Resource Investor, VA
Aug 4 2005
Monumental Opportunity in Azerbaijani Gold & Copper
By Stephen Clayson
03 Aug 2005 at 11:28 PM EDT
LONDON (ResourceInvestor.com) — One of the most intriguing new issues
of the year so far is Anglo Asian Mining [AIM: AAZ], which made its
market debut last Friday after raising an impressive £20m to fund
the exploration and development of its gold and copper concessions
in Central Asian petrostate Azerbaijan.
The company is the result of several years’ effort on the part of John
H. Sununu, formerly US President George H.W. Bush’s Chief of Staff,
and Reza Vaziri, formerly a Minister at the Imperial Court of the Shah
of Iran, both of whom worked to secure the mineral exploration rights
to substantial amounts of Azerbaijan before forming AAM in order to try
and develop them. Sununu and Vaziri now sit on the company’s board,
the latter as Chairman. Among others, the board also includes ex-UK
Energy Minister Tim Eggar.
AAM’s Chief Executive Charles Hancock, a corporate financier
by background, reports that the company’s flotation was twice
oversubscribed, even at its comparatively large value of £20m. To have
raised such an amount is indicative of a company with something of a
buzz about it, given the softness arguably afflicting the market for
junior resource stocks in London, though this condition is probably
better characterised as retrenchment after overexcitement.
So far since their flotation, AAM shares have more than held their
own in trading, rising from an initial price of 77p each to just under
90p. This reflects interest in the company’s very large portfolio of
assets, which purportedly contains all in around 15.6moz of Soviet
classified gold equivalent resources with potential according to
the company for up to 78moz more – a hefty figure indeed if it can
be verified.
But how does Azerbaijan stack up as a viable location for
realising these resources? The country’s recent past is a chequered
one. After gaining independence from the Soviet Union by dint of its
disintegration in 1991, Azerbaijan entered a period of dire political
instability. By the mid 1990s the situation had simmered down under
the yoke of the now deceased President Heydar Aliyev. Aliyev has
now been succeeded as President by his son Ilham, who rules in an
essentially absolutist fashion and has maintained ostensive stability
in the country for some time. Nonetheless, the country carries a high
degree of political risk to foreign investors.
Of concern too is a lingering conflict with neighbouring
Armenia over the majority ethnic Armenian province of Azerbaijan,
Nagorno-Karabakh. While this conflict has been in abeyance for some
time and the withdrawal of Armenian forces from the affected area is
expected during the next few years, a flare up is still a possibility.
AAM actually claims substantial mineral licences within
Nagorno-Karabakh, some parts of which are presently being mined on an
ad hoc basis by opportunistic parties, but the company is currently
unable to gain access. It hopes that this situation will eventually be
rectified if and when a lasting settlement regarding the area between
Armenia and Azerbaijan is reached and a withdrawal of Armenian troops
is agreed, but for now the licences cannot effectively be touched
and the company itself ascribes them no significant value.
In Azerbaijan’s favour as a location for mining investment, Hancock
avers that it in fact belies its reputation for turbulence, and is a
reasonable place to work. The country undeniably has its benefits as
far as the industry is concerned, these being most notably extremely
cheap energy and an abundance of cheap labour that includes experienced
geologists and mine workers.
The presence of British Petroleum as the largest extractor of
Azerbaijan’s extensive hydrocarbon reserves is also a stabilising
factor, given that the company is rumoured to have the ear of the
government in a significant way, and trickle-down revenue from this
sector of the economy, particularly with energy prices as they are,
goes some way towards promoting relative social order.
However overall, investment in Azerbaijan still carries a considerable
degree of risk in terms of the potential for political instability,
administrative difficulties or open conflict, either internecine or
with Armenia. In partial palliation though, the steering of AAM through
any troubles that may emerge in Azerbaijan is where the heavyweight
political content of the company’s board may come into its own.
The legal substrate of AAM’s involvement in Azerbaijan is a 30 year
Production Sharing Agreement with the country’s government, a bargain
which is expected to attribute approximately 55% of any resulting
cash flow to AAM. The agreement covers ground amounting to 1062sqkm,
not including the acreage claimed in the unruly Nagorno-Karabakh
region in which the PSA in theory also applies. Within the currently
accessible ground twenty two mineral prospects can be identified,
of which eight have been reviewed by the company to date.
Of these eight, AAM has selected one prospect that it hopes to bring
rapidly to production at a rate of around 250,000oz gold per year.
Other priorities for the company over the coming two years, the period
for which its initial tranche of funding is planned to last, will be
the reclassification to Western standards various Soviet reserves and
resources and the undertaking across its property portfolio of other
developmental tasks, including the completion of two pre-feasibility
and two full blown feasibility studies.
AAM believes that several practical factors will in time conspire to
make it a low cost producer of copper and gold. These are namely: the
fact that 7 of its 8 prospects would, if proven amenable to production,
be open pit mines of higher than average grade material; that all its
sites are relatively accessible by road and rail and comparatively
well supplied with water and power; and that no issues are anticipated
with disturbance of either the environment or the local populace.
The potential of AAM is clearly almost Brobdingnagian, and hence so are
the possible returns for its shareholders. Nevertheless, the company
must beware the distracting complexity of being a small outfit juggling
a large portfolio of properties in a region of a world that can have
its problems. To its advantage though, AAM can boast an impressive
board of directors of wide ranging experience and connections, and
some very interesting mineral assets. As such, it merits attention.
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