Azumah Resources Limited (ASX:AZM) appears substantially undervalued compared with other gold explorers and developers on an enterprise value to resource ounce basis.
The company’s range of deposits within the Wa Gold Project in northwest Ghana have a combined gold resource of about 2.1 million ounces.
While the enterprise value/resource ounce valuation metric is often useful in identifying companies that are undervalued within the resources sector, it isn’t a silver bullet.
Consequently, to make your own call as to whether Azumah is undervalued, it is essential to closely examine its assets and how they have been managed over the last decade.
Ibaera Capital brings financial stability and technical expertise
Similarly, to grasp what could be the start of a potential turnaround, there needs to be a comparative assessment based on new initiatives aimed at monetising those assets.
In particular, the focus should be on assessing the potential value-creating strategy that has been recently framed via an important relationship forged with Ibaera Capital.
This collaboration provides the financial backing and technical expertise to convert resource ounces into dollars and importantly grow the existing resource.
Understanding the past to appreciate the future
There is no doubting Azumah’s journey has been rocky, but it has managed to build a resource of more than 2 million ounces in one of Africa's most prolific gold-bearing regions.
It could be argued that execution has let it down in the past because there have been stages where its share price better represented the value of its assets.
They were times when investors could see a path to production and profitability.
A significant share price spike occurred in 2015 after Azumah completed a feasibility plan pointing to annual production of 90,000 ounces of gold over a seven-year mine life.
However, this didn’t come to fruition, and the doubling in its share price unwound as the feasibility study failed to materialise.
As we outline later, this and more is very much back on the table, and as a major stepping stone to production, any hint of positive news could be a substantial share price catalyst.
Shareholders want a focused approach
The other factor that could be weighing on the company’s share price is the fact that it has too many potential producing assets.
Azumah’s position could be termed as an embarrassment of riches as one can see in this video - Fly Through Movie.
This can make it difficult for investors to imagine a potential scenario where a company transforms from a highly prospective exploration play to one that creates shareholder value through transitioning to production.
As Proactive Investors will highlight, Azumah has had defined resources of more than 1 million ounces since 2010.
While it has continued to build that resource without moving to production, there now appears to be an acknowledgement that the time is ripe to create shareholder value.
Azumah ready to unlock the vault
The initiatives taken in fiscal 2018 suggest that there has been no time in Azumah’s history where it has been so focused on monetising its assets.
It is this factor, and in particular, the measures it has put in place to execute on this strategy, that suggest a turnaround is imminent.
That is where the enterprise value/resource ounce metric comes into play.
When there is a turnaround with a stock that is fundamentally undervalued there is a good chance a rerating could be substantial.
Crunching the numbers
Azumah is trading on an enterprise value/resource ounce of $8 per ounce compared with the peer explorers and developers average of $44 per ounce.
If it were to fall in line with its peers, Azumah’s market capitalisation would be about $90 million, implying a share price of 13 cents.
This compares with Monday’s closing price of 2.4 cents.
Is there any other way but up
While this doesn’t suggest that Azumah will rerate to the tune of 400% overnight, it could mean that its share price may regain sustained positive momentum.
Having hit 2.2 cents in early April, the company certainly appears oversold, and just looking at historical trading patterns, it is only slightly higher than its all-time low of 2 cents.
Exploration is still important
While Azumah has a large resource it is still relying on further exploration success and an increase in resources to drive a share price rerating.
There are examples of how this has been a determining feature of the company in the past.
For example, one of its biggest surges was in March 2010 when Azumah’s resource increased 45% to 1.1 million ounces, triggering a three-fold share price increase.
The company’s shares doubled from about 20 cents to 40 cents, and within six months had doubled again to 80 cents.
Share price rallies weren’t gold fever driven
It is worth noting that this rally wasn’t even in the gold rush days and the gold price was around US$1,100 per ounce.
The S&P/ASX 200 gold index (XGD) was hovering in the vicinity of 5,700 points, well shy of the high of 8,500 points it hit 12 months later.
This ponders the question as to why the company is trading at 2.4 cents today even though it has nearly doubled its resource since 2010 to 2.1 million ounces.
What is different today
The answer is easy - the company has not previously been in a financial position such as it is now.
Shareholders’ vision of what could be was rightly blurred by the issue of funding a transition from exploration to production
In what could be termed a transformative earn-in agreement with private equity group Ibaera Capital, exploration and studies are now funded to the tune of US$17 million.
Following this expenditure, Ibaera will be entitled to a stake of 47.5%.
Participation by Ibaera extends beyond financial support, as the group has a team of exploration and project development specialists who have a track record of unlocking value.
What does Ibaera bring
Ibaera Capital is a private equity funded, entrepreneurial mineral investment and development company backed by international investment funds.
The group invests in, acquires and develops emerging copper, nickel, zinc and gold projects from exploration and early development.
This serves to significantly revalue them through appropriate funding, astute management and patient development.
Founded in 2012 by executives from the development teams at Fortescue Metals Group and WMC Resources, Ibaera Capital is able to provide in-field expertise.
This enables the group to manage projects from exploration through to construction.
The group sets itself apart from the mainstream investment market by retaining significant technical expertise and exploration knowledge.
Ibaera has 12 geologists and engineers who are collectively and individually recognised for their contribution to the discovery and development of world-class mining ventures.
So, Ibaera has plenty of skin in the game, expertise on the ground and a substantial asset base to work with.
The building blocks
As mentioned, one of the challenges Azumah has faced in terms of investor engagement is providing a true appreciation of its asset base.
If Azumah had a single 2.1-million ounce deposit, it would be much easier to join the dots between the present and what could be a very promising future.
However, what the company has working in its favour is that a number of its large deposits are in close proximity to each other, providing the opportunity to have a centralised processing plant.
Azumah’s war chest
Azumah has three main deposits, in Kunche and Bepkong adjacent to the border with Burkina Faso, and Julie which is about 80 kilometres to the east.
The resource of 2.1 million ounces of gold grading 1.5 g/t gold includes 1.4 million measured and indicated ounces grading 1.7 g/t with these evenly distributed between Kunche-Bepkong and Wa East, the Julie deposit.
Most discoveries have been blind
Resources have been progressively grown through exploration of the company’s 2400 square kilometre licence holdings.
This territory features large tracts of prospective Birimian terrain, the rocks that host the majority of West Africa’s gold mines.
Much of this is covered in soil, alluvium or laterite so most discoveries have been ‘blind’, highlighting the potential for more consistent and value-adding resource definition.
Management anticipates resources will grow substantially as it continues to test its large pipeline of target areas and specific prospects.
Feasibility study completed in 2015
Azumah completed a feasibility study in 2015 for a mining operation based on an initial seven-year life and producing about 90,000 ounces of gold per year.
Feedstock would be sourced from open pit mining with ore treated through a nominal 1.2 million tonnes per year carbon-in-leach (CIL) processing plant.
The plant would be adjacent to the Kunche deposit, enabling it to treat Julie primary and transitional ore prior to road haul to the processing plant.
An ore reserve of 624,000 ounces has been defined with the designed optimised pits also containing inferred resources of 28,000 ounces.
Transitioning to production
Azumah’s exploration strategy has been driven by its need to boost resources to increase its reserve base from 624,000 ounces to about 1 million ounces.
This would serve to underpin a development decision and improve funding capability, in particular through an effective reduction in the development capital per reserve ounce.
This is where the company’s collaborative approach with Ibaera should come to the fore.
Not only will the group provide Azumah with a better chance of growing reserves, but its access to capital markets should also be an advantage in terms of ongoing funding.