Allied Gold Mining Plc 19 Sep 11

Long life and growth in gold; a recipe not to be ignore

Allied Gold Mining operates a gold mine in Papua New Guinea (PNG) and another in the Solomon Islands with both producing gold. Its key mine is the Simberi gold mine in Papua New Guinea where the company has been producing gold since February 2008. Gold Ridge, on the Solomon Islands, returned to gold production after the completion of a US$150 million refurbishment and redevelopment programme. First gold was poured at Gold Ridge, post the programme, in March 2011. Exploration success looks set to deliver resource upgrades and drive gold production higher in the months ahead. The following figure shows the location of the company’s key assets.

The Simberi mine is located on the western portion of the Island of Simberi in Papua New Guinea. The tenement consists of a 223 square kilometre exploration licence and a 2,560 hectare mining lease. The mine currently produces gold from a number of open pit operations as shown in the following figure.



The pits currently mine 2.4 million tonnes of ore per annum for delivery to the plant. The plant produces 70,000 ounces of gold per annum at an average gross cash cost of approximately US$822 per ounce.

The Simberi plant is currently undergoing a capacity upgrade which will increase ore throughput to 3.5 million tonnes per annum and lift gold production to 100,000 ounces from late this calendar year.

A study to increase the capacity of the Simberi plant to five million tonnes of ore is currently underway. The study will look to introduce oxide ore from the Simberi pits for processing through the plant which will increase gold production from 2015 by an additional 150,000 ounces per annum.

Total gold production from the Simberi plant will likely reach 250,000 ounces from 2015. With the benefit of the higher gold production coming through, the company is targeting its cash costs to fall to around US$650 per ounce. Simberi has a current mine life of a minimum of ten years.

In support of the mining operations, the Simberi open pits have a total mineral resource estimate of 169 million tonnes of ore which is shown in the following table (Au is the symbol for gold).



The total mineral reserve for Simberi stands at 44.48 million tonnes of ore showing 1.46 grams per tonne (g/t) gold containing 2.7 million ounces of gold. The reserve is classified into proven of 11.6 million tonnes of ore showing 1.06g/t gold for 395 million ounces of gold and probable of 33 million tonnes of ore showing 1.46g/t gold for 2,112 million ounces of gold. Simberi has further exploration upside which in our view lifts the potential for future resource upgrades.

Gold Ridge is the company’s second operating gold mine and is located on the island of Guadalcanal in the Solomon Islands. The mining operation consists of four open pits that are highlighted in the following schematic of the tenement.

The plant has undergone a major refurbishment, with the company spending US$150 million on the site. The refurbishment involved improving the plants capacity to 2.5 million tonnes of ore per annum, allowing for increased gold production of 120,000 ounces per annum. Cash costs are expected to be in the vicinity of US$650 per ounce. Gold Ridge has a current mine life of nine years.

Gold Ridge is currently in ramp up with stable production expected during the December Quarter 2011. Stable processing will improve recoveries.  The open pit mining operations at Gold Ridge are supported by a mineral resource of 64 million tonnes of ore. The following table shows the current mineral resource estimate for Gold Ridge (Au is the symbol for gold).

 

The total mineral reserve for Gold Ridge stands at 23.3 million tonnes of ore showing 1.71g/t gold containing 1.28 million ounces of gold. The reserve is classified as probable of 23 million tonnes of ore showing 1.71g/t gold for 1.28 million ounces of gold. Like Simberi, Gold Ridge has further exploration upside which in our view lifts the potential for future resource upgrades.

Total gold production from Simberi and Gold Ridge is forecast to rise over the coming years. The following chart shows the company’s forecast gold production.

Gold production is expected to peak at around 400,000 ounces in 2015. We do expect however, the company’s production profile will continue to grow beyond the forecasts provided.

On the exploration front the company will focus on its Tatau and Tabar exploration tenements (Islands to the south of Simberi, PNG). However, exploration activities will also continue to be carried out at both Simberi and Gold Ridge.

Exploration at Simberi is focussed of further resource definition drilling and metallurgical core drilling in support of the bankable feasibility study; due for completion in the current quarter. The following figure shows the Sorowar, Pigibo and Pigiput open pits.



The focus of activities is on the exploration of near-mine mineralised ore. Recent assays at Pigibo showed 32 metres showing 2.89g/t gold from 21 metres deep. The mineralisation at Pigibo remains open at depth. The assay results are significant in terms of seam, proximity and grade. Given the proximity to existing operations the assay result will likely ensure a mineral resource estimate upgrade of the Simberi mine resource will be announced.

Gold ridge exploration, Solomon Islands, has been focussed on the Charivunga prospect located between the Namachamata and Kupers open pits. The aim of the current programme is to test the up-dip of the mineralised ore body with sufficient drilling density to allow a resource estimate to be made. Assay results are pending.

Tatau and Tabar are the companies two other exploration sites. Both are located on small islands to the south of the company’s main Simberi mine (PNG). The following figure shows the Tatau and Tabar sites.



Past drilling undertaken by Barrick has confirmed the presences of copper-gold at Tatau. The better down hole intercepts from the old Barrick drill programme include 69 metres showing 1.13% copper and 0.83g/t gold from 50 metres deep and 77 metres showing 0.95% copper and 0.46g/t gold from 62 metres deep. Given the near surface finds may be a pointer to a more significant deeper ore body. The company plans to conduct an induced polarization (IP) survey over the tenement to aid in identifying priority drill targets.

Current activities will focus on the Mt Tiro region that contains the Mt Tiro, Pepewo and Seraro prospects.

Exploration at Tabar is in its very early infancy. The company is currently preparing the Banesa prospect for an IP survey to be carried out. Activities include line cutting and soil sampling.

We will monitor activities at both Tatau and Tabar with considerable interest, given the pedigree of the region.

A current strong balance sheet will act as the platform to deliver the company’s growth aspirations. At 30 June 2011 the company had a net cash position of US$25 million. Cash held was US$83 million as of 30th June 2011 and debt was US$58 million. A repayment of US$30 million is due to be paid on the loan during November 2011. The company has indicated it will continue to paydown debt when practical to do and we have no concerns surrounding the company’s financial position.

Capital expenditure on the Simberi plant expansion is expected to be US$22 million in the current half. Inclusive of the debt repayment, the company has adequate cash resources to meet its capital commitments. The company’s cash position will be supplemented by greater gold sales going forward and we are therefore of the opinion tha the group is well positioned for future growth.



From a technical standpoint, following a re-listing this year, prices opened at 202.5p on the 1st July. Despite the gap on the weekly chart, support is located at 150p, and below here, at 143p, where we believe downside risks are limited to. However, given the break above the 2008 highs, we believe further gains are a strong possibility, over the coming months, now that upward momentum has been boosted.

As a gold producer the company has de-risked itself, but maintains through exploration potential a speculative upside. We expect Allied Gold’s production profile will improve going forward as a result of successful exploration. News flow, in our view, will be positive over the months ahead, so having a nibble now should not hurt.

We are excited by the location of Allied Gold’s activities along the Pacific Rim (highlighted on the following map). As Members can see the region is well populated with major operating gold mines.



We therefore recommend Allied Gold Mining Plc as a buy for all Members at the current share price.

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