Growth in copper production poised to explode

AAZ is embarking on an expansion that will create a much larger mining business, extending well beyond its flagship Gedabek contract area (“Baseline Gedabek”). The company was awarded three concessions in 2022 at no cost, each containing a substantial copper deposit: Xarxar with nearly 100kt, Garadag over 300kt and Demirli estimated at 200kt. The staged development of the integrated Xarxar and Garadag project (“Copper 1”) and Demirli (“Copper 2”) will transform AAZ from a small-cap gold miner to a mid-sized copper producer with c.50kt p.a. of copper production, and significant gold and zinc by-products. We estimate an aggregate valuation for Baseline Gedabek + Copper 1 – Xarxar and Garadag + Copper 2 – Demirli of 214p per share.

• Baseline Gedabek: 2023 marks the low in production from declining grades at AAZ’s existing mines. The commissioning of the Gilar and Zafar copper-gold-zinc mines within the next 12 months should lead to a rebound in production of more than 40%, when measured in copper equivalent tonnes (CETs). This is a “bridge” to greater shareholder value creation from Xarxar, Garadag and Demirli.
• Copper 1 – Xarxar and Garadag: We expect Xarxar to be commissioned in 2026, with copper production of c.10,000 tonnes p.a., followed by Garadag in 2028, with c.26,000 tonnes p.a. The proximity of the deposits (4km apart) will allow shared infrastructure, including processing, in an integrated project that we estimate will cost nearly $200m (with c.$140m debt).
• Copper 2 – Demirli: The copper mine and processing plant is believed to have been in operation as recently as 28 December 2022. If intact, little investment may be needed by AAZ to restart the operation (we assume $30m). There are difficulties with access, owing to Russian peacekeepers in the Karabakh region, potentially until November 2025, unless an alternative agreement is reached.
• Risks: AAZ faces the normal risks for a junior miner, albeit without equity funding risk faced by explorers/developers. These include volatility in gold and copper prices, political (albeit mitigated), environmental and operational risks in successfully executing the mining plan and operating processing facilities.
• Investment summary: We have calculated a fair value for AAZ of 214p per share from the aggregate of three DCF valuations for Baseline Gedabek (76p)
  + Copper 1 – Xarxar and Garadag (71p) + Copper 2 – Demirli (67p). These are based on a copper price of $8,000/tonne (3.63/lb), a gold price of $1,900/oz and an 8.0% discount rate. Notwithstanding the debt-financing requirements to fund growth in the next few years, we expect dividend payments to continue.