Small-cap gold miner with bigger-cap prospects

AAZ is a highly cash-generative gold miner from four mines in Azerbaijan, where it enjoys close ties to the government. We estimate current-year free cashflow and dividend yields of 19.3% and 6.8%, respectively. The estimated aggregate free cashflow of $248.5m in 2020-30 should comfortably exceed the current market cap. In 2020, we expect AAZ to announce resource upgrades for its Gedabek open pit, Gadir and (potentially) Ugur mines, with a maiden estimate for the Gedabek underground mine in 2021. Behind them come five fast-track production targets (including Avshancli – a “significant mineral district”) at Gedabek and the Ordubad Contract Area (AAZ’s primary asset at the 2005 listing).

• First-quartile costs: AAZ’s latest reported figure (FY’19) for All-In Sustaining Costs (AISC) was $591/oz, putting it in the first quartile of the gold mining cost curve. This is due to its Azerbaijani jurisdiction, predominance of open pit mining, access to the power grid and efficient downstream processing.
• Production upgrade and upside: Exploration success and upcoming resource upgrades give us confidence that production can be extended beyond remaining Proved and Probable reserves. We are assuming that 100% of the additional 553,000 oz of Measured & Indicated Resources are mined during 2026-30 – which excludes all five fast-track production targets and Ordubad.
• Potential for two major mineralised “systems”: We believe that AAZ’s flagship Gedabek Contract Area could be part of a much bigger epithermal-porphyry system of gold-silver-copper mineralisation. Exploration work is accelerating at the untapped Ordubad project – potentially a significant copper-gold porphyry.
• 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 risks (albeit mitigated), environmental risks, 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 181p per share, using a discount rate of 8% and long-term gold price of $1,600/oz. We expect the company to pay a $0.105 dividend in 2020, implying a dividend yield of 6.8%.