Auriant Mining — Tardan CIL de-risks Kara-Beldyr

Auriant Mining AB is a Swedish gold mining company that fully controls six operating Russian subsidiaries, as well as two companies incorporated under the laws of Cyprus that form a group parent to the Kara-Beldyr project (see below). Production guidance for FY19 is 550kg from the Tardan heap leach operation and 150kg from the CIL operation plus c 64.2kg from alluvial operations at Solcocon (total 764.2kg, or 24,570oz). Now that the Tardan CIL plant has been fully commissioned however, production is expected to reach c 29,272oz per year (average) at steady-state, before being supplemented by production of another c 64,041oz per year (average) from Kara-Beldyr from FY24 (see below).

On the basis that management executes the Tardan CIL project and the Kara-Beldyr project according to the operational and financial parameters expected, we estimate that Auriant is capable of generating average annual cash flows of US$48.5m, average earnings of US$41.5m and average EPS of US$0.187 in the nine-year period from FY25–33 (inclusive), thus allowing it to pay maximum potential dividends to shareholders in the order of 21.7c per share in the period FY26–33 (inclusive). Discounted at Edison’s customary 10% discount rate, such a stream of dividends has a value of US$0.68 per share, rising to US$1.20/share on the cusp of the company’s maiden dividend in FY26. Note that our valuation specifically excludes any contribution from Solcocon owing to the variable nature of alluvial mining operations. However, it is not impossible that activities at Solcocon could be reconfigured in due course to incorporate hard rock mining and processing via a carbon-in-pulp (CIP) plant.

In qualitative terms, the principal risks to which Auriant investors are exposed include geographical/sovereign risk (including regulatory risk, see ‘2019 Rosprirodnadzor inspection’ on page 7), geological risk, metallurgical risk, engineering risk, funding risk, financing risk and management risk. In general terms, these may be summarised as execution risk, ie management’s ability to bring the Tardan CIL and Kara-Beldyr projects to account in its geographical jurisdiction and within the technical and economic parameters required. Once in production however, these risks will reduce to be superseded by more normal risks, such as commercial, commodity price, foreign exchange and global economic risks. Quantitatively, every ±10% move in the gold price changes our valuation by ±32.4%, while every ±10% move in costs changes it by ±13.2%. The effect of changes in the value of the rouble against the US dollar is approximately the same as that for costs (which is consistent with the majority of costs being denominated in local currency).

Auriant had net debt of US$75.9m as at end-December 2018 and US$83.4m as at end-September 2019. Assuming that it raises an additional US$40m (SEK385.9m) in cash via equity funding in Q120 (see page 20), we forecast that (future) net debt will peak at US$75.6m at end-FY23 (equating to leverage, defined as net debt/[equity + net debt] of 61.3%), after the majority of the Kara-Beldyr capital has been expended, before being eliminated under the influence of combined positive Kara-Beldyr and Tardan cash flows by end-FY26.

Auriant has a number of mining projects at various stages of the mining lifecycle. Tardan in the Republic of Tyva, which produced 933.5kg (29,997oz) of gold in 2016, is Auriant’s flagship mine. Solcocon in Zabaykalsky Krai is a site where alluvial production was resumed in Q317 after heap leaching production was put on hold in 2014 owing to a lack of oxidized ore (see pages 14–16). Kara-Beldyr and the adjacent Ayen Creek and Uzhunzhul are considered exploration properties – albeit with the former being at a more advanced stage, having delineated a western-style Joint Ore Reserves Committee (JORC) compliant resource and now progressing to the mine design and engineering stage, which will result in construction documentation and permits/approvals before being financed by Russian banks.

In the period 2012–16, Auriant’s gold production fluctuated between c 640kg and 1,140kg (20,577–36,652oz), with a gradual ramp-up at the Tardan mine and initial progress at Solcocon also contributing in 2013 before operations at the latter were temporarily shut down in 2014. In 2017, production reached 809.4kg (26,049oz), but has since been on a downward trend as mining and processing operations were voluntarily reduced ahead of the start-up of a new carbon-in-leach (CIL) plant in November 2019, which has been designed to supersede previous operations. Current guidance for 2019 is for production of 550kg from the Tardan heap leach operation and 150–200kg from the CIL operation plus c 64.2kg from alluvial operations at Solcocon (note that, prior to the start-up of the CIL plant, Auriant experienced notable seasonality in production at Tardan, with relatively elevated production rates in Q2, Q3 and part of Q4 and relatively depressed production rates in Q1 and part of Q4).

Now that the Tardan CIL plant has been fully commissioned however, production is expected to reach c 31,084oz per year (average) at steady-state, before being supplemented by production of another c 59,250oz per year (average) from Kara-Beldyr from FY24 (see below).

Auriant Mining AB is a Swedish gold mining company, established in 2004 as Central Asia Gold. Auriant rapidly evolved through the acquisitions of several mines located in Russia, including Tardan (in 2004), Kopylovskoye, Artel Lena, Artel Tyva, Uzhunzhul and Kara-Beldyr (2006), as well as the acquisitions of five entities (including Solcocon) associated with the merger with NMC (2009). Following the latter, the Kopylovskoye project was spun off into a separate company called Kopylovskoye AB. In 2008, Auriant entered into a JV with Centerra Gold for the exploration and development of the Kara-Beldyr project. Then in 2010–11, the company sold its alluvial mining licences, including Artel Lena and Artel Tyva, retaining only Borzya, which is now part of the Solcocon exploration and production licence. At the same time, the management board was reorganised, with the company adopting a new strategy and changing its name to Auriant Mining in 2012. Two years later, the Borzya licence was outsourced to an experienced alluvial operator (Urumkan) in 2014, with the company receiving a royalty on gold production. In the same year, Kara-Beldyr’s exploration programme was completed and Auriant also acquired Centerra’s 70% interest in the project, becoming the sole owner of this mine. According to the acquisition terms, Auriant is committed to paying Centerra a 3.5% net smelter royalty on any future mineral production from Kara-Beldyr.

