through the mill of 205,000 tonnes, and an average gold grade per year of over 2.5 grams per tonne.

The company is well-known in the London mining scene as one of those that quietly gets on with the job. It has been notable that while many have fallen by the wayside over the years, Ariana has been one of the few that has been able to transition successfully from explorer to producer and retain its independence.

The trick now will be for it to grow, and there are already plans afoot for more regional exploration in Turkey, as well as a foray out to nearby Cyprus.

Ariana’s share price has reflected this success, having more than doubled over the past five years. But the recent coronavirus chaos has seen them drop away from their February highs and create what could be seen as a buying opportunity.

Having said all that, however, for investors interested in gold, why is it worth looking at a company like Ariana, rather than just taking a speculative position in a gold ETF?

The answer is that the leverage to the upside is greater. With a gold ETF you don’t get the benefits to margin of lower oil prices and higher gold prices – all you get are the daily moves in the price itself.

A rise in the gold price such as we have seen in the past couple of weeks, as gold moved from below $1,500 an ounce to above $1,600 amounts to a rise of slightly less than 7 per cent.

On the other hand though, Ariana’s share price has been enjoying much bigger swings, and as the recovery of the gold market and the realisation that gold price strength is here to stay sinks in, the upside is likely to be significant.

After all, as Ariana’s managing director Dr Kerim Sener pointed out in a recent interview, all the economic modelling that was done in relation to production from the company’s Kiziltepe mine assumed a gold price of $1,300. Anything above that, he said, is just ‘cream’.

Now factor in the lower input costs arising from a lower oil price, and the margins look set to be chunky to say the least.

So, although it may be a little while yet before the next dividend rolls in to the company’s coffers, don’t expect investors to sit on their hands waiting for it to happen.

Instead, as the massive programmes of money printing that are now underway around the world start to have an impact, the likelihood is that more and more people will look to place their capital into gold. 

Those that are looking for that extra bit of upside could do a lot worse than consider a company with a strong track record of competence, existing cashflow, and significant upside.

 

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