Auriant Mining — Fifth successive quarter of success

Auriant’s Q121 financial results were reported in the context of known production of 209.7kg from Tardan for the quarter (compared with our prior estimate of 191.9kg) and a largely known gold price. Notwithstanding a short maintenance stop, throughput rates were maintained at high levels and a summary of the plant’s performance during the quarter, relative to our prior expectations, is as follows:

Of note were the following:

Exhibit 2 summarises Auriant’s Q121 results both in the context of the prior quarter’s results and also our previous expectations. Relative to our prior expectations, the largest variance in Q1 results was a negative variance of $0.5m in revenues (largely on account of the under-sale of gold relative to production noted above), which was offset by a $0.5m positive variance in the depreciation charge. The third largest variance was a $0.3m negative variance in the tax charge. Nevertheless, although the effective tax rate of 27.6% was materially higher than our forecast rate of 15.6%, it was well within the normal range of variation historically observed at Auriant on a quarterly basis (see Exhibit 2, below). Notably, there was also a $0.2m positive variance in the interest expense after Auriant repaid all of its high-cost debt.

In 2020, Tardan became a participant in the Regional Investment Projects programme and obtained the right to apply a reduced income tax rate of 17% and the mineral extraction tax at a nil rate. According to Russian legislation, tax losses are accumulated on the balance sheet and can be offset against future taxable earnings. Thus, in Q121 only $152k was paid in cash tax out of a total charge on the income statement of $652k, with the remainder being offset against the balance sheet amount of the deferred tax asset related to tax losses carried forward. Compared with a normalised estimate of cash flow from the income statement of $3.6m ($1.7m in earnings plus $1.9m depreciation) therefore, actual cash flow from operations amounted to $4.5m (including evidence of diligent control of working capital), of which only $1.4m was consumed in investing activities and the remainder used to pay interest and to repay debt (including leases).

On 21 December, Auriant announced total production guidance for 2021 of 900–930kg gold from Tardan and Solcocon combined (compared with 953kg produced in FY20) from 350–380kt of ore processed through the Tardan CIL plant. This guidance was reiterated at the time of its Q121 results. Assuming production of c 30–36kg from Solcocon, this total implies production from the Tardan CIL plant of c 885kg at a yield of 2.42g/t and a head grade of c 2.64g/t. As in FY20, relatively little seasonal variation in production is anticipated (in sharp contrast to the former heap leach operation).

As a result of test work conducted during the ramp-up phase, Auriant has upgraded the leaching tanks at Tardan to improve ore oxidation to ensure stable processing results. In addition, in December 2019, the company agreed a new energy deal to increase the power allocation to the Tardan CIL plant by 25% from 2.0MW to 2.5MW using a newly built 35kV power line, which has allowed it to minimise its use of diesel generators on site and, on occasion, to stop using them entirely. Unit costs are nevertheless expected to be broadly unchanged in US dollar terms in FY21 relative to FY20, reflecting some inflationary pressures in local currency terms (given something of a ‘boom’ in resources investment in Russia in addition to normal staff salary indexation). At the same time, the rouble has appreciated by 1.3%, from RUB74.0979/US$ at the time of our last note (see Making a virtue of dependability, published on 17 March 2021) to RUB73.1640/US$ at the time of writing, while the oil price has increased c 80% since this time last year. Finally, as discussed previously, stripping costs delayed from FY20 are now being incurred in FY21.

Based on the production guidance provided by management for FY21 (and with the usual caveat surrounding quarterly predictions), our financial forecasts for Auriant for FY21 by quarter are as shown in Exhibit 3.

Relative to our prior forecasts, the main changes that we have made to our forecasts are:

In common with our standard practice, our valuation of Auriant has been performed via the discounting of maximum potential future dividends at a discount rate of 10%, assuming all excess cash generated is distributed to shareholders only after all debt has been repaid.