Between March 2005 and July 2010, Auriant was listed on the Nordic Growth Market stock exchange in Sweden, and since July 2010, it has traded on the Nasdaq First North Premier stock exchange, also in Sweden.

The Tardan mine (contained entirely within the Greater Tardan licence area) is located in southern Russia in the eastern part of the Tuva Republic, around 78km from the state capital, Kyzyl, which is itself located c 300km to the south-east of Abakan, the capital city of the Republic of Khakassia. The mine is accessible via a 70km paved road from Kyzyl, followed by an 18km graded road. The surrounding area is mostly undeveloped with only small settlements between Kyzyl and Greater Tardan.

Auriant holds two exploration and mining licences, of which the first is a licence for the Greater Tardan area (valid until August 2032), while the second is for the Tardan deposit and current mine, covering 3.32km2 (valid until October 2028).

The Greater Tardan deposit consists, among others, of the following sites: 1) Barsuchy located on the left bank of Bai-Syut river, 4km north-east of the Tardan deposit (but mined out completely in 2017), 2) Pravoberezhny situated approximately 15km north-west of Tardan and 3) Bai-Syut, situated close to Pravoberezhny (neighbouring site), which is the next exploration target for Auriant (see Exhibit 3).

The Tyva (or Tuva) Republic in Siberia is one of the oldest regions of Russian gold mining. Between 1965 and 1971 the Tardanskaya and Koptinskaya exploration expeditions carried out prospecting and evaluation work in the Bai-Syut river basin at Kopto as well as at the Tardan deposit and successfully identified the Barsuchye, Soruglug-Kehm, Kopto and Pravoberezhny targets. Further geological mapping and exploration between 1970 and 2015 then focused mainly on other targets within the Greater Tardan licence area.

In 2002 and 2003, exploration of the Tapsa-Kaa-Khem gold zone was carried out by the Tuva Geological Expedition. Following this, in the period 2004–08 Tardan Gold carried out exploration works of the central part of the Tardan and Kopto deposit with a view to securing approval for commercial development of the resources.

Auriant began exploration in the Greater Tardan area in 2013, and subsequently mining operations commenced in the Barsuchy and then in the Pravoberezhny deposits in 2014 and 2015–16, respectively.

The Greater Tardan area features Lower Cambrian (metasandstones, chlorite schists, porphyries, limestones), and Silurian rocks (conglomerates with limestones). Intrusive rocks are represented by meta-gabbro, granites and gabbro. Most the gold occurrences at the Tardan deposit are located on the contact of the Kopto-Baisyutskiy intrusive massif of diorites and gabbro-diorites.

The regional tectonic structure comprises three fault systems striking east-west (Kaakhemsky, Bai-Syutskiy), north-west (Sorulug-Khem, Kyzltorgskiy and Tardanskiy), and north-east. The north-west faults are grouped into one tectonic zone controlling most the skarn gold mineralisation and represent the largest short-term potential for increasing reserves for the heap leach operations at the Tardan mine.

Within the Greater Tardan area, there are several gold mineralisation types:

The Tardan deposit itself is a 4.0km2 block bounded by tectonic fractures, which are part of the Baisyutskiy shear fracture. It is underlain by volcanic and carbonate sediments of the Tummattayginskaya and Vadibalinskaya formations with intrusions of the Tannuolskiy complex. The most common rock type is marbleised limestone of the Cambrian Vadibalinskaya formation. Approximately 20–25% of the Tardan deposit area is underlain by granitoids of the Cambrian Tannuolskiy complex of which diorites are the most common. The relatively simple structure of the deposit is influenced by the Changyssky fault zone, which defines the setting of the Tardansky graben and results in a pronounced asymmetry in the structural plan of the Tardan deposit ore field. The Tardansky graben is located in the central part of the deposit, and extends diagonally from Ore Zone 1 to the north-eastern part of the licence area and further to the north-east to the Barsuchy prospect. The width of the graben varies from 590m in the vicinity of Ore Zone 1 to 460m in the north-eastern section. To the north-west, the graben is bounded by the Changyssky fault and, to the south-east, by the Vostochny fault. The Tardansky graben includes Ore Zones 1, 3, 6, 26 and 15, which constitute the main minable gold reserves of this deposit. The tectonic faults of the Tardan ore field are represented by thrusts and shifts.

The Pravoberezhny site comprises Tummattayginskaya volcanics and Vadibalinskaya limestones, tuffs and dolomites that have been intruded by Kopto-Baisyutskiy dioritic rocks. The Tummattayginskaya volcanics and Vadibalinskaya units dip towards the north-east at 30–60°.

Auriant has identified three specific areas of contact metasomatism (alteration of the host rock, in this case limestone), which extend over 1,000m along strike and 300m in width. Here, skarns have formed within a 60m thick layer of limestone on contact with two bodies of diorite, to the north and south of the limestone, respectively. The skarns host most of the gold mineralisation at Pravoberezhny with 13 distinct zones identified, though lower-grade mineralisation is also seen in metasomatised volcanic rocks above and below the skarn zones. The majority of the area is covered by overburden sediments, which generally range in thickness from 2–4m but can reach 10m in areas of lower elevation. A relatively simple morphology of the ore body and surrounding geology provides for a low stripping ratio, estimated by the company to be less than 1:4.

