Analyst: Dr Michael Green
Email: michael.green@gecr.co.uk

Tel: 0207 562 3362

On 4th August AIM listed Ariana Resources served up drill results which have the scope to materially increase both the annual output and the minelife of  its flagship Red Rabbit project  in Turkey. This reinforces our buy stance at 5.875p but means that our 10.3p target price might have to be increased materially.

Ariana operates in Turkey, which is Europe’s largest gold producing country. The Red Rabbit project is on schedule to commence gold production in 2012 and the JORC resources currently stands at 448,000 ounces gold equivalent but there seems scope for this to become substantially larger. On 4th August, the company announced that it had defined multiple drilling targets on its newly acquired Kizilcukur Gold Prospect. A successful geophysical survey completed over the Kizilcukur vein system demonstrated continuity of potentially mineralised structures at depth and along strike of area that have been drilled in the past. Already the team has defined high priority drill targets on high resistivity anomalies which include a structure at depth that might well link the two highest-grade areas of the Kilicukur prospect. A drill programme is being planned to learn more about what are 2 kilometres of mineralised quartz veins containing high-grade gold and silver. Previous surface sampling results included grades as high as 152g/t gold and 1,320g/t silver. Kizilcukur could easily form part of the wider Red Rabbit project as it lies just 21 kilometres from Kiziltepe where mining is set to begin initially next year. As such the annual output and minelife assumptions for Red Rabbit may have to be increased materially.

Production costs at Red Rabbit have been estimated at $441-472 per ounce on the first leg of the project in the Kiziltepe zone, using open shapes defined at $800 per ounce gold and $14 per ounce silver. There is no doubt that the economics of this project are highly robust. In May it was announced that a new vein system had been discovered at Kiziltepe, which is the sector of the flagship Red Rabbit Project where gold production is set to begin in late 2012. What has been discovered is the presence of a further gold bearing vein system called the Gamze Vein with continuous high grade up to 10.7g/t gold equivalent. Geophysics suggests that the Gamze together with the previously discovered Fidan Vein systems are connected within the same mineralised structure with a combined strike length of 1,800 metres. On top of that, there is strong continuity with the existing high-grade gold bearing vein systems which all seems to add up to potential to expand the current 448,000 ounce gold equivalent JORC resource for Red Rabbit. Certainly any increased resource would further improve the economics of mining at Kiziltepe.

The results of the Scoping Study announced in early April 2011, showed that the Kiziltepe Sector of Red Rabbit Project was economically sound. The study investigated the economics of a 150,000 tonnes per annum producing 20,000 ounces of gold equivalent per year. The combined resource in the preliminary optimised pits was put at 1 million tonnes with an average grade of 3.6g/t gold and 41.6g/t silver; and so a mine life of just under seven years. The Net Present Value (8%) came out at $56.2 million and an IRR of 75.9% using base case gold price of $1,350 an ounce and silver at $20 per ounce. Cash costs were estimated in the range of $441-$472 per ounce across the life of the project. In light of the new high grade vein discovery at Kiziltepe, it could be that Ariana now has a vastly improved project on its hands and this would generate a materially higher NPV for the project.

The Red Rabbit Project is exhibiting some good grades and widths. The veins are about 4 to 5 metres wide with a halo of lower mineralisation that takes the width to around 13 metres in places, with the vein containing grades of 4.1 g/t gold plus 40 – 50 g/t silver with lower grade material in the halo running at 1.6 g/t gold and 25 – 35 g/t silver. The Kiziltepe and Tavsan Sectors sport differing geology but both look to offer the scope for a substantial increase in resources. Mining will begin first at the higher grade Kiziltepe Sector where there are 45 kilometres of quartz veins but so far the resource has only been defined on just 20% of the veins and then only down to a depth of about 100 metres.  It’s a similar story in the Tavsan Sector where resource definition has been limited to merely 20% of the 8 kilometres of gold mineralisation. There seems clear scope to add significant value by further growth in the JORC resource.

Progress at Red Rabbit has been fairly swift, helped by Ariana’s local joint venture partner, the Turkish construction group Proccea Construction Co, which is earning a 50% stake in the project by spending US$8 million. Proccea specialises in the designing and commissioning of gold and silver processing plants and has worked on such projects not just in Turkey but also in Kazakhstan, Algeria, Finland, Argentina and Saudi Arabia. Proccea is essentially financing the project beyond the construction decision stage which will leave the partners needing to find US$18 million out of the estimated US$25 million capital cost to put the project into production. The intention is to project finance the remaining US$18 million and discussions have already begun with lenders both in Turkey and internationally.

Just as one project accelerates towards the production phase, the management is pursuing well-priced acquisitions with the goal of building a mid-tier multi-project gold exploration and development company. Turkey is an enormous country, which is highly prospective for a variety of metals as well as gold, and, sensibly, the directors have chosen to make progress via joint ventures that allow others to fund exploration and share the risk. Ariana has a joint venture deal with European Goldfields that covers north-eastern Turkey where early work has focused on the Ardala copper-gold porphyry and adjoining tenements in Artvin Province.  The Ardala Project contains exposed parts of a 600 metre by 700 metre porphyry drilled in the early 1990’s which defined a non-JORC resource of 20 million tonnes of 0.25% copper and 0.45 g/t gold and 65 ppm molybdenum. Highly impressive drilling results from the nearby Salinbas prospect were announced in November 2010, which persuaded the partners to extend the drilling programme. We understand that results from the current drilling programme may be released shortly and – as this prospect is currently ignored by the market – that has the potential to accelerate the re-rating of Ariana.

We recommend the shares as a Buy at 5.875p with a target price of 10.3p on the basis of the current economics of Red Rabbit. But the latest drilling news will, if confirmed by further work this year, justify a significantly increased valuation on the basis that without a material increase in capex this project can deliver significantly higher production numbers over a significantly longer  minelife. With the European Goldfields joint-venture offering further near term upside potential our current target price must be seen as very much a base case and will be reviewed as further drilling information becomes available later this year.

Financial records & forecasts

Source: Growth Equities & Company Research

*Funds managed by t1ps Investment Management which is owned by Rivington Street Holdings, the ultimate owner of GE&CR, own shares in Ariana