Wednesday, September 27th 2023

Chaarat Gold Holdings Ltd

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Decent prospects ahead for Chaarat Gold Holdings


“…The share price is currently just above 20p, is the lowest it has been for some three years, but it is supported by a producing mine at Kapan, and news of a financing deal for Tulkubash may be on the horizon so this is a bold venture small cap natural resources play investors might want to keep on their radar…”


The chequered fortunes of Chaarat Gold Holdings (AIM:CGH), a gold mining company with two development assets set in the spectacular mountain ranges of the Kyrgyz Republic in central Asia, and a producing gold, silver, copper and zinc mine in southern Armenia, highlights the promise and challenge of seeking to establish a viable natural resources business in troubled political and economic environments.

Chaarat has wholly owned interests in the Republic’s Tulkubash oxide and Kyzyltash sulphide deposits, which it believes have the collective potential to produce 300,000 to 400,000 ounces of gold per annum for at least five years, and Armenia’s Kapan Mine and Processing Company, which has produced copper and zinc concentrate since 2003, and is expected to produce at least 50,000 ounces of gold per year over the next decade.

Headquartered in London, with more than 1,000 employees located in the UK, US, Russia, Kyrgyzstan and Armenia, Chaarat is backed by major shareholder and Executive Chairman Martin Andersson, a co-founder of Brunswick Brokerage, a Moscow based investment bank sold on to UBS, and a former Board member of the Siberian Coal Energy Company, one of Russia’s largest thermal coal producers. Executive Director and Chief Executive Officer Artem Volynets has accumulated executive experience in the Russian aluminium and energy sectors through senior roles at the En+ Group, UC RUSAL and SUAL International. Chief Operating Officer Darin Cooper has held senior positions at Nyrstar, a global multi-metals business, Fusion Capital, a Swiss investment firm, and Finland’s Talvivaara Mining Company.

The Tulkubash Oxide Gold Project


Chaarat’s primary focus is the near term development of the Tulkubash Oxide Gold Project from a cluster of promising pits to an open-pit mining heap leach operation. Less than six kilometres of the 24 kilometre site have been extensively explored so far, but the company’s most recent JORC compliant bankable feasibility study (BFS), published in May, estimates a Mineral Resource of 49.9Mt grading 0.73g/t gold containing 1,177 thousand ounces (koz) of gold, and an initial CAPEX requirement for first gold of $115m. $10m has been invested so far in preparatory construction and engineering work. This year’s Tulkubash exploration and drill programme will focus on converting resources identified as Inferred in the recent JORC estimate to Measured and Indicated. Some 1,800 metres of infill drilling is planned in 14 locations, and relatively unexamined locations beyond the core resource will also be examined. 

Chaarat’s share price was hit hard after the BFS was published in June, plunging from just under 30p to just over 20p, when the Study pushed back the company’s estimate of first gold from Tulkubash by two seasons to H2 2023. Chaarat has a long road to secure the $115m needed to fund the mine’s construction. Significant progress was made in February when the company raised the $30m equity portion of the funds. The fundraise was accompanied by news of a $22m debt-to-equity conversion deal through which Chaarat’s largest shareholder, Labro Investments, agreed to convert an outstanding term loan of $22m into equity, saving the company $2.1m in interest payments per year to 2024. The company says it is ‘in advanced discussions with financing counterparties who are completing their due diligence requirements and financing documentation’ regarding the $80m debt finance element of the project, and anticipates closing this ‘in H1 2021’.

But it is working under the shadow of the well publicised and bitter conflict between the Kyrgyz government and Canadian mining company Centerra Gold. The Kyrgyz administration that took office earlier this year under strongman president Sadyr Japarov is pursuing an aggressive agenda to nationalise Centerra’s Kumtor gold mine, which produces 510,000 ounces a year. Centerra’s Kyrgyz offices have been raided and documents seized, and the company has been fined $3bn for hazardous operations, and issued a $170m tax claim.

Japarov has presented the government’s actions as an element in a wider anti-corruption agenda rather than a money grab, accusing the Canadian company of underhand behind-the-scenes agreements with the previous administration to secure permits. But observers fear his actions and rhetoric are following the playbooks of Russia’s Vladimir Putin and Kazakhstan’s Nursultan Nazarbayev, exploiting a concentration of presidential power to undermine the Republic’s fragile democracy.

Japarov’s room for manoeuvre, however, is limited by the Republic’s economic dependence on companies precisely like Centerra. Gold production is Kyrgyzstan’s biggest source of economic revenue, and Kumtor is the largest single contributor to its gross domestic product. The country has been hit hard by the pandemic, and was one of the first to apply for emergency funding from both the World Bank and the IMF. It is also dependent on the European Bank for Reconstruction and Development, which has expressed dismay at its heavy handed dealings with Centerra. The country can ill afford to alienate its few sources of income.

In brief, it has all been very unhelpful to Chaarat’s efforts to secure project funding. In the delicate language used by the company, ‘the extensive media coverage of the discussions between Centerra and the Kyrgyz Republic is expected to be negatively perceived by potential future debt or equity investors and possibly result in a delay in the project financing’. But it insists the government’s dispute is specific to Centerra, noting a meeting held in April with the new government and investment agency of the Kyrgyz Republic in which ‘strong support and appreciation’ was received for Chaarat’s ‘investment and community support’.