Upper Bai-Syut site’s gold mining potential is exhibited by the presence of lithochemical metamorphic zones of gold and alluvial gold mineralisation in the head of the Bai-Syut brook. The geology is characterised by skarn zones in contacts between intrusive rocks (diorites) and the host rock, limestone.

On 20 August, Auriant announced that it had received a report setting out the findings of the inspection carried out by the Russian State Service for Supervision of Natural Resource Usage (Rosprirodnadzor) in the period 17 July to 13 August 2019. In its report, Rosprirodnadzor concluded that LLC Tardan Gold had breached several terms of its subsoil use licences and gave it until 13 February 2020 to rectify the breaches. Readers should note that Edison takes no view on this test, nor on any potential outcomes, other than to identify it as a sensitivity. In this section, we simply relay statements made by Auriant, either in writing or verbally, which (in the case of the former) are quoted directly or indirectly from announcements recorded on its website.

At the time, Auriant made the following observations with respect to Rosprirodnadzor’s report:

Auriant concluded by saying that it ‘is confident that it has not committed any serious violations that could entail early termination of its subsoil use rights, and there are no legal grounds for such measure.’ It also highlighted that fact that the inspection did not relate to the CIL plant in any way whatsoever, but only to the then existing heap leach operation.

Subsequently, Auriant made the following observations:

Since then, on 8 November, Auriant announced that:

On 4 December, Auriant announced that it had learned that Rosprirodnadzor had published an announcement on its website to the effect that Rosnedra had restricted its subsoil use rights in an article entitled, ‘The use of subsoil resources by LLC ‘Tardan Gold’ is suspended.’ In response, Auriant offered the following clarifications (reproduced verbatim):

Kara-Beldyr is a 34km2 site also in Tyva in the eastern part of the Altai-Sayan Orogenic belt and the western segment of the Mongol-Okhotsk trend, around 166km east-south-east of Kyzyl and c 110km from Tardan. This area is located in the upper headwaters of the Yenisey River at elevations of 1,050–1,750m. The gold mineralisation Kara-Beldyr is adjacent to the south-eastern part of a zone of alluvial gold called Tapsa-Kacheemsk. Kara-Beldyr is accessible from Kyzyl via 100km of asphalt road or 85km of dirt road in all-terrain vehicles or on frozen ground in winter. There is no permanent settlement in the area. The Kara-Beldyr exploration and mining licence was issued on 26 June 2008 and is valid until 20 February 2027.

An alluvial gold deposit in the valley of the Kara-Beldyr River was identified as long ago as 1918. More recently, gold mineralisation was discovered by a geological expedition in 1988. An area of 27.4km2 was surveyed, with detailed work being carried out along a 240km line network. During the period 2000–02 further investigations were conducted in Gordejevskoye and Ezen.

In 2000, an ore sample of 100kg was taken for analysis at the Irgiredmed Institute in Irkutsk, which showed that 62% of the gold and 32% of the silver were free milling and that recoveries of 93–94% and 70–75%, respectively, could be achieved based on a combination of gravimetry and cyanide leaching. Combined with the exploration work carried out in 2000–02, this allowed the geological expedition in Tyva to estimate a P1 and P2 resource at Kara-Beldyr.

The Kara-Beldyr project consists of two major zones: Gordeyevskoye and Lagerny, which have been well explored. The major controlling structures to mineralisation are large sub-vertical north-east to south-west trending fault structures, which are considered to be transform faults off the Baikal rift zone. The project consists of fault controlled Devonian age gold-silver mineralisation associated with metasomatised quartz diorites of Late Riphean age at Gordeyevskoye and Late Riphean and Cambrian-Vendian conglomerates and dolomites at Lagerny.

Mineralised zones are lens shaped and occur roughly parallel to the Glavny fault at Gordeyevskoye and are hosted in metasomatised zones within quartz-diorites. Metasomatic alteration forms a zone 40–110m thick and has been traced for a distance longer than 2km. Metasomatic intensity is reasonably constant along strike and can occur within the granodiorite intrusions and the quartz diorite host rocks but gold mineralisation can be sporadic. With increasing distance from the faults the metasomatic zones change from pyrite-ankerite-sericite-quartz to propylitic zones to a veinlet zone consisting of quartz and carbonate-feldspar-quartz veins.

Lagerny is located approximately 1.5km to the north-west of Gordeyevskoye with a similar structural trend and controlling fault structure. The Lagerny zone extends roughly 700m along strike and ranges from 50–150m thick. Host rocks are Late Riphean conglomerates and sandstones tectonically overlying Vendian-Low Cambrian dolomitic marbles with mineralisation occurring in metasomatic zones of quartz-sericitic alteration.

In June 2019, Auriant announced that it had been awarded the 9km2 Ayen Creek Basin exploration licence by Rosnedra. Ayen Creek is adjacent to and to the northeast of the Kara-Beldyr licence and Auriant’s rationale in obtaining the licence is based upon the assumption that the fault structures that host the Gordeevskoye and Lagernoye deposits at Kara-Beldyr continue through the hill towards the Ayen Creek area. To date, sediment tests of the creek bed show increased amounts of gold down the creek flow after its intersection with the presumed fault structures and management believes that the licence could become a substantial addition to Kara-Beldyr’s resource base. A full exploration programme is estimated to take 4-5 years, after which any reserves/resources discovered would be mined and processed using the Kara-Beldyr infrastructure.

