weighing up ags

I would be interested in feedback that anyone has about AGS and the way it has handled the Maldon Gold project over the last 12 years or so, firstly in its previous incarnation as Alliance Gold, and more recently as Alliance Resources.

I’m in the process of taking a reasonably intensive look at AGS from a medium term investment perspective. Investing in a stock like AGS short term, you can essentially ride the momentum & get out on any dip, but if you’re interested in parking your hard earned for 12mths+ you need to be reasonably satisfied about the company overall, the quality of its management and the robustness of its asset portfolio.

My interest in having a closer look at Maldon was sparked by Warwick Grigor’s Far East Capital report on AGS, whose valuation of AGS implied that he was almost placing no value on the Maldon Gold project. i.e. He claims AGS’s market cap of @$90 million implies the market is roughly valuing the uranium discovery at @$400 million This is based on AGS’s 25% stake in the JV. If this is the case then market is attributing little, if any value to the Maldon Gold project. This is further supported by the fact the prior to the U308 discovery AGS’ share price was largely bumping along the ground at 5c level.

Basically from what I can piece together at this stage, it seems that AGS’ Maldon Gold project has been a perennially disappointing project they have been working at for 12 years, and have been able to extract very little gold & sunk millions of dollars into from more than a decade for virtually no return. It seems to have been a catalogue of low grades, bad geology, and some poor management decisions. At times they have tried to sell Maldon, but have been unable to find a buyer. Rather than subjectively outline the history, here are some related links – make your own mind up.

http://www.maldon.org.au/PlacesToSee/Places/infoMinesPage.htm
http://www.ferret.com.au/articles/f1/0c0090f1.asp


I realize that AGS has made management changes over the last couple of years, although they still have some key staff members who have been with the company for at least several years. I guess my key issue/gripe is that the Maldon Gold project has the look of a cash drainer about it – after all this time (more than a decade) AGS still has yet to produce a resource statement on any of the project areas, much less produce any bankable feasibility study (BFS). However, they have claimed in previous quarterlies that they were about to produce one, but didn’t.
eg. Check out March/June/Sept. 2005 quarterlies –

March qtr 2005 “A JORC compliant mineral resource is scheduled for completion [For Alliance South] during the June 2005 quarter. The scope of works to commence in April includes a review of resource modeling, geotechnical considerations, mine planning & scheduling, metallurgy, ore processing, infrastructure, project consents, economic modelling and risk assessment."

In the June 2005 Quarter the scoping study based on what they had drilled to that point was implying a high capital cost – so they extended out the date for a resource estimation:
“In the short-medium term Alliance plans to complete a mineral resource estimate for Alliance South and in the longer term to test the remainder of its pre-defined targets, e.g. Beehive,Derby, Upper German Reefs, Lower German, Union Deeps and Derby North.”

In the Sept.2005 quarter report there was no mention of the scoping study of Alliance South or the mention of a timeframe for a JORC resource estimate at all. In the excitement about Quasar’s drilling at Arkaroola this may have been largely overlooked by the market.

I’m focused on ARC’s JORC report timetable extension, and ultimate abandonment because based on what I’ve read to date, there is little to inspire much confidence that we can expect gold production to commence over the next year or two – given current record gold prices makes it strange scenario to consider.

Now one can argue the toss about AGS’ perennial and ongoing delay about Maldon, the difficulties about drilling in an historic township etc.etc.etc. But basically from an investment perspective if it wasn’t for the Arkaroola I wouldn’t be looking at AGS at all – I would be staying well away. There are numerous better gold plays around – and notwithstanding the recent management changes, the company still doesn’t look like they are a top notch commercially savvy outfit. (Being sons of so-called blue bloods/business scions, which they talk up on their website, might increase their credibility in the eyes of some, but it does nothing for me.)

Having said all that, the Arkaroola prospect is one of the best around - and AGS has that 25% stake.

http://www.ferret.com.au/articles/13/0c010b13.asp

AGS announced the farmout deal with Quasar/Heathgate in Sept. 2002., although at the time AGS was more focused on its gold/copper prospectivity and rather than uranium. (Actually this makes me wonder whether AGS really had any idea about Arkaroola’s Uranium prospectivity at all in 2002. Given that now we are looking at a possible multi-billion dollar resource, the fact that Heathgate was able to acquire a 75% interest by spending a paltry 450 K, make it look like one of the deals of the century for Heathgate. Being so close to Beverly makes me think Heathgate must have had a pretty good idea about Arkaroola already & were able to pick it up at a bargain basement price. At least AGS were able to get keep a 25% stake, which is why we’re all still here.

Now, up to this point you might think I’m being a bit negative about AGS! lol!! I make no apologies for that. When I consider a medium term investment, I try and look at the downside as well as considering the upside. If you want to marry the girl (i.e Arkaroola) you should consider the family you might be marrying into!

For me, the downside to an investment in AGS is largely the Maldon Project – it’s historic, complicated, looks high cost, AGS have dithered with it & show no sign of changing.
The upside is obviously Arkaroola, which looks like a great prospect of evolving into mine status. Like it or not, AGS is the only ticket in town via the ASX to get exposure to this resource – and the upside could be considerable.

I’m also greatly encouraged by the fact that Heatgate Quasar is the JV partner who is calling the shots. They not only have a uranium license & operate Beverly, they are clearly commercially astute, and have the operational scale and financial muscle to bring the project to production status. From an investment perspective I would really like to see AGS hive off its Arkaroola stake into an entity separate of Maldon, so its full value could be realised. However, I’m going to assume this won’t happen.

Therefore en exposure to Arkaroola, (with huge upside) will also mean you get default exposure to Maldon (low upside/question marks/possible gradual ongoing downside). Life was never means to easy….On balance, the equation is still heavily in favour of investing in AGS, but 12month + investors should prepare/steel themselves for ongoing issues/delays/disappointments with Maldon as a counterbalance to positive developments at Arkaroola.

Hope I haven’t p*ssed off too many AGS diehards, and if I’m too pessimistic about Maldon let me know. I would be encouraged to hear why I'm too negatve about it.