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Tuesday, 11 December 2012
Amara Mining braced for busy year of potential catalysts
For an AIM quoted gold miner Amara Mining(LON:AMA) has a particularly busy schedule packed full of potential catalysts.
With cash generative production, a major mine development project and exploration upside it ticks many of the boxes for investors that might otherwise be looking at much bigger companies.
It is not a new story for investors, however.
The company, previously called Cluff Gold, has been around for years, but key board changes and a reboot of the brand has rejuvenated the investment case in the eyes of some investors.
Indeed, RFC Ambrian said in a note recently that Amara was set for a brighter future, while banking heavyweight Goldman Sachs last month added it to a ‘buy list’ of West African miners.
This new-found recognition from the City is in part due to the recent appointment of John McGloin as executive chairman in May.
Prior to his appointment McGloin was a well-regarded City mining analyst - formerly head of mining at Collins Stewart - and along with fellow Amara executives Peter Spivey (CEO) and Pete Gardner (FD) he plans to oversee the group’s next phase of growth.
“We have invested more cash flows from our operations into the business to provide flexibility going forward,” McGloin said, in an interview with Proactive Investors.
Amara is expecting to produce 53-57,000 ounces of gold this year, throwing off around $30-40mln a year in earnings. McGloin says that the re-investment of this cash is vital for the company’s future.
“We've ensured that we've invested in all our projects, and although we've got a rigid path that we're moving on in terms of exploration, development and production, we have got a spread of risk across the value chain and also the West African region.
“Also, being able to fund yourself is a great comfort to have. We have solid production and good margins. That allows us to keep investing in growth.”
The Sega project in Burkina Faso is a pertinent example of this investment. The project was acquired in May and while it is not huge, the new mine will serve a crucial strategic purpose.
Sega will cost just shy of $10mln to build and it will preserve Amara’s status as a ‘miner’ by providing higher grade ore to the maturing Kalsaka mine, which would otherwise deplete its reserves at some point next year.
Initially it will see an additional 21 months of gold production from Burkina Faso – though fresh exploration may increase this. What is most significant, however, is that the extended production will support Amara through what is likely to be its most important period to date.
A pivotal feasibility study on the Baomahun project is due towards the end of the first half.
If successful, it will trigger a transformational programme of development which will ultimately see Amara establish gold output in the order of 140,000 ounces a year.
It is estimated that the mine will cost $200mln to build, though a ground-breaking financing deal with Korean conglomerate Samsung promises to cover the majority of the project finance.
Those invested since the Cluff days will know the potential of Baomahun. For them it has for a long time been the prize they've had sights on, although the progression of Kalsaka/Sega and Yaoure means it now has a broader portfolio appeal.
They will also know that, based on original timelines, the feasibility should have been done and dusted at this point - the deadline was first pencilled in for the third quarter of last year.
But the decision was taken to spend more time on the pivotal study to ensure the project was sufficiently robust.
That has involved a full geological remodelling of the project, and the process, McGloin explains, has reaffirmed confidence and refined the mine plan – a new resource statement, released last week, will also form part of the study.
"I'm happy with the recent work we've done.
"We now have a model that we are very happy with. There is not a huge difference between the new number and the old number in terms of the global resource, but we've now got a better definition of the deposit, on a more local level.
"It gives us greater confidence as we move forward through to the scheduling and pit design, that we've got a model that will behave more like the real world rather than something theoretical.
"And we are now looking at the scheduling so we can get a high grade starter pit over the first couple of years and allow rapid payback."
That said, McGloin reckons next year's study will merely define the base case for Baomahun.
He highlights targets outside the current pit design. They are not huge in themselves (about 200,000 to 300,000 ounces each) but because they are near surface and close to the planned facilities they are likely to be economic.
There is also a much larger target further north with different geology but a similar structure, and while a lot more work is needed here. McGloin says it has the potential to be 'Baomahun size'.
It is still early days however, and McGloin is wary of talking this prospect up too much.
For now, though, the priority is to get the project signed off and built.
Key to keeping the project on track will be to start as much work as possible, as early as possible. The challenge is Sierra Leone’s long rainy season.
“Losing one month or two at the start of a programme it can potentially mean we lose a whole season because you can’t start to build a mine in the rainy season,” McGloin says.
Also between now and completing the feasibility study, Amara plans to start putting infrastructure in place.
In completing the feasibility, cost estimates and supply chain timetables also need to be refined and McGloin explains that this may yield some cost savings.
The project is currently estimated to cost US$200mln. It is anticipated that the majority of this will be covered by Samsung via a similar off-take deal to the one currently in place for Kalsaka/Sega, but, an additional element of funding will also be required. In the meantime, Amara will be throwing off $30-40mln in cash from its production in Burkina Faso.
The plan is to invest this primarily into exploration across the portfolio, to fund growth across the whole group, he says.
"We have two choices. We can either invest the money to move all our projects forward, or we slow everything down, sit on our hands, and build that cash to plug the gap for Baomahun."
McGloin points to the value that Amara is adding via its investments this year as a reason why he prefers the first option. He highlights that $10-12mln was invested this year at Yaoure. That investment, according to McGloin, has allowed Amara to advance the project and could add value in the months ahead.
“The full effect of that will be seen when we get the resource update out in the first quarter. The value will be clear to see. I’m expecting to see those resources jump significantly."
Reverting momentarily to his past role of mining analyst, McGloin explains that the City doesn’t currently recognise the value of Yaoure at all.
He also said that while it's not necessarily an ideal 'Plan A', Yaoure could potentially open up strategic opportunities to help fund Baomahun and avoid the need to raise capital in the debt and equity markets.