Solcocon is located in Zabaikalsky Krai, in the central part of the Argun micro-continent, part of the Mongol-Okhotsk belt. The Zabaikalsky Region has well-developed infrastructure with several active mining operations, such as Taseevskoye, Novoshirokinksoye (both operated by Highland Gold), Bystrinskoye (Norilsk Nickel) and Klyuchevskoye (China National Gold Group) all of which contain resources close to or in excess of 3Moz. The Solcocon (Staroverinskaya) licence block itself is located at the confluence of the small Srednyaya and Nizhnyaya Borzya rivers, 35km from the regional centre Kalga and 640km from Chita, the capital city of the Zabaikalsky region. The Solcocon (Staroverinskaya) licence was awarded in May 2004 and is valid until 15 May 2029 and covers an area of 220.4km2.

The Taseevskoye deposit was discovered in 1941 and during the period 1948 to 1994 it produced 6.4Moz of gold from 16.3Mt of ore at an average gold grade of 12.2 g/t derived from a swarm of epithermal gold bearing quartz fissure veins located within a circular area 1,000m in diameter. Mining operations were mostly conducted underground and focused on three principal vein systems, with a large, lower-grade mineralised envelope contained within an argillic alteration halo surrounding the fissure veins remaining largely untouched. In 2004, Taseevskoye was acquired by Highland Gold with the intention of exploiting the potential for open-pit mining of this large lower-grade resource. In 2015, Highland Gold decided to launch a pilot project to test processing ore from the Sredniy Golgotay deposit at the Novoshirokinskoye mill.

Novoshirokinskoye is a gold, silver, lead and zinc deposit that was discovered in 1915 and initially explored between 1956 and 1962. Highland Gold acquired Novoshirokinskoye in 2002 and developed it in partnership with KazZinc from 2006 onwards, until December 2011, when it redeemed shares from the latter to reconfigure it into a pure gold mining operation.

The Bystrinskoye mine is operated by Norilsk Nickel and is one of the largest gold mines in Russia and in the world. Finally, Klyuchevskoye is a gold deposit, the bulk of which remains un-mined after it was mothballed c 20 years ago amid high costs and low gold prices. In October 2017, the Russian government approved an agreement of cooperation with China on the development of the Klyuchevskoye gold deposit, which involves China National Gold Group acquiring 60–70% of the joint stock company, Zapadnaya-Klyuchi Mine.

Hard rock mining at the Solcocon mine has been suspended since 2014 owing to a lack of oxidised ore suitable for heap leaching. In December 2016, the company completed laboratory tests of ore from the Bogomolovskoye deposit to establish expected gold recovery rates for different processing technologies. The tests indicated that a recovery rate of 84% is possible using CIL technology and were the basis for a re-launch of mining activities in 2017. Alluvial production was resumed in Q317 to generate revenue to fund the prospective re-launch of hard rock production based on new resources identified following the restart of exploration activity in 2017. In February 2018, the company announced preliminary exploration results, which yielded 2.3t (c 74koz) of incremental gold resources in the Bogomolovskoye deposit (pending Gosudarstvenaya Komisiya po Zapasam, or GKZ, approval – see Exhibit 8). At the current time, production at Solcocon is entirely outsourced to two contractors (cf one in 2017) and generates a net margin for Auriant of c 24–29% of sales.

The Solcocon (Staroverinskaya) licence area features sediments of different ages, from Precambrian to lower Cretaceous, characterised by different lithology. These comprise carbonate rocks and sediments (sandstones, siltstones and conglomerates), as well as volcanic deposits (rhyolites, tuffs, trachyandesites and trachybasalts). The most promising formations for localisations of gold deposits are the Cambrian and Jurassic carbonate sediments. Intrusive rocks underlay a large part of the licence area and are represented by a Late Permian monzodiorite-granite complex and a mid-late Jurassic Shahtaminskiy monzodiorite-granodiorite-granite complex, which are nevertheless also prospective for gold mineralisation. The major tectonic features of the area (hundreds of kilometres long) are the north-west to south-east fault zones (Bystrinskoye) and the north-east to south-west fault zones (Kutomaro-Kozlovskaya and Smirnovsko-Mikhaylovskaya). These first-order fault zones are accompanied by second and third order faults, which play an important role in the localisation of gold and polymetallic mineralisation. Exploration undertaken by Auriant has identified three highly prospective ore fields: Yavlinskoye, Bilbichan-Solkokonskoye and Kozlovskoye. All the gold deposits and occurrences in the general vicinity can be divided into four types, depending on the composition of the ores and their localisation (although in a number of larger deposits several mineralisation types are identified):

Uzhunzhul is a 135.5km2 licence area located in the Republic of Khakassia (which adjoins the Republic of Tyva), 80km from the capital city, Abaka, which is an economically well-developed region, including the activities of several large mining companies. The Nemir-Chazygolskoye ore field, which covers the eastern part of the licence area, is located on the south-east flank of the Uybatsky gold bearing area. The Yurkovsky, Vostochny and Paraspan occurrences have been discovered within the Uzhunzhul licence area, which also features placer deposits of gold. The ore field is in the contact zone of the Basino-Uzhunzhul granite massif and extends in a north-east direction for 20km with a width ranging from 4–10km. The licence for the exploration and mining of hard rock gold in the Uzhunzhul ore cluster was awarded in November 2008 and is valid until September 2031.

