Anglo Asian announce 2013 FY results

This has been a difficult period for gold companies, Anglo Asian being no exception. We have all had to adapt to the substantial reduction in the gold price experienced in 2013, with prices dropping from highs of US$1,880 in 2012 to lows of US$1,199 in 2013, which has had a knock-on effect on both revenue and profits. In light of this, in terms of financials for the period, we have reported a small profit of US$1.4 million before tax (2012: US$28.6 million). We achieved revenues of US$70.8 million (2012: US$73.5 million) and a gross profit of US$13.3 million (2012: US$36.1 million). These results are on the back of average gold prices of US$1,387 (2012: US$ 1,666), stable gold and copper concentrate production from Gedabek and record copper sales of US$6.4 million. While the market remains somewhat depressed, 2014 has already seen evidence of stabilisation of the price as the market finds a comfortable trading range and this is predicted to continue, a welcome relief following the volatile prices witnessed over the past few years.

The year under review has been focused on capacity building and implementing plans to ensure the future growth of Anglo Asian. This has been centred on increasing efficiencies in production at Gedabek to enable gold production levels in excess of 60,000 ounces for FY 2014 and beyond; increasing the life of mine of Gedabek through defined exploration and development programmes aimed to increase the reserve and resource base, which currently stands at 744,038 ounces and 1,123,767 ounces of gold, respectively; and progressing our second mining project, Gosha, which we have now developed with a view to transporting the high grade ore to Gedabek and in turn, increasing our gold annual production by the end of 2014. With the above developments in mind, I believe the Anglo Asian team has laid the foundations for the future.

Gedabek, which is located in western Azerbaijan on the mineralised Tethyan Tectonic Belt, one of the world’s significant copper and gold bearing belts, is currently an open pit, agitation leaching plant and heap leach operation. In terms of gold production for the period, while there was a year-on-year increase at Gedabek in 2013 to 52,068 oz from 50,025 oz in 2012, we are disappointed that the figure came in under management’s expectations as a result of the weather conditions and processing issues due to the change in the ore mineralogy that made it less amenable to agitation leaching resulting in lower recoveries in Q4 2013. The main focus for Anglo Asian in 2013 was the successful commissioning of our new agitation leaching plant in June 2013. This enabled us to achieve gold sales of 46,076 ounces at an average price of US$1,387 and silver sales of 19,016 ounces at an average price of US$25. The reason for the difference in sales and product produced is two-fold. Firstly, the government of Azerbaijan takes title to 12.75% of all metals produced due to the Product Sharing Agreement (as outlined later in this statement), and secondly, there is a time lag from production to sales. Q1 2014 gold production totalled 11,312 oz with gold sales of 10,403 oz at an average of US$1,303 per oz, and we are currently on track to deliver our revised FY2014 gold production target of 62,000-67,000oz of gold.

Importantly we also produce copper in the form of a precipitated copper sulphide concentrate by-product, which also contains silver with commercial value and a small amount of gold, from our Sulphidisation, Acidification, Recycling, and Thickening (‘SART’) plant at Gedabek. The plant is one of the largest of its kind in the industry and production from the plant for FY 2013 totalled 327 tonnes of copper, 45,621 ounces of silver and 39 ounces of gold. As previously mentioned, we were pleased with the FY 2013 copper concentrate sales, which totalled US$6.4 million, a significant increase from the US$2.1 million reported for FY2012. During Q4 2013 we entered into a sales contract with Glencore Xstrata International plc (‘Glencore’) for the sale of 550 wet metric tonnes (‘WMT’) of this concentrate. Under the terms of the agreement, Glencore agreed to purchase a total of 550 WMT of copper concentrate product during December 2013 and January 2014. These sales will see our copper concentrate product continuing to add to our bottom line and in turn increasing our profitability for FY 2014. In Q1 2014, production from SART totalled 141t of copper, together with 9,249oz of silver and 6oz of gold and we had stockpiles of 152 wet metric tonnes (‘WMT’) of copper concentrate product. In terms of sales of these stockpiles, we have recently signed an agreement with the Swiss company, Industrial Minerals (SA), for the sale of our full copper concentrate production over the next three years.

