minesite item

November 11, 2008
Allied Gold Cuts Debt And Builds Production: Music To The Ears Of A Jaded Market

By Alastair Ford

Mark Caruso paces restlessly around the analysts’ update meeting. Perhaps he senses that the share price of his company, Allied Gold, is on the move. If so, he’s not wrong. Allied’s shares have been moving quite significantly of late, although it makes a big difference where you start your measurements from as to whether the recent movement looks positive or negative. From the negative perspective, Allied has not been immune to the general market sell-off and has dropped by around 75 per cent since the summer. On the other hand, the company issued a nicely positive update last week, and the shares rose by around 50 per cent, soaring off their 8.8p all-time low.

Some commentators are beginning to call the bottom of this market crash – the argument being that it’ll be bad for a long time to come, but that we’ve already seen the worst. At Minesite we’re not entirely convinced that the worst is over for the global economy, even if there has been some loosening of the credit markets recently. But on a brighter note, the worst may very well be over for Allied Gold’s share price. That bounce off the 8.8p low perhaps has a few of the hallmarks of the famed dead cat bounce, since there was some subsequent drift, and other smaller mining companies like Mwana Africa and Aricom also bounced a little last week, only to slip back later. But Allied’s recent relative strength was nonetheless supported by substantive news: the company is paying its debt package down faster than anticipated, partly thanks to a judicious hedging strategy. So, of the original US$19.3 million that was drawn down for the construction of the company’s gold mine on Simberi Island, Papua New Guinea, less than US$4 million remains outstanding.

In a world where even London’s legendary Algy Cluff has to issue equity to his lenders in order to be able to draw down previously agreed financing, it’s no bad thing to be slipping free of your bankers. Allied Gold is moving towards production of over 85,000 ounces of gold for the current financial year, at a cash cost of US$448 per ounce. That’s likely to generate plenty enough cash flow to service the company’s remaining debt, and finally to move it back into a net cash position. And even if gold isn’t flying as high as many of the bulls expected it to in circumstances like these, Mark Caruso isn’t too worried about margins. Referring to the cash cost per ounce of gold mined, he says: “US$448 is pretty good by any standard. But we believe we can bring it down to US$350”.

In combination with the falling debt, the market liked Mark’s aggressive talk of cutting costs. He’ll do it by cutting diesel costs and switching to heavy oil where appropriate, switching around reagents, and juggling the fly-in-fly-out transport roster. A selection of London’s finer mining analysts, sitting listening to Mark and diligently noting this or that technical term or detail, don’t bat an eyelid when he reels off this impressive US$100 an ounce cost cutting programme. And if the analysts buy it, then far be it from Minesite to quibble, especially if we’re getting into the murky pond of reagents and thickeners, although one has to wonder why some of the measures weren't implemented immediately on start up...

Half way through Mark’s 52-page presentation we come to a fine picture of the company’s aerial rope conveyor. Contemplating Allied’s plans to ramp up production, Evolution’s analyst Charles Kernot asks how all the extra ore will fit on to the conveyor. The answer, says Mark, is that it won’t. Simberi is actually mined from several pits, and some of the additional ore will be trucked around the side of the conveyor for processing. At the moment the resource base stands at 1.1 million ounces of oxides and 1.9 million ounces of sulphides, although Mark is fairly confident there’s plenty more to be had, and at a decent price too. Recently Allied added 610,000 ounces to its resource base at a cost of just US$2.00 per resource ounce. Exploratory drilling continues. The ideal geological outcome for Allied would be if the sulphide material under the various oxide pits actually joined up at a deeper level. Mark certainly believes that the suphide material underneath the main Sorowar pit joins up with the suphides underneath the newer Pigiput pit, in what he calls “a massive high grade sulphide feeder”. If he’s right, Allied could be mining at Simberi for many years to come.

http://www.minesite.com/nc/minews/singlenews/article/allied-gold-cuts-debt-and-builds-production-music-to-the-ears-of-a-jaded-market/1.html