Auriant Mining — More than meets the eye

Auriant’s Q321 financial results were reported in the context of known production of 233.7kg from Tardan for the quarter (compared with our prior estimate of 222kg – albeit produced via the processing of a higher tonnage at a lower grade) and a largely known gold price:

A number of features of the results are noteworthy:

Exhibit 2 summarises Auriant’s Q321 results in the context of the prior quarter’s results and our previous expectations. One unusual feature of the company’s financial results was that, in November, Tardan received a request from the Russian State Service for Supervision of Natural Resource Usage (Rosprirodnadzor, or RPN) to make an additional payment for waste disposal of $1.1m, relating to the disposal of waste rock from Pravoberezhny on dumps located at the mine in 2019 and 2020. In addition, Auriant anticipates that a further waste disposal payment of a similar $1.1m will be required for 2021 to bring the total to $2.2m, which was included as a provision in ‘other operating expenses’ in Q3 and 9M21 results (albeit the final numbers will be updated based on the results of the full year). Note that this figure of $2.2m has been excluded from Exhibit 2, below, in order that appropriate comparison may be made with both Auriant’s prior quarter and also Edison’s prior forecasts. However, it is included in our financial forecasts for the full year in Exhibit 3 and also in Exhibit 10 (albeit as an exceptional item in this latter exhibit).

In the event, once adjusted for the estimated $0.39m negative variance in operating profits as a result of the under-sale of gold relative to production, actual Q321 results were within 5.2% of our prior expectations before tax:

Auriant’s effective tax rate of 15.2% was closely in line with our forecast rate of 15.5% (NB leading to a negligible rise in the value of deferred tax assets on Auriant’s balance sheet of just $86k quarter-on-quarter). This is well within the normal range of variation historically observed for Auriant’s tax rate on a quarterly basis (see Exhibit 2). However, slightly unusually, cash taxes of $2.1m were higher than the income statement charge of $512k, which had the effect of depressing cash flow from operations to $2.3m in Q321 (cf $6.2m in Q221), of which $0.8m was consumed in investing activities and the majority of the remainder used to pay interest and repay debt (including leases).

Auriant reiterated its total production guidance for 2021 of 900–930kg gold from Tardan and Staroverinskaya/Solcocon combined (cf 953kg produced in FY20). Assuming production from Staroverinskaya/Solcocon of c 20–40kg (albeit this has proven to be susceptible to both weather-related risks and COVID-19 related risks in the past), this total implies production from the Tardan CIL plant in the range 860–910kg, which we expect Auriant to meet comfortably, all other things being equal (see Exhibit 3). As in FY20, relatively little seasonal variation in production is anticipated at the Tardan CIL plant (in contrast to the former heap leach operation).

As a result of test work conducted during the ramp-up phase, Auriant upgraded the leaching tanks at Tardan (in Q419) 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 altogether. Cash costs per tonne processed are nevertheless expected to be broadly unchanged in US dollar terms in FY21 relative to FY20 (eg $55.65/t cf $54.04/t – Edison calculation), reflecting higher volumes of stripping and exploration drilling and some inflationary pressures in local currency terms (given something of a ‘boom’ in resources investment in Russia in addition to normal staff salary indexation). At the same time, the value of the rouble has fallen by 2.1% relative to the US dollar, from RUB72.6537/US$ at the time of our last note (Sales policy disguises extent of improvements, published on 14 September 2021) to RUB74.1432/US$ at the time of writing, while the oil price is currently 47% higher than it was this time last year and has been 66% higher so far this year, to date. Finally, as discussed previously, stripping costs delayed from FY20 and exploration costs are now also contributing to costs in FY21.

