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Donald Trump may have quite a good idea here. The active ingredient in hand sanitiser is alcohol so I recon that we should all consume alcohol not to beat the virus itself but to beat the effects of lock-down. When I was informed that I shouldn't leave the house until the end of June I opened a rather good bottle of Minervois, it certainly made me feel better.
From the 2019 half year results it is clear that the real capital investment is yet to come with a potential $1.6 billion ($200 * 8 million)of future spend to increase output to 20 million tonnes pa.
Capital Investment for Future Growth
The Group’s approved capital projects are in the table above. Ferrexpo is on track to reach 12 million tonnes of pellet output by 2021.
Ferrexpo is currently considering a series of projects which will allow expansion of pellet capacity to 20 million tonnes per annum.
This includes further development of the Group’s beneficiating capacity, expansion of the Group’s pelletising capacity and
debottlenecking of logistics infrastructure including rail and port. A preliminary estimate of the required capital investment per tonne
is approximately US$150-US$200 per tonne of incremental output.
Considering where the cash might have gone and looking at the 2019 half year results.
As well as the refurbishment of the last pellet line Ferrexpo has other major capital projects underway including;
New grinding section. Process 6MTPA of crushed ore into pellet feed. Construction & assembly works underway.
Concentrate stockyard. Decoupling of concentrator & pellet plant by providing concentrate storage capacity. Construction & assembly works underway.
Press filtration plant. Replacement of disc filtration to reduce moisture in balling plant. First order for equipment placed in 1H 2019.
Logistics. Rail cars - continuation of programme to replace state rail cars. 400 rail cars ordered in 1H 2019 for delivery 2H 2019.
Go it alone
Pros
Ariana retains 50% of the profit of Zenit.
May have a larger share of any future Salinbas profits depending on whether Salinbas is commercially viable and how it is funded.
Cons
Ariana will have to devote most of its current profit and cash flow from Zenit for the next 3-4 years to continue to prospect Salinbas up to the point of having a Feasibility Study leaving little spare resources to pay a dividend or explore other potential gold reserves. This will hold back Ariana’s share price until Salinbas is completed and the associated risk removed in 5 to 6 years time.
Ariana will not recoup its exploration costs for Salinbas until either the mine is built by Ariana or Ariana sells Salinbas into a JV. If Salinbas proves not to be commercially viable (a small risk) then all the profits from the next 3-4 years will have been wasted.
If Salinbas is commercially viable then Ariana will have to raise about $60 million to build the mine, a very tall ask for Ariana to do alone and if Ariana goes alone there is a risk that some of the cash will have to be raised through equity and further dilution. It is more likely that Ariana at this point will have to go into a JV to develop the mine and therefore will not have 100% of the Salinbas profits.
There are pros and cons on both sides. The question is do shareholders want a higher current share price and dividends for the next few years with a potentially lower long term value to the company or a lower share price now and little or no dividend over the next few years with a potentially higher share price in about 5 years time (depending on how fast Salinbas is developed if commercially viable). It is a case of lower risk and lower rewards or higher risk and potentially higher rewards. As for myself the JV is the way forward, I am retired and would rather see a more immediate return so I can enjoy life even if that means my son won’t get such a large inheritance.
Hi johnpwh
Thank you for your comments, they are appreciated. I take your point about Tavsan and it may be developed on time and on budget as Ariana is now good at under-promising and over-delivering, however I have seen so many mine developments come in over budget and/or time or not even make it to fruition so I am a bit of a pessimist. I have tried below to look at the pros and cons of both the JV and going it alone (separate post) and there are pros and cons for both. Each individual investor will prefer one or the other depending on their view on risk and reward, either way in the long run Ariana should make a good return for investors. One thing that is good about this forum is the quality of discussion which I consider to be very high; it is good to have other people challenge a viewpoint with good constructive criticism.
JV
Pros
Salinbas developed risk free with no further financial input from Ariana, Salinbas still only has indicated and inferred reserves and there is still a risk that it may not be commercial.