As mentioned, a key focus of 2013 for the Company was the review of Gedabek’s mining operations with a view to implementing initiatives and development plans to improve the production profile of the mine both in the near-term, and increasing the life of mine to ensure its future production success. Construction of the new agitation leaching plant, which had an expected CAPEX of US$52 million, was completed US$7 million under budget and on target with full commissioning in June 2013. The new plant was set up initially to treat 100 tonnes of ore per hour to increase both gold oxide and sulphide recovery to 85% and 69%, respectively, and positively impact gold production for the second half of 2013. We achieved this and in Q3 2013 we recorded quarterly gold production of 20,242 ounces and Q4 2013 gold production of 14,329 ounces, as a direct result of the new agitation leaching plant, however this was achieved with much higher than expected processing and operating costs, which management are working through to resolve through fine tuning at the plant. It is our intention to continue to improve gold production, with lower grade ore being processed through the original heap leaching process.

Whilst we are facing teething problems at the agitation leaching plant which have resulted in higher than expected rates of cyanide consumption and increased processing costs, we also continue to explore the greater Gedabek area with the aim of delineating further resources and reserves to increase the life of mine of the operation. Following the completion of 26,842 metres of drilling (99 holes) as part of an on-going exploration programme, we were delighted to announce in October 2013 an updated resource of 44,644,658 tonnes at 0.783 g/t of gold for 1,123,767 ounces in the Measured and Indicated categories.

Looking ahead, the Company is committed to improving the performance of the agitation leaching plant and also establishing a second mining operation in Azerbaijan. As mentioned, Gosha is located 50km away from Gedabek and is currently being advanced with a view to developing a high grade underground gold mine, which is expected to produce circa 15,000-20,000 ounces of gold per annum once in full production. Due to the proximity of Gosha to Gedabek it is our intention that gold ore produced at Gosha will be processed at our existing Gedabek plant, and post period end, we reported that 1,095 tonnes of ore had been mined at Gosha, with 250 tonnes with an average grade of 12 g/t sent to Gedabek. Looking ahead, we are aiming to process 58,000 tonnes of mined ore from Gosha at Gedabek at an average grade of 6 g/t during FY 2014, which is expected to contribute circa 10,000oz of gold to our production figure for the year.

Further exploration works in Ordubad resulted in the issuance of a notice of discovery for two gold deposits, Piyazbashi and Agyurt. The Company will continue the exploration work to seek more mineral potential in this area.

In terms of our corporate activity for the period, we continue to work closely with the Government of Azerbaijan. As previously mentioned, we have a Production Sharing Agreement in place with the Government of Azerbaijan based on the established Azeri oil industry model. Up until the time we have recovered all of our carried forward, unrecovered costs, the Government of Azerbaijan effectively takes 12.75% of commercial products of any mine we bring into production, with Anglo Asian taking 87.25%. We expect to continue retaining 87.25% of the commercial products based on costs incurred to date and with the construction of the agitation leaching plant, this level of recovery is expected to continue for 2014.

We also have strong relations with the International Bank of Azerbaijan (‘IBA’), which is majority owned by the Government of Azerbaijan, and have various financing agreements in place with the bank. As at 31 December 2013, the Company’s net debt totalled US$45.5 million (2012: US$28.3 million) inclusive of cash of US$5.5 million (2012: US$2.4 million). This increase in net debt, was due to an additional loan agreement undertaken with the IBA to finance the new agitation leaching plant at Gedabek, which as mentioned had an estimated CAPEX of US$52 million. The new IBA loan was then partially refinanced with the Amsterdam Trade Bank N.V. (‘ATB’) and the amount of these loans at 31 December 2013 were US$11.5 million and US$36.7 million with IBA and ATB respectively, and cash in the bank was US$5.5 million at 31 December 2013. Despite higher than expected operating costs in the agitation leaching plant, due to issues with the ore type and recovery rates, the Company is not expecting to breach the Debt Service Coverage Ratio (‘DSCR’) covenant with ATB, although as a precaution has received a waiver against this covenant for the period to 30 June 2014. The DSCR ratio required is 1.25, the waiver reduces the required threshold to 1.1 in the interim reporting period of 2014. In January 2013, the Company also entered into an arrangement with industrial group Atlas Copco for the financing of underground mining equipment for the Gosha gold project for US$3.8 million (representing 85% of the equipment value) with a one-off 1% arrangement fee and 8.47% annual interest fee, to be paid in eight quarterly instalments starting April 2013. US$2.8 million was outstanding at 31 December 2013.

