Ariana Resources, the Turkey-focused gold explorer, has announced final results for the year ended 31st December 2011, which gave the board the opportunity to remind investors what was achieved during the period. Ariana has not only finalised the resource estimate and the Scoping Study for the Red Rabbit Gold Project but also completed the Pre-Feasibility Study on the Kiziltepe Sector of this project. Exploration continues at Kiziltepe, which is showing obvious potential for further discoveries on top of the four new gold-bearing vein systems that were identified last year. These are being investigated in the 4,000 metre drilling programme that has begun. In addition, new exploration licences have been acquired in the vicinity of Kiziltepe, such as the Kizilcukur property. It is becoming apparent that Ariana's flagship Red Rabbit Gold Project continues to grow in scale with further zones being identified which may serve to improve the economics of the project which is due to commence gold production in 2013.
Bonanza gold and silver grades have been found in a mineralised zone that has been identified on the extension of the Derya vein at the Kiziltepe deposit. These included: 12.1 metres @ 13.1g/t gold & 187.6g/t silver including 3.2 metres @ 38.7g/t gold & 511g/t silver and including 1 metre @ 65.9g/t gold & 760g/t silver. Exploration drilling has allowed the team to learn a lot more about the deposit and now the Arzu North vein system is seen to extend to the southeast beneath cover rather than being truncated by an E-W structure; and intercepts from this drilling programme included 34 metres @ 1.04g/t gold equivalent, 7.6 metres @ 7.60g/t gold equivalent and 5.8 metres @ 5.71g/t gold equivalent. On top of that, additional results from the eastern most part of the Emel Vein have highlighted an additional prospective zone extending towards the Arzu South structure which has demonstrated an intersection of 7.4 metres @ 1.71g/t gold equivalent. Such results illustrate the significant potential within what is a 650 metre “gap zone” that lies between Arzu South and Arzu North where a follow-up deeper drilling programme is being planned. Managing Director, Dr. Kerim Sener has pointed out these grades and widths of mineralisation are greater than anything that Ariana has seen in the seven years that the team has been exploring this deposit.
The Red Rabbit Gold Project continues to progress as the team achieve operational and corporate milestones. Additional permitting for the project is targeted for the second half of 2012, which means that first production should be in mid-2013. Apart from the results of the 2,000 metre drilling programme, there is clear progress being made in a number of directions.
Firstly, the initial stage has now been completed on the Tailings Storage Facility (TSF) design work, which will form part of the Feasibility Study, with the final TSF design and engineering study expected ahead of receiving permits for the construction start-up - targeted during H2 2012. Secondly, the acquisition of some strategically important freehold land has been completed in the vicinity of the planned Arzu South open-pit area. Ariana and its joint-venture partner, Proccea Construction Co., will be providing a US$600,000 short-term loan to the project to cover any shortfall in the development budget for phase one, which is being shared on a 50:50 basis by the partners.
To assist in the funding of the development of the Red Rabbit Project, Ariana has negotiated a US$2 million loan with YA Global Master SPV Ltd. This loan comes with an interest rate of 10% but the outstanding balance can be converted into Ariana paper at 6.65p per share by YA Global at any time. By late last year, core components of the Pre-Feasibility Study (PFS) on the Kiziltepe Sector of Ariana's Red Rabbit Gold Project had been completed by consultants Wardrop/Tetra Tech. The findings made for great reading as the PFS has increased the mine life at Red Rabbit to over eight years, which improves the fundamentals of the project. Highlights of the PFS also included: an increase of in-pit resources to 1,177,800 tonnes, corresponding to 118,200 ounces of gold and 1.45 million ounces of silver, and targeted production of 20,000 ounces gold equivalent per year in the first five years.