$30 million in the bank will enable a maiden dividend and leave substantial amount for further exploration e.g. Cyprus.
Enables Ariana to concentrate on core competencies of exploration and prospecting whilst Zenit delivers competencies of mining and refining and the new JV partner delivers capital.
Enables profits from current Zenit operation to be distributed as a dividend which will improve Ariana’s share price straight away. Anglo Asian declared a maiden dividend in September 2018 and saw its share price go from the low 40ps in June 2018 to the low 90ps in November 2018, it now has a share price of 139p. Anglo Asian now has a P/E of 18.3 compared to Ariana’s 9.2 both a fairly similar gold mining operations with similar reserves and future prospects.
The new JV partner values 53% of Zenit at $50 million which values the whole of Zenit at $94 million. Ariana currently has a market cap of $31.7 million which is made up of the intrinsic value of Ariana and the value of its 50% stake in Zenit (valued by the JV at $47 million) so the market cap is way below the real valuation by the JV even without an intrinsic value for Ariana as an exploration company.
Cons
Only has 23.5% of Zenit profit instead of 50%.
May have a smaller share of any future Salinbas profits depending on whether Salinbas is commercially viable and how it is funded.
Projecting forward to the end of 2022 if Ariana do not go ahead with the JV this is a potential scenario.
Zenit - Tavsan will have just been completed as a mine to bring total production to 50K oz gold with a potential capital cost $30 million which will be debt funded with an outstanding balance of $30 million to be repaid from the cash flow of the expanded production of Zenit over the next 2 years to 2024.
Ariana – Salinbas will have been fully prospected and licensed up to the point of producing a FS costing about $12 million in total (from the JV RNS) taking most of the profit that Ariana will have received from Zenit up to 2020.
Ariana will sell Salinbas back into Zenit for $36 million (3 times cost). Zenit will have to find about $100 million to fund the purchase of Salinbas from Ariana and build the mine (assuming a 50K oz mine costing $60 million). Zenit will still have the debt from Tavsan and will find it hard to raise all the debt so will probably have to find a JV partner to develop Salinbas or delay Salinbas until the Tavsan debt is paid off. If a JV partner is found to help fund 50% of the mine then Zenit will have to find $50 million of which Ariana will have to find $25 million leaving Ariana with $9 million cash or debt owed by Zenit.
So Ariana ends up in 2020 with 50% of the current Zenit operation and 25% of a future JV on Salinbas and $9 million in the bank or as an asset of debt having paid no dividends up to that point, and this assumes that Salinbas ends up as a viable mine.
The alternative is $30 million in the bank with 23.5% of the current Zenit operation and 23.5% of the future Salinbas operation if Salinbas is commercially viable.
The choice is a reasonable piece of cake now and reasonable pieces in the future against no cake now and a possible larger piece of cake in several years time.
Hi VanVan I hope that the world is ok with you.
If you think my missives are good enough to copy to ADVFN by all means copy them you do not need to keep asking my permission just let me know that you have done so.
I suspect that whichever strategic path Ariana chooses long term shareholders will end up making a substantial profit.
Ariana is at a crossroads with two distinct strategic paths.
1) Ariana goes it alone to prospect Salinbas to the point of a FS, this will cost about $11 million (the combined amount that the new partner and Procea plan to invest). Ariana will have to sink most of its profits for the next 4 years into Salinbas and during this time is unlikely to pay a dividend which will keep the share price depressed. Even if Ariana develops Salinbas to the point where a mine and processing plant will be built then about $60 million (for 50oz pa) will have to be found necessitating a JV, loan funding and potential equity raise with corresponding dilution. There is always the risk that Salinbas is not commercial. Going it alone means that Ariana will have a larger share of the final profits but at a greater risk. The share price in 10 years time may be greater but at the risk of a lower share price in the near and medium term with the JV.
