Mariana Resources - Crunch Time Approaches

http://www.marianaresources.com

Mariana Resources Logo
Mariana Resources (LSE:MARL) is an AIM listed junior mining company. The firm searches for gold, silver and copper in South America and whilst its share price rose sharply throughout 2009 and 2010, the company lost almost all of those gains from 2011 onwards. One widespread problem that junior miners have to face is how to manage their portfolio of assets and develop them on limited budgets. Unfortunately, a lot are unsuccessful in that respect, and over the years, Mariana has had to rationalise its operations on numerous occasions, and undertake equity dilutions in order to keep the company afloat. Having hit an all time low at 1.05p earlier in 2013, the shares have rallied recently to a current price of 3.05p. Mariana currently has ~354m shares in issue thus it has a market capitalisation of £10.79m. In its current state, does Mariana justify this valuation?


Unsurprisingly, like most metals stocks, Mariana is still trading within a long-term downtrend, even with the spike up. That downtrend actually extends well past what is shown on the chart, and up to 50p a few years ago. That continuous drifting can be seen as a key part of quite a lot of junior miners, who ultimately have failed to deliver following the initial extreme hype and expectation. The chart is very much in a neutral phase currently. What investors should look for is a sustained break out of the current horizontal trading zone. There is a slight downward trend at the moment which is often a characteristic of a bullish flag scenario - as noted in that chart, should that play out, a return to 3.965p (i.e. 4p) is implied, and such is momentum, it would probably break through and head towards 5p.

However, on technicals alone, that is a huge step to make, and I personally think that is perhaps (only just) the more likely scenario. A downward break would hint towards a return to 2.5p as a first target, and 2.0p as a final target. Nonetheless, if Mariana can break higher, there are two pivot points; 4.0p (which has acted as recent resistance) and 4.38p (which is long-term resistance). A beacon of positivity though is that Mariana has to date actually coped very well with the spike up. It has not started retracing quickly and that is probably helped by a relatively small number of shares in issue (compared to other companies in the sector). Fox Davies have a 22p target for Mariana, which is quite frankly ridiculous as that implies a £77m market cap and that is before any future fundraisings. On the other hand Beaufort Securities has a 'Speculative Buy' rating on Mariana.

Before getting onto the operational side of the company, it's worth noting that roughly 20m shares are held by the board of directors  Most of those shares are held by Ray Angus who is the company and operations manager in Peru. Encouragingly around 100m shares are also held by institutions or other listed companies. From that list, Hochschild Mining hold 11m shares and have done for several years whilst multi-billion dollar AngloGold Ashanti holds just short of 50m shares in Mariana. That holding was also created a couple of years back when they actually bought the stock at a premium to the closing price at the time. Anglogold continued to support the company in a recent placing, although it was only for (approximately) £32,000. Nonetheless, having a larger shareholder like Anglogold can only be seen as a bonus.
Now onto the company. Mariana operates in South America within Peru where it operates at the Condor De Oro project, and Argentina where it has the Deseado projects. Deseado can be split up into four separate plays; Las Calandrias, Los Cisnes, Bozal and Sierra Blanca. Both these countries remain highly supportive of miners exploiting their natural resources.

In Peru, copper and gold remain significant components of their export market, and even with the depletion of some of the higher grade deposits, investment in the mining sector has risen more that five-fold since 2007. That figure will probably continue to motor ahead. That means that any company that can get a foothold and establish themselves should be able to benefit greatly. Mining taxation did get hiked in Peru in 2011, but that is very much historic now, and those rates were deemed acceptable by the industry (through negotiations). Peru remains a highly positive country to mine within.

Argentina on the other hand does have more pressing issues. The first concerns the foreign exchange controls introduced in 2011. I am all too familiar with those impacts after Mobile Streams (LSE:MOS) has had problems moving funds out of the country. Arguably that is less of an issue for a miner as large sums of money are inherently required for capital and funding operations, but it still is an unwelcome restriction. Once again though, it does not impact Mariana materially at the moment. The other issue regards how mining is becoming more frowned upon in some provinces with campaigns to outlaw some mining aspects coming into force. Indeed, as recently as June, the Santa Cruz province announced its intentions to introduce a 1% tax on mine reserves. That tax applies to companies regardless of output and will inevitably hamper companies in that region. Those issues are worth being aware of. The truth is though that there is no need to discount these risks into the price yet - Mariana will be driven by exploration results.

At Condor De Oro (CDO) the company is currently set for a drilling programme that will see them drill at least 7 priority holes and up to 20 holes in total. Mariana is part of an Option agreement at the moment rather than anything more conclusive. Should Mariana satisfy the option agreement requirements, they will able to acquire 60% of Condor Resource's stake. Through a holding structure that involves a regional operator (EAD), the deal would give them a 51% stake in the project. To be more specific, the 51% optional interest will be encompassing the Pucayacu Gold-Copper and Yuracyacu Silver-Copper properties.

When Mariana entered into the agreement, Ray Angus commented that the acreage lay in a "highly prospective [resource] belt" and that drilling could uncover "company-maker potential". The area is 'largely untested' and it is hoped that the upcoming drills will cover major copper-gold mineralisation zones. CDO is located within the Cordillera del Condor belt and is in close proximity to some successful mining projects over the years, notably the Rio Blanco acreage which was acquired for $165m and is located only around 50km away (straight-line). Just over the border in Ecuador, the Fruta del Norte (FDN) also boasted a gold reserve exceeding 13m ounces at an average gold grade of 7.2g/t. That is a huge resource of gold and the FDN was located within the same mineral belt, just further North.

