Aureus Mining is exploring and developing gold deposits in highly prospective and under-explored areas of Liberia and Cameroon.  The company is listed on London’s Alternative Investment Market and the Toronto Stock Exchange.  This is one of a couple of stocks in the portfolio that is not yet profitable, but strong cash flows are not far off for Aureus.  I believe that the share price does not the production and exploration upside.

Aureus Mining’s main focus is exploration and development of the New Liberty Gold project in Liberia.  However, the Company also has a 100% interest in the Weaju, Gondoja, Ndablama and Leopard Rock projects in Liberia, and the Batouri and Ntem gold projects in Cameroon. The company is aiming to bring New Liberty into gold production in Q4 2014. It is also intends to progress exploration in both Liberia and Cameroon; and increase the gold resource of the company (measured, indicated and inferred).

Projects

The New Liberty Mine has a NI 43-101 compliant reserve of 910,000 oz at 3.3 g/t and a resource of 1.14m oz at 3.6g/t Measured and Indicated, and 590,000 oz at 3.2g/t Inferred.  It is 100% owned, open at depth and the licence area covers 457km².  This is the highest grade deposit in Africa and the resource should increase with more drilling.

The Feasibility study carried out in 2012 highlighted the attractiveness of the New Liberty.  It showed a pre-tax NPV of $234m (5%), a pre-tax IRR of 37% and payback in 2.2 years at an average gold price of $1,400/oz. Production of 120,000oz pa at 3.7g/t mined head grade for the first 5 years of the 8-year mine life is expected and initial capex is low at $140m, which is due to high grade.  Cash costs are forecast at $685/oz but Aureus is conducting optimisation studies to improve the project technically and financially.  Cash costs could fall to around $650/oz, which compares favourably with other African gold producers.

New Liberty is a relatively simple open pit operation with underground potential.  They will use gravity and CIL processing, the construction period is fairly short and the infrastructure is very good as the project is situated 100km from Monrovia, 80km by tarmac and 20km laterite.  The laterite road is in the process of being upgraded.

New Liberty is located on the Bea Mountain mining licence, in north-west Liberia.  The deposit is hosted in sheared and altered ultramafic rocks, and gold is associated with disseminated sulphides. The disseminated sulphide host body is more continuous than a quartz body and allows for easier exploration and mining. It is a highly sheared and mylonitised schist-belt, which trends east/south-east. New Liberty lies on Archaean rocks. These formations host approximately 25% of the world’s gold.  The West African Archaean rocks are under-explored, due to past political risk.

In November 2012, Aureus completed a successful equity placing of approximately $80m/£50m closed which now enabling them to proceed with their proposed development and construction activities at New Liberty.  The remaining funds will be financed through debt, which should now be fairly straightforward. Various institutions are currently reviewing the New Liberty Feasibility Study documentation and discussions are well advanced with a number of debt providers.  Funding should be finalised in Q1 2013.

Following the recent fund raising, around 75% of shared are owned by institutions. There are some big name resources funds on the shareholder register including RBC, Macquarie, JP Morgan Asset Management and Blackrock who hold between 5% and 10% of Aureus.

The Aureus management plan to use cash flow from the New Liberty mine to develop their other projects in the region.  4,000m of historical drilling has been completed at Weaju and a 7,700m drilling campaign began in 2012 with the objective of defining continuity of mineralisation along strike.  Generative work involving structural studies and geochemical surveys are also in progress to define new gold targets within the entire licence portfolio of 546km².  Weaju has reported spectacular grades of 3-33g/t and is located only 30km North East of New Liberty.  Although early stage, the geology is similar to New Liberty and it is possible that near surface ore could be trucked to the mill at New Liberty or a new mine could be developed if the resource is economical.

