This article is about Lydian International (OTCPK:LYDIF). The company has a market capitalization of $155 million ($160 million fully diluted). It is currently in the processes of developing its Amulsar property in Armenia. While the company also owns the Kela project in Georgia, almost all of its value is in Amulsar plus the cash it has on its balance sheet (about $30 million as of the end of March, 2013).
Amulsar will go into production in 2015. The company will produce at least 100,000 ounces of gold per year at Amulsar, and this figure is anticipated to surpass 200,000 ounces during the mine's peak period of production--about six years in; however this could occur as soon as the second year. Presuming that Amulsar goes into production as planned, at the current gold price of around $1,290 per ounce Lydian International is trading at 3-times its anticipated cash flow for the early years of the mine's life, and at about 1.5 times cash flow during Amulsar's peak production period, which is expected to be around 2020. Such figures suggest to me that the company has enormous upside potential from its current valuation.
Despite the aforementioned upside potential, there are risks to owning Lydian International. Amulsar is located in Armenia, which is a country that may not have predictable regulations and taxes that enable investors to project a future valuation on the company's shares. Also, the company needs to raise at least $240 million in order to bring Amulsar into production, which will not commence until 2015 if everything goes well. Thus investors must have an intermediate-term to long-term time horizon, and they need to factor in the possibility of share dilution or the assumption of debt at a high interest rate.
Nevertheless at the current valuation these risks appear to be largely accounted for, and long-term gold bulls should consider taking a position in Lydian International if they are comfortable investing in Armenia.
1: Lydian International's Properties
Lydian International has two properties: Amulsar in Armenia and Kela in Georgia. The former is by far the most important to the company.
Amulsar is located in Armenia.
Currently the company estimates that it has approximately 6.4 million ounces of gold (2.3 million ounces of reserves at 0.75 grams of gold per ton, and 4.1 million ounces of resources at just under 1 gram of gold per ton) (the term "reserves" implies a higher level of certainty than the term "resources"). The following two tables detail this information. I should note that the "resource" data assumes a cutoff grade of 0.35 grams of gold per ton, meaning that these figures assume that the company will not mine any ore that is less than 0.35 grams of gold per ton.
|Category||Tons||Au grams/ton||Total Gold|
|Proven + Probable||94.9 million||0.75||2,290,000|
|Category||Tons||Au grams/ton||Total Gold|
|Measured + Indicated||70.5 million||1.04||2,362,000|
The company anticipates commencing production at Amulsar in the middle of 2015, which means that production is two years away. Production will begin slowly at less than 100,000 ounces annually before increasing to over 200,000 ounces per year. While this will take several years, the company believes that it can reach these peak levels of production in just the second year after mining commences if it is capable of raising roughly $70 million of additional capital (the company anticipates needing $270 million for the "base case" scenario). This information is displayed on the chart below.
Since Amulsar is a surface mine it will be very inexpensive to mine despite its relatively low grade among economical gold mines (around 1 gram per ton). The company estimates that it will have roughly $470/ounce cash costs and $750 "all in" costs which include administrative expenses, exploration, repairs, taxes, and so on. Considering that many mining companies have costs of around $1,200 per ounce this is incredibly inexpensive. Thus once production commences at Amulsar Lydian International will have very strong cash flow. The following chart estimates this cash flow at various gold prices assuming a conservative cost of $850/ounce and two production targets: 100,000 ounces (extremely conservative), and 150,000 ounces (conservative relative to the production estimates for later on in the mine's life).
|Gold Price (U. S. Dollars Per Ounce)||100,000 Ounces of Production||150,000 Ounces of Production|
|$1,000||$15 million||$22.5 million|
|$1,250||$40 million||$60 million|
|$1,500||$65 million||$97.5 million|
|$1,750||$90 million||$135 million|
|$2,000||$115 million||$172.5 million|
|$2,500||$165 million||$247.5 million|
Thus at the current gold price the company is trading at roughly 3 times its estimated cash flow in 2016 or 2017. Given that two years is a long time to wait for any production, and that 3 - 4 years is a long time to wait for production of at least 100,000 ounces (assuming the base-case scenario), the current valuation seems to be reasonable. However there are still additional risks that make the stock appear more expensive: namely the fact that the company must raise at least $240 million, and the fact that Amulsar is located in Armenia, which poses political and regulatory risks.
The Kela project in Georgia is an early stage exploration project. The company is currently attempting to get environmental clearance from Georgia's government so that it can explore further. It has not released any geological reports or done any drilling, although it has found some ore on the surface that is 1 to 4 grams of gold per ton, which is reason for the company to invest time and resources in further exploration.
A: The Price of Gold
The price of gold has fallen recently, and Lydian International's future cash flow is highly leveraged to the price of gold. So long as the downtrend illustrated below remains intact, there is a reasonable possibility that the gold price will continue to fall in the short term.
B: Raising Capital
Lydian International will need approximately $270 million (or $340 million in the second scenario discussed above) in order to bring Amulsar into production. Given the company's current market capitalization, this is nearly twice what the company is worth. The company has many ways to raise this money, and given the estimated size of Amulsar I doubt that the company will have much trouble raising it. However all of its options will be punitive to shareholders in some way.
- It can issue stock and dilute shareholders. At the current share price this would be very punitive as the company would need to issue almost two times as many shares as there are currently outstanding.
- It can issue debt. If it were to do this it would have to do so at a fairly high interest rate given that it has no current revenues. However there would likely be willing lenders given the size of Amulsar and its estimated cash flow potential.
- It can sell a royalty or stream to a royalty or streaming company. This means that the company promises to give or sell some of its metal to a company in exchange for a front-end balloon payment. The company cannot raise all of its funds in this way given the size of the existing royalty and streaming companies, but it can raise some.
- It can find a joint venture partner. In essence the company would be selling some of the property. If it found a large partner then there would be very little risk that the mine does not go into production.
C: Mining In Armenia
While Armenia's government welcomes foreign investment Armenia remains a third world country. The company claims that Armenia is adopting policies that encourage the privatization of property and growth in industry. However I am still concerned that Armenia might not be a safe place to invest in mining. Dundee Precious Metals, which operates the Kapan mine in Armenia, acknowledges that there is a lack of transparency and consistency when it comes to regulation and taxation. Nevertheless there does not appear to be an immediate threat that would prevent Lydian International from developing Amulsar.
D: Lydian International's Size
Lydian International essentially has one property of value. If the company cannot mine at Amulsar for whatever reason, then Lydian International is essentially worth the cash on its balance sheet (about $30 as of the end of March), or a fifth of its current market capitalization.
Lydian International seems to be a solid investment for gold bulls who do not mind assuming the political risk that goes with investing in an Armenian mining project. It has a solid property in Amulsar that will likely be in production in just two years. Amulsar will be a low cost producer, and it may produce far more than the 150,000 ounces per year than I anticipate above. Ultimately if the company does not encounter any serious roadblocks its shares will trade at multiples of its current $155 million market capitalization in a few years.