2) Ariana enters the JV, gets $30 million up front (which is the current market cap) and ends up with only 23.5% of the resulting JV. The future risks are considerably diminished as there are no costs for Ariana in developing Salinbas if it is proved to be commercially viable. The upside is that Ariana can pay a windfall dividend from the $30 million and start paying regular dividends which should improve the current share price also Ariana will have a 23.5% share in the potential profits of Salinbas without having to make any financial commitment. The downside is that Ariana will lose 50% of the current and future Zenit profits and will have a smaller share of the potential profits of Salinbas (depending on how the capital to build the mine is raised if Ariana goes it alone). Even with the JV Ariana is likely to have a considerably higher share price in 10 years time than the current share price and will have a higher short and medium term share price.
The question is do you want higher risk and potentially higher reward in the distant future or much lower risk with potentially lower reward in the distant future but a higher near and medium term reward?
Hi VanVan
By all means copy the post onto ADVFN.
The MoU shows that an outside investor values Zenit at around $94 million (53% for $50 million), Ariana will get $25 million (about £19.3 million) for their share which is 76% of the current market cap and still have a 23.5% stake in Zenit which is valued at $22 million by the outside investor.
Ariana also get $5 million for putting Salinbas into the new JV which will then be hopefully progressed to production without any more capital input from Ariana. Ariana get 23.5% of any future profits from Salinbas with no further risk, loans or share dilution. One big worry of mine was always that Salinbas would eat Ariana’s profits for the next few years with no certainty of success and an inevitable JV and potential large loans and equity raises to bring the mine to production if successful.
As it stands the MoU will enable Ariana to give an initial windfall dividend and then annual dividends from the Zenit profits and still have cash to invest in new prospecting. Any prospecting at the existing pits and Salinbas will be paid for by the new JV.
Ariana are not a gold miner/producer, it is Zenit that is the miner/producer. Ariana does not have access to large amounts of funding to develop Salinbas. The new JV has fund raising capacity and mining/producing experience and Ariana can get on with what it is good at which is prospecting, then selling the prospects into the JV for 3 times the prospecting costs and finally enjoying 23.5% of the profits of any new productive mines (without any capital commitment).
I am certain that Kerim is happy with this as he is a prospector at heart.
If this goes ahead Ariana will have unlocked considerable shareholder value, de-risked the development of Salinbas and still own 23.5% of a very profitable gold mining operation.
My main worry was that Ariana’s profit from Zenit over the next few years would have been taken up in the prospecting and Definitive Feasibility Study of Salinbas leaving little profit for distribution to Shareholders which would have depressed the share price for the near future. Salinbas may not yet prove feasible and, if so, would have significantly reduced the overall distributable profit. This deal removes that worry. If Salinbas does prove to be an economically viable mine then Ariana then Ariana will get 23.5% of the profits with no cost of future share dilution.
The real benefits of this deal are;
An outside investor has indicated that the true value of the current Zenit operation is in excess of $100 million and even if the deal fails then this gives an indication that Ariana’s share of value is over $50 million.
Ariana will get $30 million up front some of which it states it will distribute back to shareholders, the remaining amount will fund the exploration and resource estimation of new prospects for the near term without having to use the profits on the remaining 23.5% of Zenit some of which could be used to make regular dividend payments.
Salinbas will be progressed up to the Definitive Feasibility Study without any cost to Ariana and the mine will built using loan funding arranged by the new partner.
The arrangement has a lot of synergy; Ariana can concentrate on its core competence of prospecting, Proccea have proven ability to build and run a gold mining and refining operation and the new partner has the ability to raise the necessary capital to develop any prospects that Ariana finds and sells into the JV.
Zarro wrote "If we agreed to go and buy a £300k house on a 50/50 basis and I got a loan for £150k with a 50% LTV mortgage on the house would you be happy to put in your £150k contribution in return for a 50% share of the £150k equity in the house?"
