The Turkish mining sector has been growing
steadily over the past ten years experiencing average year on year growth of
11%. The election of President Erdoğan on the 10th August this year provides
certainty over the political direction of the country that has witnessed decent
GDP growth of 5.2% each year on average between 2002 and 2011 and 4% growth in
2013.
Turkey is Europe’s largest gold producer.
In 2013 the country produced 33.5 tonnes of gold, from 7 producing mines and by
2015 is looking to take production to 50 tons annually with more mines coming
into production. The Turkish authorities are pro mining and recent events are
supporting that view.
http://www.invest.gov.tr/en-US/infocenter/
publications/Documents/MINING.INDUSTRY.PDF
Turkey has seen decent year on year growth
and earnings from its mining activities. Turkey wants to increase gold
production to 50 tons annually by 2015. Permitting new gold mines and expansion
projects is critical to achieving that objective.
Source: Turkish Gold Miners Association
Some investors are nervous about Turkey
when it comes to the mining sector and often when it’s a junior miner, they
think the transfer of discovered value in the ground to value back to
shareholders is paved with difficulties. Permitting is one of the concerns that
most worries investors.
Might I shed some light on three recent
events that indicate to me at least why investors uncertain about Turkey’s
mining sector should think about softening their approach.
Lets look at Australian listed Chesser
Resources (CHZ:ASX) a 31 million USD market cap Australian based gold
exploration company that have been developing the Kestanelik gold exploration
project in western Turkey. The company acquired the prospect in 2009 and set
about undertaking a drill campaign that eventually led in 2011 to the company
securing a JORC compliant resource of 703,000 ozs of gold with decent sets of
grades near surface, some as high as 28 g/t Au and with most targets hitting
well over 5 g/t Au.
On the 3rd September Chesser announced to
the market that a Turkish group, Nurol Holdings had placed an offer to Chesser
to purchase Kestanelik for $40 million USD in cash and where the deal would
give Chesser shareholders a cash return of A$0.15 per share. Chesser’s share
price closed Friday at A$0.15 and so if the deal goes through, it would provide
its shareholders with a huge premium. In fact Chesser’s market cap in itself is
only $31 million, this deal would double the value. It’s a good deal for both
parties, as Chesser gets the value now and Nurol benefit by buying 703,000
ounces of gold for an in the ground price of $57 per ounce.
What this deal does mean to investors is
this.
1, That a Turkish industrial group like
Nurol, is confident that it can take this project from its discovered stage to
production stage and that means navigating permitting, financing and all the
other hurdles that have to be overcome to enable the company to realize the
true value of its investment. It essentially means that Nurol is confident that
the regulatory, political, financial and importantly local stakeholder support
is there for this project to be turned into a mine.
2, For investors it means that an
exploration stage company in Turkey, that discovers, delineates and develops a
good high quality gold play, has an exit strategy that can deliver decent
returns to shareholders.
I have no doubt that Chesser shareholders
will vote in favour of the deal, why wouldn’t they? After all they have two
other projects in Turkey that they can now fund with the proceeds from this
sale and bring into production if they want to.
So I hope this transaction eases some
concerns about Turkish gold exploration and what it can mean for an investor.
Now onto Eldorado Gold (ELD:TSX) the
Canadian listed gold mining company. Eldorado is a strong investor in Turkey
and is currently mining gold from its flagship open pit Kişladağ mine in the
west of the country. No stranger to permitting Eldorado first identified the
Kişladağ ore body back in 1997 and has taken the project all the way through
exploration, construction to mining and processing. Kişladağ is a big footprint
mine with a big environmental footprint too.
The important piece of news associated with
this story came out on the 26th June when Eldorado announced that it had
secured Environmental Impact Assessment approval for the expansion of Kişladağ
from its current 12.5 million tonnes per annum to a maximum of 35.0 million
tonnes per annum, more than nearly trebling the operation. This is a big expansion and where the company
would naturally have to have had updated forestry permit approvals for the
expansion.
What this signals, is that the Turkish
Ministry of Environment and Urbanisation clearly remains supportive of mining
operations and it would seem aligned to the fact that Turkey’s economic
development of the mining sector, and in particular gold, is clearly motivated
to permit to help grow output and meet its own growth targets.
For UK Investors, the story here is London
listed Ariana Resources (AAU:AIM). The company is fully funded for the
development of the Red Rabbit Project and its first mine at the Kiziltepe
Gold-Silver sector of the project. Ariana recently secured 100% surface exploitation
rights to the Arzu South target. Clearly, this means that the locals who have
assigned these rights to Ariana are supportive of the development of Red Rabbit
and the bringing into production of Kiziltepe. Ariana is only awaiting some
final permits before proceeding into mine development. Given the recent market
indicators and the ambition of the Turkish government to grow the economy and
the mining sector, why would investors choose to be cautious about Ariana?
On a final point, what is more interesting
is making the resource comparison, valuation analysis and strategic position
Ariana now have in Turkey. For example, Ariana has a joint venture project with
Eldorado on the Salinbaş and Ardala gold project where 49% of the project is
held by Ariana. Excluding the Ardala extension Salinbaş on its own is a JORC
compliant resource of 770,000 oz Inferred and Indicated, the grade is 2.3 g/t
Au plus 12.1 g/t Ag. Approx. 23% of resource is Indicated. Compare that
to Chesser’s Kestanelik resource which has 703,000 ounces in the Inferred and
Indicated category. The grade 2.15 g/t Au plus 1.9 g/t Ag. Approx. 26% of
resource is Indicated.
At the moment, the market is not just
undervaluing Ariana in terms of its proximity to entering production, it is
failing to properly value its other assets such as Salinbaş, where if you
compare that project on the same valuation matrix as Chesser’s Kestanelik
project, it would value Ariana’s stake in the Eldorado- Salinbaş extension only
and not including Ardala at $20 million alone and where Salinbaş has a better
grade and a larger deposit with the Ardala upside………Astonishing
To add more to this story, Ariana’s
chairman Michael de Villiers purchased another 1,000,000 ordinary shares taking
his stake in the company to 2.02%, another real sign of the confidence
surrounding Ariana at the moment.
