The company I picked out with potentially the most share price upside is an Aim-traded gold, silver and copper miner in Azerbaijan, a little known region of the former Soviet Bloc. That's because I firmly believe that the monetary authorities - Federal Reserve, Bank of England and European Central Bank - will be forced into turning on the electronic printing presses on a massive scale in the months ahead due to the deteriorating economic situation in Western Europe and the contagion effect it is having on other major economies including the US.
That country's recovery is at best looking fragile as consumers become more cautious - retail sales fell in May and employment data has been poor - and large corporations have to contend with lower exports to Eurozone end markets than previously forecast. Given consumer spending accounts for over 70 per cent of US economic output, the country is far more susceptible to external shocks such as the Eurozone crisis than many would think. And with half the swathes of the European Union in recession, it is inconceivable that US export growth will not be severely impacted if this crisis deepens further as seems highly likely.
Frankly, I don't think the major central banks will have any choice but to embark on another round of quantitative easing in an attempt to try to offset the impact of the severe economic slump that is unfolding right now in Europe. In the case of the ECB, it is also one way to cap sovereign bond yields across the board and stop the contagion from spreading to Italy, the world's third largest debtor with a public debt mountain of €1.9trillion.
If I am right then gold bugs, who have seen the price of the yellow metal fall back from a record high of $1921/ounce in early September to a low of $1522/oz - a level that has interestingly been successfully tested three times since the autumn - could be in heaven. That's because any concerted central bank action would underpin a 'risk-on' rally in equities and commodities - as we witnessed to great effect after the ECB launched a €489bn lending programme to the region's banks in mid-December. In the case of gold, it would also get boost from investors looking to hedge against the risk that the central bankers are debasing fiat currencies.
Clearly, we don't have to do anything until one of the central banks signal that further quantitative easing is on its way. When it does we will have ample opportunity to take positions in the yellow metal either through ETFs, covered warrants or shares of gold miners. However, my guess is that the smart money will be buying in advance to take first mover advantage which is why I have been taking a very close look at the investment case behind Azerbaijan Aim-traded gold, silver and copper miner Anglo Asian Mining (AIM: AAZ – 37p).
What sparked my attention was a bumper set of results a month ago when the company reported pre-tax profits of £20m last year on sales of £54m (Anglo Asian Mining reports in US Dollars, but I have converted the figures to sterling at current exchange rates). Those profits were based on gold production of 57,000 ounces and silver output of 39,000 ounces from its Gedabek open pit mine which Anglo Asian holds mining and exploration rights over until March 2022. What also impressed me was a cash operating cost of only $513 per ounce which is less than a third of the $1573 per ounce average selling price achieved last year for its gold. So this is a very low cost producer enjoying a huge profit margin. It is also one with a sustainable business model as latest JORC ore estimates show that Anglo Asian Mining has 744,038 ounces of gold resources at Gedabek alone.
True, the company is hardly in the same league as Barrick Gold or Randgold Resources and a discount needs to be factored in given the business is based in Azerbaijan. Even so, investors seem overly cautious because the company is capitalised at only £38m, or the equivalent of 3.5 times post tax earnings. Now that miserly valuation would be warranted if Anglo Asian Mining had financial problems, but it doesn't. Net assets of around £50m dwarf net borrowings of £2m, so the balance sheet is barely geared. That leaves the company in a comfortable position to invest in its other mines including Gosha, located 50 kms north-west of Gedabek, which according to house broker Fairfax has "capacity to produce between 10,000 to 15,000 ounces of gold annually with a mine life of five years."
To make things even more interesting shares in Anglo Asian Mining are trading in the apex of a rising triangular chart formation and any close above 40p would signal that the consolidation period is finally over and a major break-out is taking place. I would view this price action as a golden buying opportunity targeting a return to last year’s high of 80p, a realistic price target if, as I firmly believe, monetary easing programmes are announced in the months ahead.