It is becoming clear that discoveries such as the Gamze Vein, where continuous high-grades of up to 10.7g/t gold equivalent have been identified and the Hande Vein with grades up to 7.74g/t gold equivalent, really serve to underline the team's confidence that the wider Red Rabbit Project region shows the potential for up to 1 million ounces of gold equivalent. The strategy looks to make sure of near-term revenue generation, while at the same time letting Ariana benefit from the significant uplift potential that any new discoveries will bring. Apparently, geophysics suggests that the Gamze Vein, together with the previously discovered Fidan Vein system, is connected within the same mineralised structure, with a combined strike length of 1,800 metres. In addition, at Kepez, which is 6.5 kilometres away from where the Feasibility Study is underway, it was reported in November 2011 that high grade silver grades had been found from the Karakaya Vein, which complements the existing high gold grades. Apparently, the average silver grade was 65g/t with a maximum 277g/t giving gold equivalent grades of 8.32g/t with a maximum of 46.84g/t. It is little surprise that the team is reviewing the possibility of earlier production from Kepez in combination with Kiziltepe. This all adds up to tremendous potential to expand the current 448,000 ounce gold equivalent JORC resource for Red Rabbit. On top of that, 2,000 metres of drilling has been completed recently at Kiziltepe which has confirmed the presence of continuity between the Arzu North and Arzu South structures. It all goes to suggest increased resource potential which could further improve the long-term economics of this project.
Ariana has chosen a strong local joint-venture partner in the Turkish construction group Proccea Construction Co., which is earning a 50% stake in the project by spending US$8 million. Proccea specialises in the design, construction and commissioning of gold and silver processing plants and has worked on such projects not just in Turkey but also in Kazakhstan, Algeria, Finland, Argentina and Saudi Arabia. Proccea is essentially financing the project beyond the construction decision stage which will leave the partners needing to source US$22 million out of the estimated US$28.4 million capital cost to put the project into production. Discussions have already begun with lenders both in Turkey and internationally for the remaining capital requirement.
With one project accelerating towards the production phase, Ariana management is pursuing well-priced acquisitions with the goal of building a mid-tier multi-project gold exploration and development company. Turkey is an enormous country, which is highly prospective for a variety of metals as well as gold, and, sensibly, the directors have chosen to make progress via joint-ventures that allow others to fund exploration and share the risk. Ariana has a joint-venture deal with Eldorado Gold that covers north-eastern Turkey, where early work has focused on the Ardala copper-gold porphyry and adjoining tenements in Artvin Province. The Ardala Project contains exposed parts of a 600 metre by 700 metre porphyry drilled in the early 1990's which defined a non-JORC resource of 20 million tonnes of 0.25% copper and 0.45 g/t gold and 65 ppm molybdenum. The nearby discovery of the Salinbas epithermal gold system has added to the prospectivity of this area, with recent drilling reporting intercepts of 9.5m @ 6.48 g/t Au + 39.4 g/t Ag, 11.3m @ 4.98 g/t Au + 42.8 g/t Ag and 25m @ 3.34 g/t Au + 7.9 g/t Ag. The company intends to continue drilling at this location during 2012 to further define the extents of the mineralisation which is still open to the east and to the south.
Valuation
The move from explorer to producer is seldom smooth and the delay in first gold production from Red Rabbit until 2013 looks due to changes in Turkish environmental regulations. This project remains economically robust and is improved by recent further discoveries and so the fall in the stock price on the back of this delay looks like a good buying opportunity. Our model of the Red Rabbit Gold Project gives a Net Present Value of US$85.2 million (£52.3 million) of which Ariana will have a 50% stake and based on the number of shares on a fully diluted basis of 300.8 million gives a target price of 8.7p. We recommend the shares as a Speculative Buy at 2.625p with a target price of 8.7p as the company moves decisively closer to gold production and a potential increase in the resources base.
Financial records & forecasts
Year to 31st Dec | Sales (£000) | Pre-tax Profit (£000) | Earnings per share (p) | Price Earnings Ratio (x) | Dividend (p) | Yield (%) |
2009A | 0 | (402) | (0.27) | NA | 0 | 0.0 |
2010A | 0 | (523) | (0.25) | NA | 0 | 0.0 |
2011A | 0 | (1,347) | (0.54) | NA | 0 | 0.0 |
2012E | 0 | (1,500) | (0.60) | NA | 0 | 0.0 |
Source: Growth Equities & Company Research
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