I am just a plain investor like you without any mining industry experience. I have studied economics, accounting and financial analysis (completed a course through the Securities Institute of Australia, including a unit on mining industry analysis over 10 years ago). I never use anything fancy in my review of a company because it takes a lot of effort and I am not sure how useful it is. I just try to get the big picture, understand general market trends, and look at a company's potential profit in a fairly simplistic way. I also think a lot about risks, but as I have no mining industry expertise I can easily be deceived.
There are investors on this thread with good insight into mining companies such as JUK and BWJ who may give you a good analysis of the situation. JUK has done some useful modeling on other companies.
What you have written looks right based on my understanding.
In the short term the underlying issue for the success of AAM is the grade of the ore and the level of recovery that can be achieved. If they are under-achieving on grade or the recovery of gold from the plant then there is potential for the company to go under because of a lack of revenue relative to costs. One of the key costs (besides labour) is fuel. A low ore grade requires the processing of more ore to achieve a particular level of gold production. If you want to see how a reduction in grade can negatively impact a company's profits then look up the last few quarterly reports of NGF (which I used to own).
I am hoping that JW has not been optimistic in his grade assessment or taken short-cuts in his exploration program to determine the size of the deposit and grades. As plough and some other have noted, a grade of 2.2 grams per tonne should generally result in a profitable operation. The reserve of the Beta deposit has a grade exceeding 3 grams/tonne. One worry is that the contractors are taking the ore from the wrong location where it is of far lower grade (this happened last year at NGF).
On the basis of publicly available information I believe that AAM should be profitable, and has a lot of upside. Again as JUK keeps reminding us, there are high risks in the start-up phase and clearly AAM has under-achieved.
I am not sure if I have been of any help.
We will not need any luck if grades are as stated and they fix the operational probems over the next few days.
loki
AAM Price at posting:
24.5¢ Sentiment: Hold Disclosure: Held