I strongly believe that the New Liberty near-mine targets could add to the planned 125,000oz pa and management’s longer term aim is to build Aureus into a mid tier producer.  The other early stage projects have shown very promising results.  Reconnaissance drilling at Gondoja includes results of 87m @ 1.4 g/t, whilst Ndablama, has shown results of 55m @ 2.2 g/t, 79m @2.2 g/t.  Leopard Rock has returned 4m @ 17.6 g/t and 9.4 g/t over 6 metres.

Country

Liberia is one of the more stable countries in Africa and this is another major positive.  It has had a democratically elected government since 2006.  Madame Ellen Johnson-Sirleaf is Africa’s first female Head of State and was re-elected in 2011. The region is relatively underexplored and US$18bn of foreign direct investment has been committed to date, mainly for the mineral, oil and agricultural sectors. Companies such as BHP Billiton, Arcelor Mittal and Chevron are operating there.

Liberia’s external debt decreased from $4.9bn to $250m (2007 – 2010). They have a sustained UN and US commitment and the IMF are forecasting large falls in Gross Government debt by 2012.

Management

One of the major plus points of Aureus is the experience of the Board of Directors.  This is a heavyweight board for a development company. The company is led by David Reading who is CEO & Director.  Mr Reading has over 35 years’ experience across the fields of exploration, feasibility, project development and mining having held senior positions with leading mining companies. He is the former CEO of European Goldfields and the former General Manager of African exploration for Randgold Resources. He was instrumental in the giant Loulo discovery in Mali.

The Non-executive Chairman & Director is David Netherway who is a mining engineer with over 35 years of experience in the mining industry. He was until the takeover by Gryphon Mineral Ltd (GRY-ASX), the CEO of Shield Mining Limited, an Australian listed company exploring for gold and base metals in Mauritania. Before this, he served as the CEO of Toronto listed Afcan Mining Corporation, which was successfully taken over by Eldorado Gold. Mr Netherway was involved in the construction and development of several other gold mines in West Africa.  He is currently the Chairman of Afferro Mining and Altus Strategies and a non-executive director of several other companies.

Non Exec Directors include Luis da Silva, who is CEO of Afferro Mining Inc. He has extensive international experience with multinationals Lafarge SA and Blue Circle Industries Plc. Mr da Silva is a graduate Mining Engineer. David Beatty is CEO of Rio Novo Gold Inc and has executed over $10 billion in M&A in over 70 countries. Adrian Reynolds has more than 30 years in the exploration, development and mining industry with a focus on gold. He was also part of the executive team at Randgold Resources that was responsible for compiling the feasibility studies for three gold mines.  Finally, Jean-Guy Martin is a chartered accountant with 35 years of experience. He recently retired from PricewaterhouseCoopers LLP and has advised multinational companies (including Rio Tinto, Bain Capital & Blackstone) looking to complete acquisitions and divestitures.

Valuation

Aureus has a market cap of around £100m (including £50m in cash), which based on a reserve of around 1m oz, values them at £100/oz.  Whilst this may not look cheap, the project will be in production next year and many lower quality juniors are now facing a struggle to survive.   The Canadian broker, Clarus Securities is forecasting eps of $0.41 (25p) in 2015, which puts Aureus on a PE of under 2.

I am surprised the market is attributing little value to the regional targets, which should add more ounces, given David Reading’s background as former head of exploration at Randgold. One broker is forecasting Weaju could add 15p to the valuation.

Conclusion

Aureus has a high grade gold deposit that has attractive economics and exciting exploration upside in an underexplored region.  Once debt financing has been finalised in early 2013, the New Liberty mine will be fully funded to production.  This should then ensure that there are no further dilutive equity raisings.  To raise $80m of equity in the current environment is a testament to management and project fundamentals, despite the placing being done on the back of a depressed share price.

Aureus is currently trading close to its 52 week low of 45p (the high was 92p).  This is partly due to the placing and also the negative sentiment across the junior resource sector. However, the equity placing should now have put a floor under the share price.  On a 2015 PE of under 2x the shares look too cheap and are likely to be significantly rerate in the next 12 months. If they are not then I would not be surprised if a larger company made an opportunistic bid for Aureus.