In a note to investors, London based stockbroker Fox-Davies Capital said that Oxus Gold’s (AIM: OXS) recently announced US$185 million financing agreement substantially de-risks the company’s operations. Resultantly the broker has reduced its discount rate by 2.5% points to 10%, Fox-Davies maintained its 'buy' recommendation for the Uzbekistan focused gold explorer.
The consortium consists of Baiyin Non-Ferrous Group Co Ltd, CITIC Construction Co Ltd and Chang Xin Yuan Su Equity Investment Fund Management LP. Baiyin and CITIC are ultimately owned and controlled by the Chinese government. Chang Xin is a private equity fund registered in the People's Republic of China and managed by Long March Investment Consulting.
Under the terms of the financing, the Chinese consortium will invest US$85 million through the issue of new ordinary shares and convertible loan notes. Oxus will also grant the consortium warrants, to subscribe for more new shares in the company for US$20 million, subject to a further project financing with a minimum of US$80 million. Collectively the consortium will subscribe for 573 million shares in Oxus at 6 pence each, representing a 59.7% shareholding in Oxus.
The increased working capital will be used to develop operations at the 50% owned Amantaytau Goldfields joint venture (AGF) the company has with the Uzbek government. The proceeds are expected to allow AGF to target first production at the project for the middle of 2011 and increase annual production to 0.3 million ounces. Oxus Gold has an unofficial in-house estimate of 24 million ounces of gold and almost 500 million ounces of silver for the total Amantaytau resource.
The planned development programme includes the expansion of existing open pit heap leach mining operations and the development of one or more underground mines. The extracted ore at AGF will be processed using bio-oxidation technology.
The financing deal also allows for a five year US$35 million exploration programme, targeting unexplored oxide ore bodies on the lease, which could be brought into production faster and more cheaply that by immediately going underground. Fox-Davies said that there is ample scope for significant increases in ore reserves now that the financing for is available, as very few of the oxide pits have had their sulphide extensions tested at depth.
Fox-Davies said that exploration would likely commence using shallow holes to test the sulphide potential immediately below the oxide material in some of the pits, which could be developed using low cost open pit techniques that would be mined faster and more cheaply than the underground ores in the current schedule. As shallow drilling will come first, the research house said it would not take long to see the results and that it expected an increase once the ore reserves are recalculated at the end of the current year.
According to Fox-Davies, the Chinese investors did not come into the venture to simply own 50% of a 300,000oz per year mine and were mindful of the existing exploration potential.
Furthermore the stockbroker believes that Oxus will have enough money to complete a second bio-oxidisation plant and expand the mine once the first has been built and commissioned.
Fox-Davies set a new target price of £0.12 per share, changed from the former £0.40p target, following the fundraising and the subsequently enlarged issued share capital.
In order to emphasize the exploration upside, Fox-Davies offered two possible scenarios that could lead to substantial increases in the price target for the stock. Under the first scenario, the exploration programme would find an additional 9 Mt of ore at grades very similar to the existing sulphide grades, enabling the plant to maintain its production rate of 300 ktpq (kilotonnes per quarter) until the end of 2025, while the current plan production is scheduled to drop from 300 ktpq in 2015 to 265 ktpq in 2016, 230 ktpq in 2017 and close in 2018.
Under the second scenario, the research house assumed that significantly more ore would be found and that the plant capacity would expand to 600 ktpq during 2013 and will be operational at the higher tonnage from 2014 until 2025, requiring 25 Mt of ore grading 7 g/t and the expansion costs would then amount to US$80 million.
The first scenario would push the target price up to £0.29 per share, while the second scenario would propel the price to reach £0.37 per share.