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Aureus goes for gold

Aureus Mining's New Liberty gold project in Liberia offers investors a higher-risk but higher-reward play on the rising price of gold
September 27, 2012

Aureus Mining's (AUE) New Liberty gold project in Liberia is one of the best undeveloped gold projects owned by a junior mining company listed on London's Alternative Investment Market today.

IC TIP: Buy at 69.5p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Advanced-stage, high-grade gold project
  • Positive gold price fundamentals
  • Exploration upside in a new gold province
  • Management has built mines in Africa before
Bear points
  • Challenging time to raise mine finance
  • Operating in Liberia carries risks

All of the eight brokerage firms currently covering the company rate its shares a buy, according to Bloomberg. We've also been keen on Aureus for a while and indeed recommended the shares of its parent company, African Aura, in July 2009 before it spun off its gold assets into Aureus in early 2011. But now, with monetary stimulus in the US, the eurozone and the UK all making for a bullish gold price environment, and several important catalysts expected over the next few months, we see Aureus as nearing a tipping point and expect the shares to re-rate significantly higher as the company starts to produce gold.

Aureus's New Liberty project ticks all the important boxes necessary to become a prospective new mine. Firstly, the deposit is of significant size; Aureus has drilled off 1.7m ounces at New Liberty and the orebody remains open to the west and at depth. Secondly, the deposit is suitable for open pit mining and is high-grade. That means mining costs can be kept low while revenues will be significantly boosted from the hefty metal content. And thirdly, metallurgical testwork shows that around 93 per cent of the gold can be recovered using a simple processing circuit - implying capital costs associated with building a plant there will be relatively low, and technical and operating risks vastly reduced.

The only issue at New Liberty is a high strip ratio - a lot of waste rock will need to be moved to access the gold-bearing ore - but this should be more than offset by the higher than usual grades and the simple metallurgy.

Indeed, preliminary modelling shows the project's economics to be very strong, with an internal rate of return of 62 per cent. In as little as 18 months, New Liberty could be developed into a 120,000-ounce-per-year gold mine with impressive average cash operating costs of around $632 (£390m) per ounce - lower than the industry average and just over one-third of the current $1,750 gold price. And while initial capital costs are likely to be higher than the previous estimate of $113m, they should still be kept relatively low.

AUREUS MINING (AUE)

ORD PRICE:69.5pMARKET VALUE:£84m
TOUCH:68-71p12-MONTH HIGH:92pLOW: 46p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:40.5pNET CASH:$31m

Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (p)
2011nil-7.78-7.00nil
2012*nil-3.30-2.80nil
% change----

Normal market size: 6,000

Matched bargain trading

Beta: 1.27

£1=$1.62

*Edison forecasts

Aureus has already been awarded a mining licence for the project and all it now needs is environmental approval. The company expects to receive this in the next few weeks, coinciding with the release of a definitive feasibility study. With these in hand, management can then approach banks for funding - several institutions have already been shortlisted. Admittedly, market conditions aren't ideal to secure mine finance at the moment - but management's strong track record and the project's robustness give us confidence it will.

 

 

Aureus is also well positioned to benefit as Liberia becomes a more accepted mining destination. The company controls over 457 sq km of land around New Liberty and is busy exploring at least a half-dozen highly prospective targets nearby. Fittingly, chief executive David Reading is an experienced mine-finder - he previously acted as Randgold's general manager of exploration and, most recently, as chief executive of European Goldfields.

True, Liberia has its fair share of risks. But we view the country as one of the most exciting exploration frontiers in west Africa and, as well as having democratically re-elected a Nobel Peace Prize winner Ellen Johnson Sirleaf as president earlier this year, more than $18bn of foreign direct investment has been pledged to Liberia's natural resources sector over the next decade by major companies.