Another concern is continued ambiguity regarding the boundaries of a UNESCO world heritage site, classified as ‘highly protected territory’, overlapping some areas of the Tulkubash licence. Again, however, Chaarat says it has the government’s ear, maintaining that the classification was made in error: Chaarat’s mining licence agreement is compliant with Kyrgyz law and ‘a prime ministerial decree addressing this issue is being prepared for public consultation and then formal signature in H1 2021 to correct this matter’.

The Kyzyltash Sulphide Project


Chaarat’s other Kyrgyz project, the Kyzyltash sulphide deposit, is a longer term, and rather more speculative venture. The company estimates that Kyzyltash, with the potential to produce 200,000 to 300,000 ounces of gold per annum, has scope to overshadow Tulkubash, but would only be viable as a more expensive refractory extraction operation. Exploratory drilling has indicated Measured, Indicated and Inferred Resources of 46Mt at 3.75 g/t containing 5.4 Moz gold. Chaarat has set a preliminary timeline for first gold at Kyzyltash by 2026, on the condition of success at Tulkubash. A metallurgical test programme this year will seek to identify optimal processing methods, with results expected early next year.

The Kapan Mine and Processing Company


Chaarat acquired its Kapan mine in early 2019 for $55m for its near term cash flow and growth potential. The mine has Measured and indicated Resources and Reserves of 1,178 koz contained metal, with 6.4M at 5.7 g/t (gold equivalent), and is expected to produce for at least seven years. The company’s annual report for 2020 reported production of 58.2 koz gold equivalent, 6pc more than its production guidance, contributing revenues of $76m, up from $68.1m in 2019.

The company’s plans for Kapan are also subject to a degree of political risk, in this case the ongoing instability generated by Armenia’s conflict with Azerbaijan over the territory of Nagorno-Karabakh. The Armenian government is currently locked in a stand-off with the army after signing a Moscow-brokered peace treaty in November that made significant concessions over the disputed enclave, which Armenia had controlled since the collapse of the Soviet Union.

Nevertheless, a positive Q1 operations update reported production of 16,174 gold equivalent ounces, up 21pc on Q1 2020 (13,353 oz), due to ‘increased third-party ore treatment, and improved mine grade’. The results give a sense of the mine’s composition, reporting production of 8,893 ounces of gold, 160,945 ounces of silver, 605 tonnes of copper, and 1,527 tonnes of zinc. The mine is on track to deliver on its 57 koz gold equivalent guidance for the year. The update also confirmed that the Tulkubash and Kyzyltash drilling programmes are on schedule, with operations unaffected by an upsurge of Covid cases in the Republic. A cloud was cast over the company’s Q1 operations by a fatality, initial investigations by Chaarat, the mining contractor and relevant authorities ‘indicating that the contractor’s employee walked over a blocked ore pass against basic general safety practices and behavioural safety principles’. The incident brought lost time injury in Q1 and the recordable injury case rate to 0.78 (per one million hours worked) compared to 0.39 in Q1 2020. Chaarat stated that ‘Lost Time Injuries remain too high and further improvement of the safety performance at Kapan remains a continuous focus for the organisation’.

Chaarat’s prospects


The company’s financial results for the year ended 31 December 2020 reported the significant improvement the February financing deal had made to its debt position, reducing it from $70.5m as at 31 December 2020 to $46m now, a reduction of 35pc. Helped by steady Kapan production revenue was up 12.5pc in 2020 to $76m (2019: $68.1m). Revenues allowed the company to record an an operating profit of $1.9m, against a loss of $18.4m in 2019. Following the February equity raise the company had cash and cash equivalents of approximately $31.2m, as at 1 March 2021.

Chaarat’s financial position was further smoothed by the negotiation of an investment agreement with Çiftay, the Turkish mining construction and mining contractor selected for the Tulkubash project, superseding a joint venture agreement reached in 2019. Under the new agreement Chaarat will retain 100pc ownership of the Tulkubash and Kyzyltash projects, with Çiftay becoming a strategic investor through the issuance of new ordinary shares. Chaarat will pay Çiftay a maximum cash consideration of $25m for construction and issue up to $17.3m shares to Çiftay. With regard to he Tulkubash financing agreement the announcement reiterated Chaarat’s ‘advanced discussions with potential financing counterparties’.

Chaarat is operating against the backcloth of a positive long-term outlook for commodities – as we discussed at length in our feature on commodity prices last month – with expectations of continued strong demand for materials from Asia and worldwide demand for the metals required for the energy transition. The outlook for gold is less certain, prices having retreated from the $2,000 high reached last summer, pushed down by expectations of higher interest rates, a stronger dollar and rising bond yields. But gold is still above $1,800 and continues to wait in the wings as a hedge against higher inflation.

Chaarat’s share price, currently just above 20p, is the lowest it has been for some three years, well down from the 25p to 30p zone it had occupied till June. Indeed it touched 40p as recently as last summer. The company is clearly something of a speculative bet, working in fragile jurisdictions, with much work to do to secure financing for its flagship project. But it is supported by a producing mine at Kapan, and news of a financing deal for Tulkubash may be on the horizon. Chaarat is fraught with risk, but it’s a bold venture small cap natural resources investors might want to keep on their radar.