Aureus Mining – Theory turned upside down?

Just another tale of mining woe – or an investors’ opportunity?

‘The Theory’, of course, is that as a miner approaches production, with all initial spending nearly over and cash generation in view, investors will be taking note and pushing the shares up.

Not down, as in the case of Aureus Mining (AUE)!

So how is it that – even though a three year development and construction programme at its 90% owned New Liberty gold mine in Liberia is almost finished with all funds (hopefully) raised (and spent) and gold, in quantity, already being sold – the market cap is now only 1/4 of the original project NPV and the shares are only 1/10th of brokers’ targets six months ago?

On the other hand, with the shares showing signs of bouncing off the bottom, might The Theory be about to reassert itself?

The reason The Theory has turned on its head is of course ‘events’, or rather, the lack of them, with the mine’s ramp up to full operation delayed by yet one thing after another so that it is now nearly a year late.

First it was Ebola in neighbouring Sierra Leone. Then it was teething troubles in the processing plant. Now it is the cumulative effect of all this on Aureus’s ability to repay the first instalment of the project loan advanced for construction almost two years ago. Around $10m plus interest is due by end March which the company doesn’t have (even though over $13m should have been earned from gold produced in the last few months, and even though it raised over £8m in a forced share issue only three months ago).

So Aureus has asked the banks to re-schedule in line with a revised mine plan it is working on, while a committee has been appointed to ‘evaluate the company’s options’ – which seems a strange thing to do if management is sure it’s just a question of getting things back on track, and if it didn’t think the banks weren’t going to enforce something nasty (like bankruptcy or sale!).

Assuming the mine gets back on track with the same plan as in its latest 2015 technical report, that loan repayments are deferred for a bit, and that no other snag or banker requirement (for e.g. a further equity raise) pops up, then AUE’s shareholders’ 90% share of the 8% discounted present value of the mine’s cash flows after loan repayments and tax (on the present much expanded 560m shares in issue and with gold at $1,200/oz) would be worth 14.6p per share. That would be my absolute maximum ‘value’, which readers will know means that my realistic ‘target’ for the share price would be considerably lower.

However, that would be for a company not in default of its banking covenant and at risk of who-knows-what measures they might impose.

Looking back this explains Aureus’s situation and investors’ current perceptions. In 2011 when it was formed (coming onto AIM in April at around 100p), and even in 2013 when New Liberty looked mostly financed despite the deteriorating funding market, it seemed very attractive. There was lots of cash in the balance sheet and a near 1.5m gold resource at over 3 g/tonne cheaply mineable from open pits – producing preliminary estimates of a truly golden 50% (pre-tax) IRR (at the then $1,400/oz gold price) in return for a mere $113m to get the mine into operation. Big institutions flooded aboard.

But spending was ballooning, with exploration in Liberia and Cameroon as well as mine development calling for another $77m raised at 50p in 2012 and another $15m (at 32p) in 2013. By end 2013 Aureus reported the mine 33% complete, with gold  resources increased to 1.7m ounces, and said it was ready to sign up for a $100m project loan to cover the rest of the mine’s development.

By then also, a Definitive Feasibility Study was showing an 8.5 year life, 859,000 gold ounces to be produced, and a post-tax NPV5 (i.e. quite flattering) of $119m at a $1,300/oz gold price, with the IRR down to 19% giving a 3.4 year payback. But shares in issue had stretched even more than spending – to 252.3m.

The $100m loan was signed in April 2014 and by December all but $20m had been drawn down, at which stage (including its earlier exploration and development) the mine had swallowed up $197m, while $75m was outstanding on the project loan. Although there was $33m cash for working capital, another $25.3m had had to be raised at 27p in spring 2015.

The net result at the most recent end Sept 2015 balance sheet showed the cash almost all gone, the outstanding project and other loans at nearly $100m, and 369m shares in issue.

Phew! So far, so rocky, but maybe the rewards were now in sight. Especially as the mine at July 2015 had ‘reached nameplate capacity’, enabling President and CEO David Reading to report (in so many words) “This is a significant achievement… giving me confidence in our ability to deliver profitable ounces in line with our business plan… and the mine is on track to reach full scale commercial production by Q4 2015 and to sustain an annual production rate of 120,000 ounces throughout 2016.”

Unfortunately on September 7th he had to report that “although initially hampered due to unavailability of explosives, the Company continues to expect to meet its production target for the first 12 months of operations…. [and] we look forward to reaching commercial production levels at New Liberty during Q4 2015.”

But at end October he had to report yet another short delay caused by the failure of an ore crusher, although, even so, “the company will continue to work towards declaring Commercial Production by year end”, which a few days later had become “we are now looking forward to declaring commercial production in January 2016.”

The market might have swallowed this, believing all would get back onto the track it thought Aureus was on. But what finally spooked it was the shock announcement on November 30th of further bank funding accompanied by yet another equity raise at a deeply discounted and obviously distressed 5p (nearly 1/3rd the prior market price). That put the final nail in the already diluted equity coffin, adding a horrendous 45% to shares then in issue (in exchange for only $11m of peanuts) to bring the current total shares in issue to 536.2m – 4.6 times the level where shareholders back in 2013 thought they had an attractive value per share.

Since then the tale of woe has continued, with more delays, culminating on January 22nd with the announcement of discussions with the company’s banks and, a few days later, that “a Special Committee has been formed to conduct a review of strategic options to enhance shareholder value”

Of course, we don’t know to what level ‘shareholder value’ in their eyes might now have fallen. But a ray of hope is that gold production in January 2016 and up to February 18th has been 11,001 ounces versus 17,172 ounces in H2 2015.

Without any detail there is little point now in trying to estimate whether in the next few months gold sales (dore bars at a lower than gold market price) will meet all the other creditors (suppliers as well as the banks) probably clamouring for payment. The mine’s long term economics may be all very well, but what counts for the company’s ability to pay them is the near-term cost of getting that gold out of the ground. The so-called All-in Sustaining Cost just isn’t relevant.

As I said earlier, Aureus’s share value now (with gold at $1,300/oz) is only 14.7p even assuming no further shocks or dilution. That absolute ‘target’ (as a broker might flag if he updates all his figures) doesn’t give much margin should production problems continue and should the banks impose stricter terms. While some investors might go for a quick ‘relief’ bounce (if it seems warranted) I certainly won’t be chasing the shares until that updated mining plan (due any time now) and loan repayment schedule is accepted by the banks.

Overall –  here we have yet another case – as for so many miners, and as I showed in detail for Ariana, Aureus has been a victim of much extraneous exploration and out-of-control development spending that has grotesquely diluted shareholders in what they originally thought was such great value in their central New Liberty mine. But I doubt whether investors, big and small, let alone miners’ managements, will learn the lesson.