The significant potential of its raw materials now ensures that the Republic of Khakassia is classed among the resource-rich regions of Russia, which increasingly determines its role in the Russian economy. Placer mining on the current Uzhunzhul area started in 1835, with c 1.9t of gold mined to date. The most prospective occurrences within the Uzhunzhul area are Yurkovsky, Vostochny Flank, Vostochny and Paraspan.

The Nemir-Chazygolskoye ore field, covering the eastern part of the licence area, is located on the south-east flank of the Uybatsky gold bearing area. As per Auriant’s internal estimates, the most promising prospects for discovering gold deposits within the Uzhunzhul area are the Yurkovsky, Vostochny Flank, Vostochny and Paraspan occurrences. The ore field is in the contact zone of the Basino-Uzhunzhul granite massif and extends in a north-east direction for 20km with a width ranging from 4–10km. In addition, the licence area contains a number of placer gold occurrences.

Intrusive rock covers a significant part of the licence area and is divided into five types, all of which form intrusive massifs extending in a north-east direction and small stocks of syenite, granite, granodiorite, gabbro, gabbro-diorite and diorite porphyry. The north-east strike faults trend in the same direction as the Uybatsky zone structures. Numerous faults are associated with mylonites and cataclastites, and are associated with dykes, alteration zones, gold, lead-zinc, copper and molybdenum mineralisation. North-west and north-south faults are less developed. They cross and displace fault zones of other directions. Within the licence area, sulphidic metasomatites are located within fault zones, developing along contacts with granite massifs and are characterised by intensive pyrite mineralisation and silicification. The depth of the oxide zone is 130–150m from the surface. Beresitic and propylitic zones are widely represented in the intrusive rocks, developing along north-east and east-west faults. The width of such zones varies from tens of centimetres to tens of metres, up to 3–4km in length.

The producing Kuznetsovskoye mine is located several kilometres south-east of the border of the Uzhunzhul area. The Igrgol fault zone controls the gold ore bearing structure on the licence area. It represents a set of faults running in a north-east and east-west direction. All the gold ore-bearing bodies occur within this zone. The licence area features predominantly two ore types: gold-quartz and gold-quartz-sulphide. Gold-quartz ore types are localized within the intrusive massif. Gold-quartz-sulphide ore types are found in the contacts of the intrusive massifs. Gold-quartz ore types occur primarily in the Vostochny Flank and Yurkovsky occurrences. The Yurkovsky prospect contains 12 gold-bearing zones found in steeply dipping tectonic cracks that run in a north-east and east-west direction. The length of the zones varies from 400m to 2,500m and are up to 350m deep. The widths of the ore zones vary from 0.3m up to 150m. The main mineral found in the ore is pyrite, with occurrences of arsenopyrite, chalcopyrite, galena and native gold. The maximum gold grade in the ore bodies is 150g/t, with averages from 3.0–35.3g/t depending on the zone. The Vostochny Flank occurrence incorporates ore bodies with widths varying from 4.2–47.0m and lengths up to 520m.

Auriant reports its reserves and resources according to both Russian (GKZ) and western (CRIRSCO) standards, depending on the deposit and its history. In general, more historical work tends to have been performed to Russian standards and more recent work to western standards. Current guidelines on the alignment of Russian (Categories A, B, C1, C2) and western (measured, indicated, inferred) mineral reporting standards are as follows:

While not interchangeable therefore, in general, it can be seen that Russian C1 reserves correlate with western Proven reserves (and therefore typically the Measured category of resources), while Russian C2 reserves correlate with western Probable reserves (and therefore typically the Indicated category of resources) – perhaps the substantive point being that both conform to western categories with relatively high levels of geological confidence (ie not the Inferred category) and should therefore engender a degree of confidence.

In April 2019, the resources of the Kara-Beldyr deposit were approved by the State Reserve Committee (GKZ). According to the resource statement filed by Auriant for approval, Kara-Beldyr C1 and C2 resources amounted to 842,000oz of gold (26.2t) at an average grade of 3.38g/t and 2.044Moz silver (63.6t) at an average grade of 8.2g/t. Inter alia, this allows a comparison between Kara-Beldyr’s resources, defined according to western standards, with its reserves, defined according to Russian standards, as follows:

The above statement of reserves and resources was effective as at end-Q117. Since then, Auriant has announced preliminary drilling results from its 2017 exploration campaign, which concentrated on the north-east flank of Solcocon’s Bogomolovskoye deposit (which was previously the prime source of oxidised heap leach ore in 2013 and 2014). The campaign comprised 4,100m of core drilling and 26,000m3 of trenching, which generated a total of 5,458 samples. In addition, Auriant conducted a cameral assessment of its previous exploration activities, carried out in 2014, on the south flank of the Bogomolovskoye deposit. A preliminary assessment of both exploration results is as follows:

Auriant will submit these resources to GKZ for approval once it progresses toward the goals of its comprehensive exploration programme on Solcocon.

At a share price of SEK3.15 (US$0.326), Auriant’s estimated enterprise value of US$107.5m (based on estimated net debt of US$75.2m as at 31 December 2019) therefore equates to a resource multiple of US$62.62 per total resource ounce (albeit excluding the potential additional reserves and resources at Bogomolovskoye depicted in Exhibit 8).

