How Anglo Asian plans to build on its Azerbaijan success

It has taken Azerbaijan’s first modern day gold project into full production. Now Anglo Asian Mining (LON:AAZ) is hoping to build on this success by increasing the reserve base and refinancing a U$S44 million loan.

The company’s operation at Gedabek, in the west of the former Soviet republic, poured its first gold last year.

Total production was 40,000 ounces in the first year of production and in the last six months AA has produced 28,500 ounces of precious metal. That puts it on course to modestly exceed its target of 53,500 ounces for 2010.
It is planned that production will plateau at around 60,000 ounces for the remainder of the mine’s projected six-year lifespan.

However work is already underway to prolong the useful life of Gedabek.  SGS Mineral Services is preparing a report which should lift the 700,000 ounce resource base by at least 50 per cent.

An update on progress is expected by the end of August.

However we’ll have to wait until the end of the year or early 2011 to discover what can be added to the mine’s 300,000 ounce reserve base.

While a rise in reserves would be an obvious boon, AA may have to upgrade from its current, low-cost heap leaching process of extracting gold in favour of using the agitation method of recovery.

"The grades we are getting have been significantly higher than our project plan," says Andrew Herbert, Anglo Asian’s chief financial officer.

"If we do see a big increase in reserve ounces at a higher grade we are going to be looking at a different method of processing - one with a higher recovery of gold.

"So we are looking at the agitation leaching process, which might run alongside a heap leach."

While more gold will be recovered from the agitation process (traditionally 30 per cent of the metal is lost in heap leach), there is a cost to building a new ore processing plant.

The additional capex for setting up an agitation leaching facility will be determined after the more exact quantity of resource is known and a feasibility study is conducted.

This potential expenditure is bound to figure in the thinking of management as they attempt to refinance a US$43.9 million loan with the Bank of Azerbaijan.

It helped fund the Gedabek mine’s development, but the 15 per cent interest rate is punitive by today’s standards.

It has already begun repaying the loan, and must do so in full by 2013. However the company is looking into various options to partially refinance this debt by the end of the year.

"We are currently talking to other banks about refinancing. How quickly we can do this or if it is an option which suits us is all up for discussion," he said. 

In the meantime the group is making good progress with its Gosha gold licence, which should be extended beyond April 2011.

And the company is confident that it will extend the Ordubad licence area, which is up for renewal 2011 which will allow it to further develop the property to fast-track towards a discovery.

One thing that might concern investors is the production sharing agreement with the Azerbaijan authorities.

The first thing to say is this is an almost exact facsimile of the deal the Azeris have with the established oil companies operating in the country.

The agreement allows for the group to recover 75 per cent of the cost associated with Gedabek, though the government will take 12.75 per cent of revenues during that claw-back period.

After that the Ministry of Ecology and Natural Resources is entitled to 51 per cent of the "remaining proceeds".

"However  for the next three years we will be recovering around 87 per cent of the revenue.

"We can recover against historic and capital and operating costs, plus charge an imputed rate of interest on those outstanding cost.

"However as a low cost producer we will make a decent profit margin.

"For many mining companies there are better arrangements. On the plus side we have a reasonably low costs base and constructive relations with the government. Overall it is a good environment in which to do business."

Those close links with Azerbaijan have been fostered by the company’s chairman, Khosrow Zamani, a former director of the International Finance Corporation, and chief executive Reza Vaziri.

Vaziri has close ties to the country as a founder of the US-Azerbaijan Chamber of Commerce, which channelled investment into the nation after the collapse of the Soviet Union.

"We have got good relationship with the Azeri government, "Herbert said.

"Our CEO is on good terms with the Government of Azerbaijan."