Gold standard: Stockopedia speaks to Andrew Herbert, the CFO of gold producer Anglo Asian Mining plc

Since pouring first gold at its flagship Gedabek mine in Azerbaijan in May 2009, AIM listed Anglo Asian Mining Plc (LON:AAZ) has been gradually ramping up production and is on course to hit its target of 53,500 ounces in 2010. With an imminent new mining study promising to increase the Gedabek mine’s resource ounces by at least 50%, the company is looking at bolstering the life of the mine and making further production efficiencies.

Anglo Asian shares a focus on exploring the Caucasus for mineral wealth with companies such as Frontier Mining (LON:FML) and Zincox Resources Plc (LON:ZOX) in Kazakhstan and Kryso Resources (LON:KYS) in Tajikistan. Its portfolio of production and exploration assets in Azerbaijan includes a 1,962 sq km prospective exploration portfolio, assembled on the back of analysis of historic Soviet geological data and held under a production sharing agreement with the country’s government. With production now underway at Gedabek, the company is planning to use its new cash flow to take a closer look at licences at Gosha and Ordubad.

Stockopedia spoke to Anglo Asian Mining’s chief financial officer, Andrew Herbert about the company’s plans to increase production from the Gedabek mine and its strategy for further exploration.

Andrew, you joined Anglo Asian Mining two years ago as the company was heading towards first production. What is your background and why were you tempted to join the company?

I started with the company in July 2008 and I came on board just after the company started constructing the mine at Gedabek. Prior to that I spent almost three years at another gold producer based in Mali in West Africa and prior to that I had various financial jobs, often with overseas developing and start-up companies in emerging economies. I had just come from another gold miner and I saw another opportunity and it seemed to be a good time to come in. They had started building a mine and it looked like it had good potential. From a finance point of view it is interesting to come in to a company that had not yet gone in to production, with the challenge of keeping the cashflow managed properly during that process.

Clearly, you have had a lot of support from the Azerbaijan government as well as funding support from the International Bank of Azerbaijan. How important are those relationships to the company going forward?

Raising finance is very much a team effort. In fact, whilst the IPO money we raised of approximately £20m in 2005, most of that was spent in 3-4 years on our exploration and development efforts. To actually build the mine, that was financed through a loan from the International Bank of Azerbaijan. The driver to get that backing was our chief executive, Reza Vaziri, who was the force behind us being able to get that loan. Once we had the finance in place, it made it a lot easier to manage the cashflow. We are now at a stage where we are cash generative and that makes life a lot easier.

To be able to raise US$44m during 2008 and 2009, in spite of all the financial problems in the markets, meant we could cover 100% of our project. So the IBA has been a very supportive partner and we are now in a situation where we are starting to pay back that loan. But it is a key relationship to us and should we require further financing in future on other projects then we can demonstrate to them that we are paying them back when we said we would.

On subject of market conditions, the market declines of recent years actually came at a time when the price of gold was on the rise. What are your views about that?

What the gold price does is obviously key to us. I have been in the mining industry for five years and you rarely come across accurate predictions so we manage that by constantly looking at the downside risks. The models that we have been running suggest that even at $900 gold over the next few years we would still be in a position to be able to repay our loan on time and still have money left for exploration. The board has been considering putting a forward sale, or hedge, in place. So yes, we pay close attention to the gold market and we are always considering how to manage risks.

With production underway since May 2009 how satisfied have you been with the ramp up and production output of the mine?

Yes we are, although we did have a few production problems. In the first quarter of production to September 30, 2009 we were at 3,745 ounces and we got that up to 14,836 ounces in the latest quarter to June 30, 2010. So we are satisfied. We set ourselves a target of 53,500 ounces for calendar year 2010 and we got to 28,500 ounces in the first six months so we are more than 50% of the way there. Obviously, we are still working on various aspects of the process to make improvements and eliminate various constraints and possibly increase production. So we are generally happy but we have still got work to do to make sure the operation runs successfully and minimising our maintenance costs and maximising the availability of equipment to process the ore.

Is it straightforward to ship equipment to the mine in Azerbaijan and, likewise, to ship the gold, silver and copper back out?

A lot of the chemicals and spare parts need to be sources from overseas so there is a bit of a lead time, but we are managing that successfully. In terms of shipping the gold out, it is very easy. The gold is produced as three, four or maybe more of dore bars in a month, which are then shipped under armed guard to Switzerland where they are refined. We also produce a silver and copper concentrate, which will only be a small proportion of our revenue, but we are currently investigating the best way to sell that into the market. Logistically, transporting the copper will be more difficult because we have got 200 tonnes of concentrate to sell.

Attention is now turning to the resource expansion at Gedabek. What would a resource increase of perhaps 50% mean for the mine and for Anglo Asian?

SGS Mineral Services are doing a study on our behalf and obviously they are working with our technical people. This resource update is the first stage of a bigger project they are doing. First of all, they have re-analysed existing data from the mine together with the ore that has been taken out of the mine to date. We have already said that we are expecting the resource ounces to grow by at least 50% but the next part of the project is to analyse the reserve ounces and find the best way to mine those reserve ounces. We are expecting that to be done by the first quarter of 2011 and by the time that project has finished we will not only have a handle on the resource ounces but we will also know the reserve ounces and they will have given us recommendations on the best way to mine it. So we are confident that our resource ounces will increase and that will have a knock on effect on our reserve ounces – our economically minable ounces.

At Gedabek, the ore is currently taken from the mine and crushed into 12mm particles and put on to a heap leach where solution is poured on to it. In that process we lose 30% of the gold, which remains in the heap and can’t be extracted, which is a hefty amount of gold to lose. That heap leach plant was designed on the back of a reserve estimate of 300,000 ounces with an average grade of 1.8 grams per ton – it was really designed for a low grade mine. What we have found is that we are actually producing higher grades so far and once SGS’s work is complete, and if it looks like there is a lot more higher grade gold in the mine, we will not want to keep putting it through a heap leach where we lose 30%. We will look perhaps at agitation leaching or some other method where we can recover 90% of the gold. So the SGS study will have a big impact on Gedabek mine; we believe it will increase our reserve ounces and we believe we will be able to extend the mine life and/or increase annual production. It will also have some implications for how we mine that gold.

What plans have you got to now look further afield for exploration opportunities in the country? How straightforward is it going to be to replicate the success of Gedabek elsewhere?

We have got six contract areas, one of which is Gedabek. Three more licences are in an area of Azerbaijan that is occupied by Armenia, which we can not access until the political problem there is resolved. We have two other properties which we are currently exploring, Gosha and Ordubad, and we have got those licences until 2011. But we can extend for a year if we can demonstrate that we are working on them, which we can easily demonstrate. At Gosha we are at an advanced stage of exploration and we hope to announce our plans for the licence by the end of the year. At Ordubad we are continuing to explore, although there are no discoveries in the pipeline, but we still think it is a good property and we will be doing our best to keep hold of it and further explore it as cashflow becomes available.

Effectively, in the first few years of operation the deal with the Azerbaijan government sees us get 87.25% of the metal produced from the Gedabek mine and the government gets the rest. We think we are going to be a reasonably low cost producer so we can certainly make enough margin to finance other activities. Yes, we do have a loan to pay back but we feel we should be able to balance those repayments with carrying out further exploration. Other than that, we are a small company, we are concentrating on getting Gedabek to generate as much cash as it can and to be a successful working mine. Likewise, if there are any other opportunities that come along then we will look at those.