For the two deposits on which western resource estimates have been compiled, the Kara-Beldyr mineral resource estimate is based on gold and silver estimates within a 5m × 20m × 5m block model. Grades are estimated from composited samples by ordinary kriging using modelled variograms (where possible) and inverse distance weighting (nearest-neighbour) where modelled variograms were deemed not to be robust. Modelled wireframes were treated as hard boundaries and top-cuts were applied to data where applicable. The final model was verified visually and statistically by Wardell Armstrong (WAI) and classification was applied following the guidelines of the JORC Code (2012). Prospects for eventual economic extraction were tested by running open-pit optimisation and the application of appropriate economic and technical parameters. Note that the mineral resource shown in Exhibit 6 reflects the combination of both the Gordeyevskoye and Lagerny zones.

The Pravoberezhny mineral resource estimate is based upon data from surface diamond drill holes only. Exploration has been completed on roughly 20–40m profile sections with 20–40m intervals between holes down-dip. All logging, sample preparation and sample analysis was performed at Tardan. A comprehensive QA/QC programme was implemented to monitor the performance of the sample preparation and laboratory, including the insertion of a range of duplicate samples, blank samples and certified reference materials. In addition, external check samples were sent to an independent laboratory. WAI assessed the results of this programme and identified limited concerns regarding sample quality, but concluded that there was ‘little risk’ that the final global mineral resource estimate could be compromised by sample data quality. The mineral resource estimate itself is based on gold estimates using a block model with each block measuring 2.5m × 10m × 1m. Grades were estimated from composited samples by ordinary kriging using modelled variograms. Modelled wireframes were treated as hard boundaries and top-cuts were applied to data where applicable.

Auriant is currently using three different methods for gold processing, namely carbon-in-leach, heap leach and alluvial – albeit, the residual heap leach operations at Tardan will be discontinued from the end of Q419 in favour of pure CIL processing instead. A summary of each is provided below.

Currently, Auriant is in the process of ramping up its new CIL plant at Tardan. The CIL process is a variation of the carbon-in-pulp (CIP) process. In a simple CIP method, the ore is first crushed and/or milled to ensure that gold is readily accessible for cyanide leaching. Subsequently, the pulp is thickened to increase density to about 50% solids by mass. Leaching reagents in the form of cyanide and an oxidant (eg air or oxygen) are added, and afterwards, the pulp is passed over a feed screen to ensure removal of tramp material such as woodchips, plastics and grit larger than c 0.6mm. After feed pre-screening the pulp goes through a cascade of well-mixed adsorption tanks. The gold auro-cyanide complex in the aqueous phase is readily adsorbed onto the activated carbon. The carbon is then eluted (typically with acid), resulting in the reversal of the adsorption process with most of the gold desorbing from the carbon back into solution. Gold is then typically recovered from the solution by electro-winning. In case of CIL, carbon is added directly to the leach circuit to run the leaching and adsorption processes concurrently.

The heap leach plant is the second plant in the Tardan mine, which was commissioned in 2012. In the heap leach process, the mined ore is crushed to a size of 10mm or less before being agglomerated with cement, which turns the crushed material into a granular form that prevents ore particles from clogging the irrigation systems and the heap from collapsing. Following agglomeration, ore is then transported via conveyor to a radial stacker, which stacks the ore onto the heap leach pad (up to a height of 7m). The heap is irrigated with pipes and sprinklers with a weak sodium cyanide solution, which percolates through the ore in a 120-day cycle that dissolves the gold present. The solution drains away at the bottom of the (lined) heap and is piped to the plant, where gold is finally extracted with the use of activated carbon in large adsorption columns. The recovered solution is then recycled to the heaps. From the columns, gold is desorbed using a hot caustic solution and is then deposited onto cathodes, which are then smelted into doré bars containing at least 70% gold. Finally, the gold doré is then transported to specialised precious metals refiners, where it is re-smelted into refined gold.

An alluvial processing plant is currently in operation at the Solcocon mine following its re-start in 2017.

Unlike at its genesis in 2004, when it adopted Russian Generally Accepted Accounting Principles and there were no management accounts, Auriant today has evolved into a bona fide western company run along western lines and to international standards, with the single exception of the fact that it reports to the Russian State Commission on Mineral Reserves (Gosudarstvenaya Komisiya po Zapasam, or GKZ) on geological matters. Otherwise, Russians tend to be employed at an operational level on account of their experience in working on the steppe, while the board of directors is composed of one Briton, one American, two Swedes and a Finn. The head office is English speaking, board papers are western and board meetings are conducted solely in English. Management accounts are similarly prepared monthly in accordance with western standards and the remuneration committee sets all management targets.

In formulating its valuation, Edison has made certain costs and scheduling assumptions relating to Auriant’s current and future mining activities. These are set out in the following tables. In general, costs are presumed to be denominated in Russian roubles (RUB) and are then converted into US dollars at the prevailing forex rate (RUB64.0188/US$ at the time of writing). Our gold price forecasts are those set out in our report, Gold: Doves in the ascendant, published in August 2019, and are reproduced here in real (as opposed to nominal) terms:

Note that, as such, Edison’s average (real) gold price forecast over the course of Auriant’s mines’ anticipated operations, from 2020 to 2033 inclusive, is US$1,372/oz (simple average) cf US$1,377/oz previously – albeit, it is generally higher in earlier years and lower in later years, reflecting, in particular, the volte face by the US Federal Reserve in moving from a tightening monetary stance in November 2018 to a loosening one in March 2019, with its attendant re-inflation of the total US monetary base which had otherwise been contracting.