If you got a loan of £150k on a property worth £300k that was jointly owned 50/50 you would in fact be getting a 100% mortgage on you share of the asset. Your joint owner would still own 50% of the property i.e. £150k which he could fund any way he wants. Legally you cannot raise a mortgage on an asset you do not own, i.e. the 50% of the house owned by your joint owner.
If Ganfeng purchase another 27.5% of Sonara to bring their holding to 50% then both Bacanaora Lithium and Ganfeng will hold 50% each of the undeveloped mine. Sonara Lithium will then have to raise the money to build the mine whether with an equity raise with 50% of the new shares in Sonara being sold to each of Bacanaora and Ganfeng to raise the capital to build the mine or more probably both Bacanora and Ganfeng will lend Sonara the money to build the mine and will be repaid from the cashflow of the mine. The RK loan was agreed with Bacanora and will be guaranteed by the Sonara Lithium assets of Bacanora amongst other assets. If Bacanora only own 50% of the shares in Sonara Lithium then only these shares can be used as an asset for the loan.
The good thing with loan funding is that both parties can loan Sonara Lithium differing amounts without it affecting the ownership of the business and both parties will get their money back (with interest) as long as the business makes a positive cash flow. Ganfeng could loan Sonara Lithium more capital than Bacnaora Lithium and vice versa.
If the funding for Sonara Lithium was carried out as an equity raise by Sonara Lithium then the money used to purchase the shares cannot be redistributed back the Bacanora and Ganfeng as it is a non-distributable and both Bacanora and Ganfeng can only take cash out of Sonara Lithium if it is making a profit. Loan funding, however, can be paid back as long as there is a positive cash flow. Also both parties would have to match capital funding to keep the equity balance at 50/50.
I am invested in Ariana Resources which has a JV with Proccea in Turkey to build and operate a gold mine. Ariana was not able to raise all the capital by itself but the JV was able to gain loan funding from Proccea, Ariana and the Turkish banks to build the mine because it had Proccea on board. The JV works very well.
Thanks for the comment Zarro. My son and I looked into this a few weeks ago and although it wasn't very clear came to the conclusion that the Red Kite loan agreement was signed by Bacanora Lithium and that when the loan is taken up Bacanora Lithium will hold the liability in its accounts. The loan will be secured on the assets of Bacanora Lithium which will include its share of Sonara Lithium. If anyone has more clarification on this I would be very grateful.
Ganfeng have not stolen Bacanora from the current investors. The cost of developing Sonara will be realised within Sonara Lithium and Ganfeng will have to contribute its share of the $420 million required to develop the mine. So if Ganfeng end up owning 50% of Sonara Lithium they will have to find $210 million to invest in the mine to retain their 50% stake. My guess is that Ganfeng will buy 27.5% of Sonara Lithium for about $10 million off Bacanora. They will then both loan Sonara Lithium $210 million each to be paid back from the initial cash flow of the mine. Bacanora currently have access to about $180 leaving $30 million to be found. The loan repayments from Sonara Lithium will be used to repay to Red Kite loan. Of course this means that Bacanora will only have 50% of the profits of the mine, but I would rather have 50% of the profits of a functioning mine than 100% of the profit of a non-existent mine.
If Ganfeng do not increase their ownership of Sonara Lithium then Bacanora could have to find another $145 million but would be entitled to 77.5% of the Sonara profits. Ganfeng have signed several supply agreements to supply Lithium to future gigafactories and therefore need to get Sonara built. Bacanora has given itself the ability to issue 500 million shares to cover all eventualities and possible to fund Zinwald, it does not mean that Bacnaora will issue all the shares.
Two things; first the 500 million shares is a roll over resolution from last years AGM where the resolution giving the company the authority to issue up to 500 million shares expired at this years AGM and second the fact that the company says that costs are expected to be in line with the original estimate is all they can say until they have carried out the new detailed specifications and know what exactly the costs are going to be.
From the AGM the last sentence is the operative one.