On the basis that management executes the Tardan CIL and the Kara-Beldyr projects according to the operational and financial parameters anticipated, we estimate that Auriant is capable of generating average cash flows of $63.5m, average earnings of $54.8m and average EPS of 40.9c in the 10 years from FY25–34, thus allowing it to pay maximum potential dividends to shareholders of 46.3c per share in the period FY26–34. Discounted at our customary 10% discount rate, such a stream of dividends has a value of $1.72 per share (cf $1.76/share previously), as shown in the exhibit below, rising to $2.77/share on the cusp of the company’s maiden dividend in FY26. Note: readers should note that, effectively, the sole reason for the (albeit modest) decline in our valuation of Auriant, from $1.76/share to $1.72/share, is the decline in its share price from SEK5.08 at the time of our last report to SEK4.70 currently, thereby increasing future assumed dilution (see Sensitivities and risks, below). In the absence of this factor, our valuation would have otherwise remained steady, at $1.75/share.

Our approach to gold price forecasting, and the gold prices underlying our earnings and dividend assumptions, is set out in our note, A golden future, published in June 2020. Readers should also note that our valuation specifically excludes any value attributable to Solcocon beyond FY21 on account of the variable nature of alluvial mining operations. However, it is possible that activities at Solcocon may be reconfigured in due course to incorporate hard rock mining and processing via a carbon-in-pulp plant.

In qualitative terms, the principal risks to which Auriant is immediately exposed include geographical/sovereign (including regulatory risk), geological, metallurgical, engineering, funding, financing and management. In general terms, these may be summarised as execution risk relating to management’s ability to bring the Kara-Beldyr project in particular to account within its geographical jurisdiction at the required technical and economic parameters (note however that this risk has already been substantially mitigated by management’s success in developing the Tardan CIL project). Once in production, these risks will reduce and be partially replaced by others, such as commercial, commodity price, foreign exchange and global economic risks.

However, one specific risk that bears further, immediate consideration from an empirical perspective is funding. In this particular case, our valuation sensitivity to the price at which Auriant raises an assumed $20m in equity for Kara-Beldyr (assumed at the start of FY22) is shown below:

Readers should note that (assuming conversion before FY26) the above table effectively also provides an analysis of Auriant being funded by way of a convertible bond (cf conventional equity) with a conversion price at one of those shown (typically at a premium to the existing share price compared to conventional equity at a discount) and a coupon close to the company’s cost of debt. In the event of such a convertible remaining unconverted, however, and therefore behaving like conventional debt, our valuation of Auriant instead rises to $2.18/share at the start of FY21 (albeit with a correspondingly higher maximum debt level of $76.9m (cf $54.0m in the ‘base case’ scenario, in the ‘Financials’ section, below).

At end-March 2021, Auriant had net debt of $64.2m (cf $65.7m at end-Q420) on its balance sheet, but $66.1m (cf $67.2m at end-Q420) if lease liabilities are included. While, at first glance, net debt has fallen by only $1.5m during the quarter (excluding lease liabilities), we note that it would have fallen by $3.3m if all the gold produced had been sold and by $6.7m if all the gold currently held in inventory had also been sold. Assuming the company raises an additional SEK166.6m ($20m) in cash via equity funding at the start of FY22 (cf mid-FY21 previously), we forecast that its net debt will evolve as follows until FY25, before being eliminated in FY26:

Note that our estimate of Auriant’s maximum (future) net debt requirement of $55.9m (cf $56.2m previously) at end-FY23 equates to a leverage ratio (net debt/(net debt+equity)) of 48.2% (cf 50.5% previously).

Mining operations at Tardan continue to operate, to all intents and purposes, as normal. All personnel on site are subject to daily temperature checks and the mandatory use of personal protective equipment to minimise the risk of infection. Intensive disinfection measures have also been implemented. To date, quarantine measures are reported to have had an insignificant effect on the mine’s operations. Further measures will depend on employee test results. In the meantime, however, management is confident that mining and gold production can continue at Tardan, although there may be temporary interruptions to some of the mine’s operations depending on the number of people who are infected and their positions at the mine. In accordance with Rospotrebnadzor’s instructions, infected employees are released from observation once two negative test results at least one day apart have been obtained. In the meantime, alluvial gold mining operations at Solcocon are reported to have commenced in Q221, to all intents and purposes, unaffected by the pandemic.