Forecasts for Auriant for FY19 are based on production guidance for the year of 550kg from the Tardan heap leach operation and 150kg from the CIL operation plus c 64.2kg from Solcocon and the assumption that costs are consistent with those experienced in recent winter quarters (note that Auriant experiences notable seasonality in production, with relatively elevated production rates in Q2, Q3 and part Q4 and relatively depressed production rates in Q1 and part Q4). In the meantime, as discussed previously, production at the Tardan complex has been shifted from a gravity and heap leach process flow route to CIL only, with the subsequent opportunity to re-process ‘exhausted’ heaps. As such, FY19 will be the last year in which Auriant actively stacks its heaps at Tardan, although production from the heaps will inevitably spill over into FY20 as a result of the heaps’ leach kinetics and the time-lag between stacking, irrigation and production. Thereafter, we forecast production at Tardan for the remainder of the life of the operation – being increasingly sourced from the Pravoberezhny deposit (see Exhibit 7) – to be as follows (note that these forecasts are substantially unchanged from those used in our report, Auriant Mining: All aboard the Auriant express, published on 6 March 2018, other than to reflect the delay in commissioning the CIL plant from H119 to H219):

Readers should note the 2.81g/t average life-of-mine grade of material mined compares with the 3.23g/t in-situ grade of resources at Pravoberezhny (see Exhibit 6). Note also the improvement in metallurgical recovery and the consequent decline in unit cash costs as operations move from heap leach to CIL.

At the same time, Auriant will commence construction of its Kara-Beldyr mine. Unlike Tardan (from which it is c 110km, or 73 miles, distant), Kara-Beldyr has been designed using a CIL process flow route from the outset with correspondingly higher expected future metallurgical recoveries. Our expectations for mine scheduling, production, output and costs at Kara-Beldyr are similarly set out below:

Note the 2.02g/t average life-of-mine grade of material mined compares with the 2.68g/t in-situ grade of resources at Kara-Beldyr (see Exhibit 6). Initial capital expenditure of US$94.9m equates to US$79.09 per (maximum) annual tonne of throughput or US$1,273 per (maximum) annual ounce of gold produced.

The main underlying assumptions from which the above cost estimates for the above two operations have been derived include (but are not limited to) the following:

The capex estimate for the Kara-Beldyr project has increased by c US$20m since our note, Auriant Mining: All aboard the Auriant express, published on 6 March 2018. Almost all of the increase may be attributed to Kara-Beldyr’s power supply arrangements. Where before we had assumed electrical power would be supplied to the plant and mine by diesel-fuelled mine-site generating capacity, we now assume it will be grid-based.

Built between 1956 and 1972, the 6,000MW Krasnoyarsk hydroelectric power plant, in Divnogorsk, is Russia’s second biggest power station. The plant is situated on the Yenisey river, which is the sixth largest in the world in terms of discharge, the seventh longest (depending on how you define its source) and the largest that flows into the Arctic Ocean. The electricity generating facility comprises a 124m-high, 1,065m-long concrete gravity dam and 12 Francis generating units of 500MW capacity each. It is operated by JSC Krasnoyarsk HPS and produces 18.4TWh annually, most of which is delivered to RUSAL’s Krasnoyarsk smelter. However, it is also the supplier for Kyzyl (the capital of Tyva/Tuva) that lies at the confluence of the Great Yenisey and Little Yenisey rivers. From Kyzyl, a 220kV state line runs 100km to the east and to within 110km of the Kara-Beldyr site.

Because a mine at Kara-Beldyr will help provide infrastructure for a remote and undeveloped area, it should be eligible for state support in the form of access to grid-supplied electricity at a preferential rate. In this instance, for an initial outlay of US$13m to build a line and substation, Kara-Beldyr would be eligible to buy electricity from the grid at the wholesale rate of RUBL2/kWh (cf a regional rate of RUBL5/kWh and a diesel-generated cost of RUBL24–28/kWh), which would give the initial investment a payback period of approximately one and a half years (cf approximately 20 years for diesel-generated power).

Auriant is targeting the conclusion of a technical connection agreement, which fixes the point of connection between its line and the state line, in the spring of 2020, after which it will take approximately four years to construct the power line and substation, such that grid power could be delivered to Kara-Beldyr by Q423.

Auriant had net debt of US$75.9m at end-December 2018 and US$83.4m as at end-September 2019. Whereas production from the Tardan CIL plant had originally been anticipated in H119, delays (eg the delivery of the last electrical transformer, which was two months late) resulted in the plant not being fully commissioned until mid-November. While this has meant that the benefit of the improved CIL plant economics has not, to all intents and purposes, been experienced in FY19, the shortfall has been somewhat mitigated by management’s decision to resume stacking and production at the heap leach operation which we estimate will have generated a modest cash inflow for the year, such that we are forecasting net debt to be US$75.2m as at end-FY19.