A somewhat disturbing cloud though is that to gain the 51%, Mariana must spend $12.5m within the four years since January 2013, and issue Condor cash/share payments of $2.5m for each of the two properties. The latter will be easier to solve, especially if the share price rallies, but the former is of material concern considering the less than impressive cash balance of Mariana. A lot therefore rides on the upcoming drills. For now, the company must meet its first commitment of spending at least $500,000 on the upcoming 1,500m of drilling. Part of the reason why Mariana is likely to have not drifted as much as is likely is because the drilling campaign is set to start imminently as the company has received all the drilling approvals necessary. On October 15th Mariana noted that drilling was primed to start with the drill rig mobilised and in place.

In Argentina, activity has actually been scaled back in light of the change of view of the mining sector. Activity is very much now confined to exploring the projects that are already there, in a low-cost manner. Mariana did mention that it could possibly perform some regional consolidation, but given the company's financial position it would be in the best interests of holder if they didn't. I suspect that they won't anyway, as is common sense.

For some reason a lot of junior miners seem to over promise and underachieve and they like to have a huge array of assets, all which tend to be in the exploration category. At the moment, Mariana has sufficient projects to be focusing on, and if anything they could streamline their operations in Argentina if necessary. As it stands though, Las Calandrias, Los Cisnes, Bozal and Sierra Blanca are decent complements due to their proximity. The projects are also very close to fellow LSE listed Minera IRLs (LSE:MIRL) Don Nicolas project. Minera recently announced that it has successfully set up an $80m funding arrangement for Don Nicolas and that very much underscores the prospectivity that Mariana are after.

Mariana does indeed have a resource, and that is 519k oz of gold equivalent at Las Calandrias. It is well located, albeit the gold grades recovered to date are low (typically less than 2g/t). The plays elsewhere in Argentina are very much exploration based, but once again, these are set aside for the time being as the focus is clearly on Peru.

In September, Mariana also signed a new Letter of Intent in Peru with Condor regarding a separate project. The RNS states: "Under the terms of the LOI, Mariana has the right to acquire a 70% interest in the property within four years by incurring direct exploration costs of US$4,000,000, and making cash and/or share equivalent payments to Condor for a cumulative sum of US$1,125,000. A non-refundable US$25,000 payment was made on signing the LOI giving Mariana an exclusive due diligence period of 45 days". Based on my reasoning given earlier, this is a confusing move. It is clear that Mariana will seek to monetise or dispose of some of its assets in the future through a sale or other means. That will avoid the need to self-fund so many projects at once. However, as alluded to earlier, selling any of the Argentinian assets will be fairly difficult due to the mining environment deterioration and thus the price achieved may disappoint - Las Calandrias is the only area with real material intrinsic value in my opinion, but even so, that won't fetch a particularly high price because of the grade.

Therefore it is fair to realise that funding is a concern here. Equity placements have been the preferred method of raising capital for Mariana and rightly so as they don't carry long-term repayment obligations. The most recent placing happened in August at a price of 1p/share.
- The net proceeds from that totalled £875,265
- As at June 30th, Mariana had cash and equivalents of £328,229
- Net payables of £44,487 (ignored as probably won't need to be paid yet)
- Ignoring rig procurement costs etc, an estimated operating cash drain of £320,000 based on the 6 months to June figure
Based on that, the cash balance at the moment could be around the £1m mark. That will be sufficient for the drill, but post that it starts to become a problem once again.

courtesy of freedigitalphotos.net
Mariana is not an atypical junior miner in the sense that it is cash-strapped, but has the potential to rerate if its drilling results come in positively. With the drill program upcoming there is plenty of scope for a speculation driven rise similar to that of Solomon Gold (LSE:SOLG), and as noted before, that is probably what is keeping the share price buoyant. In other words, if there was no upcoming drill program, Mariana would probably already be at 2.5p, especially since the latest equity raising took place at 1p. Anglogold Ashanti does remain supportive, but you do have to question the extent as the dilution was not particularly strongly backed by them, and it was done at a discount. If they really believed the Mariana story there is nothing that could have stopped them from putting all the money in at a far smaller discount. There are questions that have to be asked in that respect.

The company's cash position remains questionable and thus the whole investment case really does lie on the upcoming drill results. If the drills are positive then this will re-rate, if not, then Mariana will have to crawl back to the markets for another cash injection, but it will be backed into a tight corner. You would expect that they should be able to get some decent drill feedback though. In the case of a positive outcome the funding situation will be self-resolving as the share price rise will price Mariana back into being able to undertake a placing. That is actually the ideal scenario and the company have hinted at that being possible: "Positive drill results will potentially leverage the Company's share price and could facilitate funding for ongoing drilling."  During the drilling, you can bet that investors will not give two thoughts to the funding profile and all eyes will be on the drill results - that will help the bull case. Mariana is highly speculative, and not for the faint hearted, and that is the exact reason why there is a fair chance that it may show price bullishness in the near-term. Crunch time really is approaching for Mariana and a lot rests on this set of Peruvian results. No Rating.

3 comments:

  1. Balanced review. very interesting company but very risky looking.

    CraigJ

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  2. Investor presentation out this morning! Things are building up to the 'crunch'

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  3. This comment has been removed by the author.

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