Prodigious cash generation and FCF yield

Anglo Asian Mining (AAZ) is a highly cash-generative miner of gold, silver and copper from three mines in Azerbaijan, where it has a track record of close cooperation with the government. The company listed on AIM in 2005 and produced its first gold in 2009. In 2018, it produced 83,376 of Gold Equivalent Ounces (GEOs), paid its first dividend and the balance sheet moved into a net cash position. At this stage, we have made the highly conservative assumption of no production beyond 2025. Nevertheless, our DCF valuation of 146p reflects AAZ’s prodigious cash generation. Indeed, we estimate that the annual free cash yield during 2019-25 will average 18.7%.

• Strategy: AAZ’s strategy is to unlock value by creating the leading gold and copper producer in Azerbaijan and leveraging its first-mover advantage and the experience of its management team. This involves maximising production at the lowest possible cost at its main Gedabek site and developing additional production from exploration at other sites in the region, initially Ordubad.
• First-quartile cost position: AAZ’s last reported figure (1H’18) for AISC was $543/oz, putting it in the first quartile of the gold mining industry’s cost curve – due to its Azerbaijani jurisdiction, predominance of open-pit mining, access to the national power grid and investment in efficient downstream processing facilities.
• Production upside: Our production estimates for 2019-25 are conservatively based on the proved & probable reserves for the Gedabek open pit and the nearby Ugur deposit. This excludes 833,000 GEOs at the former, which are currently classified as resources, the impending JORC resource at the Gadir underground mine and the exploration potential of the copper-gold porphyry system at Ordubad.
• Risks: AAZ faces the normal risks for a junior miner, albeit without the funding risk faced by explorers and developers. These risks include volatility in gold, silver and copper prices, political risks (albeit mitigated in this case), environmental risks, and 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 146p per share, using a discount rate of 8% and long-term gold price of $1,300/oz. We expect the company to pay a $0.06 dividend in 2019, implying a dividend yield of 5.6%.