James Faulkner and Zak Mir on Amara Mining. A mid-tier producer valued at a small cap price?

4 mins. to read

Small cap gold miners aren’t exactly at the top of investors’ shopping lists at the moment, but perhaps that’s reason enough to give them the once-over. Amara Mining, previously known as Cluff Gold, is pretty typical of the sector, having seen its share price fall from highs of more than 100p in 2011 to recent lows of 10p. The shares currently trade at 17p to capitalise the firm at just under £56 million. So why have we singled out the company?

Amara has the potential to become a top-ten African gold miner through its Yaoure Project in Côte d’Ivoire. During Q1 2014, the firm completed a Preliminary Economic Assessment (PEA) for the asset, which suggested a net present value (NPV) of $688 million with an internal rate of return (IRR) of 32%, based on a discount rate of 8% and a gold price of $1,250 per oz. Furthermore, project economics remain robust at a gold price of $1,100 per ounce, with an IRR of 23% and NPV of $406 million. This is against a gold price of $1,302 per oz at time of writing so there looks to be considerable potential here.

The PEA envisages average annual production of 325,000 ounces over a 12-year initial life of mine from a single open pit containing 4.2 million ounces. It also sees total cash costs at just $691 per oz and a rapid total payback of 2.4 years. However, the report also highlighted the significant financial requirements of the project. The PEA envisages a capex requirement of $274 million, excluding $42 million contingency, and $92 million for owner-operated mining. These high upfront costs are some of the the main reasons why the shares are being valued so low.

Following a placing to raise £18.5 million in April, Yaoure’s Pre-Feasibility Study (PFS) is now funded to completion (expected Q1 2015) and Amara intends to upgrade a portion of Indicated resources to the Measured category in 2015 to support the Bankable Feasibility Study (BFS). These should pave the way for the company to begin negotiations for project financing, with the most likely route looking to be a joint-venture of some sort, possibly with a larger mining company.

Meanwhile, Amara has two other assets in its portfolio: Kalsaka/Sega in Burkina Faso; and Baomahun in Sierra Leone. Kalsaka/Sega represents the firm’s existing production base. Management took the decision to stop mining at Kalsaka in July 2013 as it had become unprofitable due to the combination of lower grade ore and reduced throughput combined with the lower gold price. Mining is scheduled to stop in Q1 2015, with some continued leaching of heaps likely to deliver a few more ounces. Meanwhile, trucking of ore from recently established operations at nearby Sega commenced in September 2013, which should help to sustain Amara while it prepares the ground at Yaoure.

Over in Sierra Leone, Baomahun is a different kettle of fish. Having previously been the firm’s flagship project, Baomahun has taken a backseat of late after a somewhat disappointing Feasibility Study last June. Assuming a discount rate of 8% and a gold price of $1,350/oz the Study envisages a post-tax Internal Rate of Return of 22% and a post-tax net present value (NPV) of $127 million. The study also implies life of mine average total cash costs of $799 per ounce, a mine life of 11.5 and a payback period of three years. Total capital costs excluding contingency are estimated at $237.2 million. Amara has previously stated that it would be looking to fund the development costs “in a non-dilutive fashion”, with the sale of a small portion of the project equity or the bringing in of a joint-venture partner being considered. We believe this asset should now be seen as option value on a more geared play on the gold price, which may become interesting in a higher gold price environment.

With the company’s production operations set to wind down in Q1 2015, the pressure is on Amara to advance its Yaoure Project towards development. Total cash costs at Yaoure are among the lowest in Africa ($594 per ounce in the 6.5Mtpa scenario), which should ensure that this project gets off the ground in some form or another. In the meantime, an infill drilling programme has the potential to increase the Inferred Resource later in 2014.

Of course, the risks to Amara reaching its potential remain large, most notably any further falls in the gold price, political risk in Africa, concerns over financing and potential equity dilution. However, with the potential to be producing six figure sums of gold (in oz) in just 2/3 years time, Amara is a potential mid-tier producer being valued at a small cap price.


Extended Base Building Promises A Return Towards 30p

Given the undoubted private investor enthusiasm for Amara Mining that there was early last year, it is painful to note the share price breakdown on the daily chart. However, it would appear that there are some valid grounds for assuming that the worst is over here for the bulls on a technical basis. The beginning of the end of the bear run was flagged by the RSI as is so often the case. This delivered bullish divergence ahead of the lows in July. Since then, there has been a rising trend line in the oscillator window with the 11 month line exceptionally long and currently running just below the key neutral 50 level.

The RSI itself is now at 57, and at least while there is no break back below the 2013 support line we can assume further gains, and particularly if there is no weekly close back below the 200 day moving average – now at 15.45p. That said, the recovery process could be kickstarted by a break of the red August resistance line nominally at 18p and the top of a post summer triangle formation. The view currently is that a break of 18p resistance could lead as high as 30p on a 2-3 month timeframe with this target being the top of last year’s trend channel.

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