As a company we are committed to maintaining high health, safety, social and environmental standards. We have a Health, Safety, Environment and Technology Committee (‘HSET’) established at Board level, which is under the chairmanship of Professor John Monhemius, one of our Non-executive Directors. This committee has the responsibility to oversee all aspects of the HSET of the Company and to make recommendations to the Board. We are saddened to have to report that during Q2 2013 there was a fatality at Gedabek, the first since the mine was opened. This tragic incident was due to a Contractor’s haulage truck overturning on 5 April 2013, fatally injuring the driver. Control measures for fleet transport were reinforced following this accident and these now include radar gun speed measurements, in-vehicle cameras, road patrolling and maintenance enforcement.

In Q2 2013 an action plan and audit report was submitted to the International Cyanide Management Institute (ICMI) – Cyanide Code. Corrective actions were implemented as required by the Audit review for the Cyanide Code and the process is on-going. Various other environmental measures were implemented in the year including planting of 883 trees, profiling and landscaping of disturbed terrain, and regular monthly campaigns for surface and groundwater monitoring and on-going vehicle monitoring. The goal of the company is to strive towards zero harm and much work has been done to instil a culture of safety whereby employees understand that they have a duty to take care of themselves and their co-workers. In Q3 2013 the Lost Time injury (LTI) rate was zero at a time of increased hours and productivity as a result of expansion. A total of 156 LTI free days were recorded and this pleasing trend continued into Q4 2013 where, zero LTI’s were again maintained, bringing a record of 248 LTI-free days since the last reported incident on 26 April 2013.

We have approximately 555 personnel working in the company and we recognise that mining is a hazardous environment and we continue to seek improvements.

2013 has been a year of transition and investment for Anglo Asian. The commissioning of our agitation leaching plant at Gedabek was a significant milestone for the Company, and an investment made in order to improve gold recoveries and reduce operating costs. The plant will enable us to deliver on these long term objectives, however due to initial teething problems at the plant we were disappointed not to be able to meet our FY2013 gold production target. Our proactive and highly experienced management team are addressing the issues and post-period end, have installed a continuous Knelson concentrator, which has already improved gold recoveries to more than 80% by pre-treating the ore to isolate the copper sulphides that have been limiting the recovery of gold.

The complexity of the ore at Gedabek necessitated the installation of a Resin in Pulp plant (‘RIP’) instead of the industry standard Carbon in Leach (CIL) technology. RIP is new technology in the gold industry and this, together with the complexity of the ore, has resulted in a longer than expected period of commissioning, with fine tuning required. The technical team have been working to optimise the plant settings for the type of ore we have and by the end of Q1 2014 progress is being made going into Q2 2014.

With these improvements we are on track to meet our new FY2014 target of between 62,000 to 67,000oz gold production, of which 10,000oz will come from our second project, Gosha, where significant progress was made over the period, with the first 250 tonnes of the 1,095 tonnes of ore mined to date having been processed at Gedabek, only 50 km away.

With record copper sales of US$6.4 million during the period, and with our Gedabek initiatives in place with noticeable results starting to flow through, we look forward to the year ahead as we continue to maximise value for shareholders. I would like to take this opportunity to thank our Anglo Asian employees, partners, the Government of Azerbaijan, both ATB and IBA, advisers, fellow directors and shareholders for their continued support as we continue to build the Company into a leading mid-tier gold, copper, silver producer in Azerbaijan and Caucasia.

Khosrow Zamani