Based on the production guidance provided by management for FY21 (and with the usual caveat surrounding quarterly predictions – but with especial note of Auriant’s propensity to sell gold on an ‘as needed’ rather than ‘maximised’ basis), 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 estimates are:

Kara-Beldyr has now been confirmed as part of the regional electricity development programme in the Tyva Republic. However, owing to a slower than expected decision-making process, the start of production has now been pushed back by Auriant from 2024 to 2025 and this assumption has now also been incorporated into Edison’s valuation of the company (below), such that the combined production profile of each of the company’s two major assets is now presumed to be as follows:

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 $58.8m, average earnings of $53.5m and average EPS of 34.0c in the 10 years from FY26–35, thus allowing it to pay (average) maximum potential dividends to shareholders of 39.0c per share in the period FY27–35. Discounted at our customary 10% discount rate, such a stream of dividends has a value of $1.45 per share as at 1 January 2022 (cf $1.59/share as at 1 January 2021 previously), as shown in the exhibit below. This valuation then rises to $2.33/share on the cusp of the company’s first potential dividend in FY27.

Readers should also note that our valuation specifically excludes any value attributable to Staroverinskaya/Solcocon beyond FY21 on account of the variable nature of alluvial mining operations. However, it is possible that activities at Staroverinskaya/Solcocon may be reconfigured in due course to incorporate hard rock mining and processing.

A bridge chart reconciling our updated valuation of Auriant with our prior valuation, according to the individual factors responsible for the change, is provided below:

Readers should note that, with the delay in the timing of the development of Kara-Beldyr being approximately balanced by the passage of time (ie our updated valuation discounting to January 2022 rather than 2021), the majority of the decline in Edison’s valuation of Auriant could be attributed to the decline in the latter’s share price, from SEK3.84 at the time of our last note (Sales policy disguises extent of improvements, published on 14 September 2021) to SEK3.12 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 $1.56/share (cf $1.59/share previously).

Based on Edison estimates, it may be observed that Auriant is trading on valuation multiples that are consistently lower than the averages of a selection of 13 London-listed gold mining companies and lower than the multiples of the companies themselves in 87% of instances (102 out of 117 individual measurements):

Within the context of the above table, readers should also note that, in general (and possibly contrary to public opinion), FSU-focused gold mining companies typically command ratings that are, on average, at a 41.6% premium to those of their international peers.

In qualitative terms, the principal risks to which Auriant is immediately exposed include geographical/sovereign (including regulatory), geological, metallurgical, engineering, funding, financing and management risks. 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 is sensitive to the price at which Auriant is assumed to raise an additional $20m in equity for Kara-Beldyr (assumed at the start of FY22) as follows:

NB Assuming conversion before FY27, 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 $2.14/share, albeit with a correspondingly higher maximum debt level of $62.3m (cf $37.8m in the ‘base case’ scenario – see ‘Financials’ section, below).

At end-September 2021, Auriant had net debt of $59.9m on its balance sheet (cf $60.3m at end-Q221, $64.2m at end-Q121 and $65.7m at end-Q420), but $61.2m (cf $61.9m at end-Q221, $66.1m at end-Q121 and $67.2m at end-Q420) if lease liabilities are included. While, at first glance, net debt has declined by $0.4m during the quarter (excluding lease liabilities), we estimate that it would have fallen by $1.4m if all the gold produced during the quarter had been sold and by $6.9m if all the gold currently held in inventory as ‘finished products’ had also been sold. As noted in its results call with analysts on 30 August, the change in Auriant’s sales policy with respect to gold (from ‘maximised’ to ‘as needed’) has arisen as a consequence of its success in fully repaying earlier high cost debt (originally raised to help finance the CIL plant construction), which has resulted in a material reduction in interest rates from 9.5% in H120 to 4.9% in H121 and which has also now allowed it to refocus operationally on deferred stripping at the Tardan deposit. Hence early/accelerated debt repayment is no longer a priority for the company.

Assuming the company raises an additional SEK183.1m ($20m) in cash via equity funding at the start of FY22, we forecast that its net debt will evolve as follows until FY26, before being eliminated in FY27 (NB excluding any effect from unsold gold):

Note that the estimates above assume the start of Kara-Beldyr capex in FY22. Otherwise, our estimate of Auriant’s maximum (future) net debt requirement of $37.8m at end-FY25 equates to a gearing ratio (net debt/equity) of 55.3% and leverage ratio (net debt/(net debt+equity)) of 35.6%.

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, Auriant has launched a vaccination programme at Tardan. To date in FY21, it has vaccinated 80% of its workforce. All other things being equal therefore, management is confident that mining and gold production can be maintained at Tardan. 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.