Prodigious cashflow AND bigger “system” potential

Anglo Asian Mining (AAZ) is a highly cash-generative miner of gold, silver and copper from four mines in Azerbaijan, where it has close ties to the government. In 2018, it produced 83,376 of gold equivalent ounces (GEOs), paid its first dividend and had net cash on its balance sheet. At this stage, we have made the highly conservative assumption of no production beyond 2025. Nevertheless, our DCF valuation of 156p reflects AAZ’s prodigious cash generation and gold/copper stockpiles. Indeed, we estimate that the company’s aggregate underlying free cashflow during 2019-25 will be in excess of its current market capitalisation and the annual free cash yield will average 16.2%.

• Lowest-quartile cost position: AAZ’s FY’18 reported figure for AISC was $541/oz, putting it in the first quartile of the gold mining industry’s cost curve. This is due to its Azerbaijani jurisdiction, predominance of open-pit mining, power grid access, modest reinvestment levels and efficient downstream processing – all of which contribute to the group’s cash generation.
• Production upside: Our 2019-25 production estimates are conservatively based on 482,000 oz of Proved & Probable gold reserves (and related copper/silver) for the Gedabek, Gadir, Ugur and Gosha mines. They exclude i) an additional 553,000 oz of Measured & Indicated Resources, and ii) the potential for commissioning an underground mine at Gedabek before 2025.
• Beyond 2025: It is highly likely that production will continue well beyond our current forecast horizon. Besides the potential for an underground mine at Gedabek, we believe that the Gedabek-Gadir area could be part of a much bigger porphyry-epithermal system of copper-gold-silver mineralisation.
• Risks: AAZ faces the normal risks for a junior miner, albeit without the funding risk faced by explorers/developers. These include volatility in gold prices, political (albeit mitigated) and environmental risk, as well as operational risks in successfully executing the mining plan and operating downstream processing facilities.
• Investment summary: The outstanding aspect of AAZ’s financial performance is its cash generation, which is reflected in our DCF valuation of 156p per share, using a discount rate of 8% and long-term gold price of $1,350/oz. We expect AAZ to pay a $0.07 dividend in 2019, implying a dividend yield of 4.7%.