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March 21, 2011

Allied Gold Pours Its First Gold In The Solomon Islands, And Is Now Heading Towards A Production Target Of 200,000 Ounces A Year
By Our Man in Oz



The disaster in Japan did more than just drag down the uranium sector. The flow of grim news is drowning out news of some promising developments elsewhere. There?s no better example than the way the market has treated Allied Gold in the days following its announcement of the first gold at its Gold Ridge project in the Solomon Islands. Rather than reward a company which has delivered on its promises and taken a big step towards becoming a world-class gold miner, investors instead chose to sit on the sidelines as Japan staggered through its triple-headed catastrophe of earthquake, tsunami and nuclear crisis. Since reporting the pour last Wednesday the multiple-listed Allied (Aim, TSX and ASX) has slipped A3 cents lower to A62 cents, and sagged to as low as A54 cents at one stage. But that price might soon be viewed as the bargain of the year, as stockbrokers form a conga-line to heap praise on Allied, tipping it as A$1.00 company in the making.
The importance of Gold Ridge to Allied will become clearer over the course of 2011, but the key fact is that the company is now more than a one-trick pony. Gold Ridge joins Allied?s existing operating at Simberi Island in Papua New Guinea, confirming the company as a major player in the gold belt of the South Pacific. With an initial target of 120,000 ounces of gold a year, Gold Ridge puts Allied on track to meet a first stage production target of 200,000 ounces a year. That will be followed by future expansion which will raise total production to more than 300,000 ounces a year, at around US$600 per ounce.

?Re-rating imminent,? is how analysts at RBC Capital Markets described Allied recently. ?Allied is trading to a significant discount to its peers?, RBC added. Other brokers agree. Mirabaud, Oriel Securities, and Wilson HTM in Brisbane have all chimed in over the past two months with optimistic opinions on Allied. The key factor is the proof that the Gold Ridge mine works as promised. ?Commencing countdown? was the heading on Oriel?s review of Allied. Oriel noted that Simberi and Gold Ridge represented a strong growth platform that could take production to an annual level of 320,000 ounces by 2015. And Wilson said: ?We continue to look to first gold production from the Gold Ridge project as a near-term catalyst for a re-rating?. Events in Japan have postponed, but not stopped, the re-rating. Wilson tips A92 cents as a target share price, and RBC suggesting A$1.00 as the objective.

More will be heard about Gold Ridge this week, following a formal opening ceremony to be held on Tuesday 22nd March, a year to the day after a reconciliation ceremony was held at the project site and sods were turned as the start of redevelopment. Prior to that, the project had spent the best part of a decade in mothballs after a small war in the Solomons. This time around, and after Allied has spent A$150 million on refurbishing and expanding the mine originally developed by Delta Gold. The project will process 2.5 million tonnes of ore a year for the recovery of 120,000 ounces of gold for a minimum of nine years at a target cost of US$650 an ounce in the first two years, falling thereafter to US$550 an ounce.

With reserves currently estimated at 1.3 million ounces, and likely to rise as exploration steps up, Gold Ridge acts as a perfect complement to Allied?s other project, Simberi. At its most recent reserve estimate Simberi boasted 2.1 million ounces. Together, the two mines mean that Allied can officially talk about 3.4 million ounces in reserve and 8.3 million ounces in resources, a bigger reserve base than many of its better-known peers, and enough to provide material for at least 10 years of open pit mining. In his latest presentation, Caruso produced a series of telling graphics which showed that Allied has more reserves than Resolute, Kingsgate, Perseus and Medusa, but a market capitalisation that is significantly lower.

Boiled down, Allied is a company hitting its targets and delivering on promises, facts that some of the smarter professional investors have recognised. M&G has built its stake in the company to 19.9 per cent, Baker Steel is sitting on 9.9 per cent and Franklin Templeton now holds up to 7.4 per cent. What these investors see is what the brokers are starting to see too: a company undervalued at this stage of its graduation to the status of a 200,000 ounce a year gold producer. Oriel has compared Allied?s current status with that of Avocet and Centamin which both commissioned mines in 2010 and were subsequently re-rated. It also added the thought provoking notion that with Gold Ridge joining Simberi in production there could now be interest in Allied as a takeover target.

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