It is proposed to authorise the Directors to allot Ordinary Shares up to a maximum nominal value of
£50,000,000 (representing 500,000,000 Ordinary Shares), which is approximately equal to 260 percent
of the Company’s issued share capital as at 15 November 2019 (being the last practicable date prior
to the publication of this document). As at the date of this document, the Directors’ intention is only to
make use of this authority in order to raise funds to assist in financing the approximate US$420 million
capital expenditure requirement to develop Phase 1 of the Sonora Lithium Project. This authority
replaces the similar authority approved by shareholders at the Company’s last annual general meeting
and if passed, will expire at the conclusion of next year’s annual general meeting.
Ferrexpo has been oversold, the market for pellets is growing due to the pressure on steel producers to reduce CO2, there is a large oversupply of 62% fines and this is driving the price of iron ore down but it looks like the pellet premium will at least remain steady if not grow as in the article here; https://www.nasdaq.com/articles/analysis-pellet-pivot%3A-china-develops-taste-for-high-grade-iron-ore-as-coastal-furnaces
Ferrexpo recently signed a long term contract with Thysenkrupp
“Ferrexpo agrees its first long-term contract with thyssenkrupp AG In October 2019, Ferrexpo was pleased to sign its first long-term pellet supply contract with thyssenkrupp Steel Europe AG. After developing the business gradually over the previous 5 years, the landmark signing ceremony was held in Dusseldorf following reciprocal visits of senior management to the operations of Ferrexpo in Ukraine and thyssenkrupp Steel Europe AG in Duisburg. Thyssenkrupp Steel Europe AG is one of the largest steel producers in western Europe and requires high quality pellets to increase operational efficiency and reduce its CO2 footprint.
Both these things are good for Ferrexpo’s outlook.
If the end result is a JV to build and operate the mine then that is ok by me. I would rather have 50% of an operating mine than 100% of no mine at all. If we did not have the buy in from Ganfeng then Bacanora would have to raise a very large amount of equity ($250 million plus) as it is the amount that Bacanora need to raise will be relatively small (about $30 – 40 million) Even with the added dilution from the JV my calculations are that this will ultimately be beneficial to existing shareholders. I am still forecast about £1.50 at 17,500 tonnes and £3.00 to £4.00 when production reaches 35,000 tonnes.
Ganfeng is taking a 50% share at the Sonara project level which will effectively make it a joint venture. When the mine is developed through the JV Ganfeng will have to fund 50% of the venture with Bacanora funding the other 50%. Bacanora already has access to about $200 million of the $230 million it will need to invest into the JV and therefore will only need to raise about $30 million through equity thus giving a relatively small amount of dilution in Bacanora itself. This has to be offset by Bacanora only getting 50% of the profits of the Sonara project. If this is the case with the JV then this is a good deal for existing investors as the profit per share will be about 25% more than if Bacanora had to find all the extra capital required to build the mine through a very large equity raise. I calculate a long term share price of over £3.00 per share.
I am invested in Ariana Resources who have a JV with Proccea Construction Co to build and operate the gold mine and processing plant at Kiziltepe in Turkey which enabled them to raise the finance to build the mine with less dilution (although there was a fair bit) and spread the risks. It seems to work very well now the mine is in production.
I mean 35,000 tonnes not 25,000 tonnes
The final real value of Sonara will be realised when two things happen;
a) when production gets to 25,000 tonnes pa and
b) when any loans are substantially paid back.
With a fair wind and Ganfeng's know how and money production might get to 35,000 tonnes by 2023, the loan pay back might take longer. The higher the loan amount the higher the final share value but the longer it will take to pay the loan back.
Also I know that it will be easier to raise the money with Ganfeng now invested but don't forget if they invest at the project level they will then have an equity stake in the project which will dilute the earnings attributable to Bacanora as the parent company. Ganfeng will want a return from investing at the project level.
As I have been investing in the AIM market for several years I now take a more pessimistic view of production dates and share dilution to mine completion thus I have taken 2026 as the year that I suspect that full share value will be realised . Oh for the days when I was a happy, optimistic investor.