For the purposes of the following valuation, increased (albeit more efficient) capex of US$95m for Kara-Beldyr is presumed to be financed via an equity raising at the corporate level with the balance being financed by debt via Auriant’s banking relationships. Whereas, in the absence of other information, Edison typically assumes future equity financing to ensure maximum 50% leverage (defined as net debt/[net debt+equity]) in its valuations, in this case, owing to its sustained and strong relationships with local banking institutions, Auriant management believes that a higher level of net debt is possible, possibly up to 67% leverage and potentially even higher (as has variously been the case in the past). For the purposes of this valuation process therefore, Edison has assumed a ‘rounded’ level of equity funding that results most closely in maximum leverage of 60% which, in this case, implies a future level of equity funding of US$40m that results in maximum future leverage of 61.3% (see ‘Financials’ section on pages 24–25). The price of the funding is presumed to be the prevailing share price of SEK3.15. Note that, historically, 52% of any subscription rights associated with equity financing have been swapped for a reduction of the main shareholder’s debt (ie effectively an equity-for-debt swap), although it remains to be seen whether this will once again be the case in any future equity raisings. Variations from this scenario (including the assumption of funding via a convertible bond rather than conventional equity) are considered in the subsequent Sensitivities section below.

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 project and the Kara-Beldyr project according to the operational and financial parameters set out in the previous section, we estimate that Auriant is capable of generating average cash flows of US$48.5m, average earnings of US$41.5m and average EPS of 18.7c in the nine-year period from FY25–33 (inclusive), thus allowing it to pay maximum potential dividends to shareholders in the order of 21.7c per share in the period FY26–33 (inclusive). Discounted at our customary 10% discount rate, such a stream of dividends has a value of US$0.68 per share, as shown in the exhibit below, rising to US$1.20/share on the cusp of the company’s maiden dividend in FY26:

Our ‘base case’ valuation of US$0.68/share compares with one of US$0.72 in March 2018 (see our note Auriant Mining: All aboard the Auriant express) and one of US$0.82 in December 2018 (see our note Auriant Mining: Tardan CIL >60% complete). The main underlying factors occasioning this 5.6% decline in value include 1) Edison’s near-term expectations of a higher gold price (see ‘Assumptions’ above); 2) a decline in the value of the Russian rouble relative to the US dollar in particular; 3) the passage of time, albeit this effect is somewhat mitigated by the delay in the Tardan CIL plant achieving full capacity, from H119 to H219; 4) a higher share price reducing the dilutive effect of future fund-raisings; and 5) an effective two-year delay from FY22 to FY24 in the development of the Kara-Beldyr project. Note that our valuation specifically excludes any value attributable to Solcocon on account of the variable nature of alluvial mining operations. However, it is not impossible that activities at Solcocon could be reconfigured in the future to incorporate hard rock mining and processing via a carbon-in-pulp (CIP) plant.

In qualitative terms, the principal risks to which Auriant is immediately exposed include geographical/sovereign risk (including regulatory risk – see section entitled ‘2019 Rosprirodnadzor inspection’ on page 7), geological risk, metallurgical risk, engineering risk, funding risk, financing risk and management risk. In general terms, these may be summarised as execution risk, which is management’s ability to bring the Tardan CIL and Kara-Beldyr projects to account within its geographical jurisdiction and the required technical and economic parameters. Once in production however, these risks will be perceived to have reduced and several other risks, such as commercial, commodity price, foreign exchange and global economic risks will become relatively more pronounced.

Five specific risks, in particular, are pertinent to Auriant and bear further consideration:

Readers should note that (assuming conversion before FY24) 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 cf equity at a discount) and a coupon close to the company’s cost of debt. In the event of the convertible remaining unconverted, however, and therefore behaving like conventional debt, our valuation instead rises to US$1.19/share (albeit with a correspondingly higher maximum debt level of US$126.0m cf US$75.6m in the ‘base case’ scenario – see ‘Financials’ section on page 24, below).

Moreover, in contrast to a number of other mining jurisdictions, Russia has been on an upward trend in terms of its ranking, as well as its score, in the Fraser Institute’s survey of Investment Attractiveness since at least 2010/11:

From a quantitative perspective meanwhile, Auriant’s valuation varies with metals prices, costs, the discount rate and foreign exchange rates, as shown in the tables below.

Stated alternatively, Auriant’s current share price of SEK3.15, or US$0.326, implies a discount rate applied to its forecast future dividends of 18.4%, so at the current price the shares offer investors a potential investment internal rate of return of 18.4% pa (fully diluted) in US dollar terms.

With respect to foreign exchange rates, the relationship between the rouble and the US dollar has a direct causative effect on margins (costs are typically denominated in roubles, whereas revenues are denominated in US dollars) and is therefore significant in terms of its effect:

Note the similarity in Auriant’s valuation sensitivity to the rouble and changes in unit costs, which is consistent with its operational cost base being denominated almost entirely in local currency terms.

Auriant’s Q319 results to the end of September were announced on 29 November and recorded the company’s first profit since Q317:

Auriant’s EPS of 1.3 US cents per share in Q319 equates to annualised EPS of 5.2c. Note that, while production from the heap leach operation was robust in Q319 (7,279oz), sales were less so (6,763oz) and were materially lower than the 12,908oz produced in Q316, for example. By contrast, steady state production from the Tardan CIL operation should amount to c 7,318oz per quarter (an uplift of 8.2% relative to Q319 sales) and should be achieved at a materially higher margin (eg 58% cf 37%) – implying that, all other things being equal, steady state EPS from the Tardan CIL operation should be comfortably in excess of 5.2c/sh.

As at end-September 2019, Auriant had net debt of US$83.4m on its balance sheet. Assuming the company raises an additional SEK385.9m (US$40.0m) in cash via equity funding in Q120 (as previously described on page 20), we anticipate its net debt will evolve as follows until FY25, before being eliminated in FY26:

Note that our estimate of Auriant’s maximum net debt requirement of US$75.6m at end-FY23 equates to a leverage ratio (net debt/(net debt+equity)) of 61.3%.