Amara Mining: Potential 205% Upside

Revised guidance/forecasts
Production of 8,008oz of gold in Q3 was below Edison’s expectation of 9,794oz, principally, as a result of the decision to discontinue the processing of stockpiles of transitional material in the light of the lower gold price. As a result, Amara Mining Plc, (AMARA) has reduced its production guidance for the full year from 50,000oz to 40,000oz, while Edison has reduced its expectations from 45,471oz to 40,151oz. Of more significance however is output from material derived from the Sega licence, which achieved an annualised production rate of 56,000oz in November, supporting Amara’s official production guidance of 60-70koz in FY14.

Short-term catalysts: Yaoure and Baomahun
A formal mineral resource update at Yaoure is expected to be released by the end of the year. Current resources of 2.7Moz (at a 0.5g/t cut-off) are contained within 40% of the mineralised volume drilled. Assuming continuity of mineralisation etc, drilling out the remaining 60% presents the possibility of increasing the resource by 3-4Moz, although management is guiding towards a figure of 2-3Moz. In our note of 2 October, we estimated that this could eventually add as much as 6.9c (4.2p) to the valuation depending on the degree of resource increase at Yaoure (100% assumed) and the degree of upgrade (0.45Moz assumed upgraded from ‘inferred’ to ‘indicated’ although probably in FY15 rather than the forthcoming update). Following the Yaoure resource update, Amara expects to announce the results of the Baomahun re-optimisation in January.

Long term: Potential 205% upside
Subsequent to the updating of our gold price forecasts (see Gold – US$2070/oz by 2020, published in November 2013), Edison estimates a (diluted) value for Amara of US$0.62 (£0.38), based on estimated (maximum potential) dividends payable to shareholders over the life of operations. This valuation specifically excludes blue sky (eg exploration at Yaoure). At a long-term price of US$1,243/oz, by contrast, the equivalent valuation falls to US$0.13 (£0.08) per share – implying that the market is beginning to discount either a higher gold price in Amara’s valuation or the execution of future value-adding initiatives by management. In the meantime, Amara’s post-transaction EV of US$59.0m compares to a global average cost of discovery of its resource base of 5.7Moz (attributable) of US$56.1m, ie it would cost effectively as much for a major to purchase Amara and its associated production, assets and resources as it would to invest in exploration to discover the same resource base (without the associated risk).

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