Amara: Weak numbers but a good investment. But not good enough

PUBLISHED: Jan 24 2013 @ 17:27 | Comments (0) | More info about Tom Winnifrith

Dual AIM and TSX (Canada) listed West African focused gold mining company, Amara Mining (LSE:AMA) has announced 2012 production results for its Kalsaka mine in Burkina Faso ahead of a full-year results announcement scheduled for 27th March. I commented positively on the company in November and the following updates my view after this latest news from the company…

To read my November update and see why the latest news is a clear “miss” click here

Amara has reported production of 53,544 ounces of gold at Kalsaka for 2012 – comparing to guidance of 53,000-57,000 ounces (this having been reduced from 60,000-70,000 ounces) and 71,505 ounces in 2011. This is attributed to an unusually heavy wet season in Burkina Faso and the mine approaching the end of its minelife. The company did though note that it still enjoyed strong cash generation and ended the year with a record $36.2 million in cash and liquid assets.

Guidance for 2013 is for production of 50,000-60,000 – lower than I had hoped with the company recognising its permitting timeline for benefitting from trucked material from Kalsaka’s neighbouring ‘Sega’ project as “aggressive” given a recent change of government in Burkina Faso following elections.

The share price response has been a more than 7.5% decline to a current 54.5p, capitalising the company at £91.6 million. Some disappointment is understandable but it is the longer-term outlook here which is of particular interest to me. The company emphasised that “drilling results received to date from the Sega licence give confidence that there is further upside potential to Sega’s current resources… This upside potential adds further confidence that production will continue at the Kalsaka/Sega complex until production commences at Baomahun, which is expected in H2 2015”.

A feasibility study for the Sierra Leone located Baomahun project is anticipated later in the current half year, with a resource update from Yaoure (Côte d’Ivoire) and exploration update on Kalsaka/Sega expected in the current quarter. From 2015 Baomahun can be expected to deliver production of 150,000+ ounces per annum and there is then the enormous potential of Yaoure to consider. Annual production of 150,000 ounces at a $700 per ounce margin (gold currently trading at more than $1,670 per ounce and my outlook remaining positive given global economic woes) equates to cashflow of $105 million (£66.5 million) per annum being thrown off. On a miserly 3x multiple, a share price of approaching 120p is derived.

There are of course significant steps needed to be made for the company to get to such a position and not meeting short-term expectations does not aid the company’s perceived value in the near-term but the upside potential from current share price levels makes me minded to retain a positive view for the long-term here.

You will make money from owning Amara but might you make more elsewhere in the gold sector? The answer is, I believe. Yes.

For instance, Medusa ( analysed HERE) offers less upside but far more certainty of delivering it – it is a safer bet.

Highland Gold ( analysed here) offers as much upside in share price terms but its management team has a better record of delivery and I would have more certainty of it coming up with the goods

There is a case to be made for Minera IRL ( analysis HERE) in that it offers a similar upside in terms of price but, again its management is one you would back to deliver

If you want safety, crave gold exposure but are happy – at current gold prices – for less upside my mid cap pick would be Pan African Resources ( analysed HERE)

So what is the stance on Amara? The shares are cheap. They will go up. But there are safer or bigger gains to be made elsewhere in the sector. As such I cannot, after this latest disappointment say buy. I must instead apologise for not my best share tip. If you are a holder your choice is either to hang on and wait for delivery and an eventual re-rating or to sell now, take it on the chin and reinvest in one of the ideas suggested above.

Tom Winnifrith writes for 10 UK and Us investment and political websites. Links to all his writings plus stacks of unique content can be found on his own blog www.TomWinnifrith.com – you can get alerts to all his articles by following him on twitter @tomwinnifrith

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