Buy Allied Gold (AGDL:AIM) at
39p ahead of the company starting its second mine, expected in March or April, and its likely inclusion in the FTSE 250 later in year. Resource stocks tend to get a valuation
boost when they bring on new mines and tracker funds will buy into Allied Gold
once it qualifies for the mid-cap index.
The company says final preparations are on track for its Gold Ridge project in the Solomon Islands. The announcement of first gold pour can have a major impact
on a miner’s share price. Cluff Gold (CLF:AIM) increased by 290% to 56.5p in the three months after saying in November 2008 it had produced its first
batch of gold from the Kalsaka mine in Burkina Faso. Avocet Mining (AVM:AIM) jumped by 21.5% to 104.5p in less than a fortnight after pouring its first gold from the Inata mine, also in Burkina Faso, in December 2009.
Allied Gold expects to produce between 20,000 and 30,000 ounces of gold from Gold Ridge in 2011 and 110,000 to 120,000 ounces annually thereafter. Production from its Simberi site in Papua New Guinea is currently running at an annual rate of 70,000 to
75,000 ounces. This will be increased to 100,000 ounces by the end of 2011.Therefore Allied Gold will be producing a combined 220,000 ounces from 2012. This could increase to 320,000 ounces annually by 2015 as it is hoping to extract sulphide material at Simberi in addition to the oxide deposit currently being mined. The £409 million cap has begun a feasibility study and hopes to make a decision in mid-2012.
Chief financial officer Frank Terranova confirms to Shares the company is applying to move from Aim to London’s Main Market. He expects the event to happen by July. Terranova also reveals Allied Gold is looking at becoming a London-incorporated business. This will enable it to qualify for the FTSE indices, assuming there is the requisite minimum 25% free float (essentially shares in the public domain not held by management or family). Both these events should be positive for the share price. Many institutional investors refuse to buy into Aim stocks, so they could soon finally consider Allied Gold for their books. The Main Market also has a higher profile and often commands loftier valuations than Aim.
Shares in Allied Gold have pulled back this year after a strong run in the second half of 2010. This is partly in reflection of a correction in the gold price but also amid local media speculation in the Solomon Islands the landowners of Gold Ridge were not happy about compensation for loss of trees, proposed jobs creation and royalties, thereby putting the mine start-up at risk. The company says the local media is jumping to the wrong conclusions.
Terranova says it is true Allied Gold continues to be in talks with landowners, but claims these are more about building long-term relationships and not about matters which could delay Gold Ridge’s maiden production. He explains: ‘The previous owner of the mine promised four or five apprenticeships; we will initially take on 30. Some people wanted us to take on 750 apprenticeships, but that is not workable. Surely 30 trainees is much better than the five previously offered? I wouldn’t call this matter a dispute.’
The company is looking to cut costs. Under consideration is a move from diesel to heavy fuel oil at Simberi, as the latter is around 30% cheaper. Terranova says this would knock $50 per ounce off mining costs, currently pegged at $652 per ounce. Allied Gold believes the Solomon Islands government will soon build a hydro power station which would mean it can switch from diesel to hydro power at Gold Ridge, potentially in three years’ time. With 8.3 million ounces of gold in its portfolio and several share price catalysts in sight, Allied Gold looks poised to shine.