PRECIOUS ASSET

There has been a steady trend toward an increase in gold extraction in Azerbaijan this year. Although global prices of this metal have now hit the lowest levels since 2010, the country's leading gold mining company is preparing to develop new fields. According to forecasts issued by the World Gold Council (WGC), resumption of global demand for this key precious metal can be expected in the near future due to current global economic and political developments.

At a dear price

Lately, gold prices have to a large extent been pegged to the economic situation in the United States and Europe. The high volatility of the exchange rates of the dollar and the euro have also played a role. A considerable decrease in demand in the automotive industry (platinum catalysts) and manufacturing of electronic appliances has also affected the parameters of the precious metals market. Finally, a decline in the jewellery market has a large impact on prices. As a result, after going through a series of fluctuations, the price of gold was recorded at 1,067 dollars per troy ounce at COMEX auctions on 27 November 2015. For comparison: the peak level of gold prices early this year was more than 1,300 dollars per troy ounce. However, the downward trend in demand that has been dominant in the second half of the year has reduced the price of the key precious metal to the lowest level in the last five years.

Nonetheless, WGC experts be-lieve that we soon should expect a recovery in demand for precious metals. According to the forecasts, global gold consumption should reach 4,300 t in 2015 (4,217 t in 2014). The central banks of a number of countries are continuing to buy gold, as the economic and political situation in the world leaves much to be desired. Demand for gold in its capacity as "refuge" grows following the terrorist attacks in Paris, the war in Syria, and expectations of further quantitative easing in China. Pre-New Year demand in the jewellery market and demand observed for ingots and coins in the United States, Europe, China and India should help prices go up.

At the same time, some experts have expressed concern that under the pressure of the prospect of an increase in US Federal Reserve rates and positive US economic statistics, gold prices may fall to 1,000 dollars per ounce before the end of the year.

Time will soon show what factors will be dominant and what the situation will be like in the global market of precious metals. For the time being, many gold mining companies are experiencing financial difficulties due to declining profits and rising costs related to field development.

"The decline in gold prices in the world market has led to a significant reduction in the prices of shares in companies that extract and produce gold, and we have also felt these negative processes. We hope that the opening of a new plant and a new deposit will affect the market and the prices of our shares will go up again," said recently Reza Vaziri, the head of the operating company Anglo Asian Mining PLC (AAM), which is developing Gadabay and Qosa gold deposits.

According to the head of the AAM, the company may increase its authorized capital (which currently stands at 111m dollars) in the future in order to finance works at the deposits Qosa, Qadir and Ordubad, so as not to raise money from commercial banks. It is worth recalling here that at the end of the third quarter of this year, AAM's net external debt was 51m dollars, of which 17.4m dollars were loans from Azerbaijani banks.

Growth regardless

However, despite unfavourable foreign conditions and a decline in the profits of gold miners, there is a marked increase in extraction from gold deposits in Azerbaijan. Recently, AAM specialists clarified a production forecast compiled at the beginning of the year. To all appearances, volumes of gold extracted this year could reach a total of 74,000 ounces. This would be approximately a 23-per-cent increase in production on 2014, when just over 60,000 ounces of gold were produced. It is noteworthy that the increase in output has had an impact on the company's revenues: in the first half of this year, they were 41.8m dollars, which is almost 28 per cent more than last year. In the future, the company plans to produce 80,000 ounces, and if the current level of global gold demand remains the same (and an increase in prices cannot be ruled out either), it plans to reach an acceptable level of profitability.

On the whole, AAM is not bad at managing the challenges of the time at all: while investing in the development of deposits and building processing infrastructure, the company, nevertheless, reduces the cost of production processes and increases return on investment. In particular, specialists at the analytical department of the investment company AzFinance believe that in terms of asset quality and relatively low operational costs, Anglo Asian Mining could be regarded as one of the most efficient international gold miners. According to AzFinance, the company was able to reduce production costs per ounce of gold. In comparison with 2014, the real costs of the gold miner have decreased by 25 per cent from 1,050 dollars to 790 dollars amid increased output and the devaluation of the manat. It is also worth noting a decrease in pre-tax loss from 7.5m dollars to 4.1m dollars, which is indicative of a 45-per-cent improvement on this parameter. Hence it follows that the costs of gold production at Anglo Asian Mining are 21 per cent lower than the average (997 dollars) of well-known companies around the world. And if the expected increase in gold prices materializes, it will be able to generate even more profits, thereby improving its own profitability.

One of the most important factors that contribute to AAM's stability could be growth of output: in particular, it was facilitated by the recently launched commercial extraction of gold at the new gold mine Qadir. The third field, Qadir, is located a kilometre away from the main mine, Gadabay, where AAM has been extracting precious metals since mid-2009 under a production sharing agreement.

It should be recalled that in the third quarter of 2013 the company began to develop gold and copper deposits at the Qosa field in Tovuz District. Last year, 28,900 t of ore were extracted from this mine, and 4.15 grams of pure gold were produced from each tonne. Reserves at Qosa are estimated to be approximately 40,000 ounces of gold, which are planned to be extracted before 2017.

The company is also exploring the new field Agyurd in Ordubad District of the Naxcivan Auto-nomous Republic. The field is very difficult to develop, and if exploration cannot be completed before snow falls, these works will be postponed to the end of March 2016. AAM expects good results from Agyurd: according to preliminary data, approximate gold reserves there are 200,000 ounces. The contract area in Ordubad District also includes a number of areas to be explored and developed - Sakardara, Piyazbasi, Misdag, Salala and Diyakcay.

The company does not invest in ore extraction and exploration works only. It invests in modern technology and mining equipment. Not so long ago, it put into operation a new flotation facility for ore processing and production of copper and precious metals. This year, this equipment is planned to be used to extract 5,000 ounces of gold and 1,200 t of copper. The company believes that this technology line will be a very important segment of a full-fledged copper plant, which is planned to be built in the near future.

Copper

In parallel with extraction of precious metals, Azerbaijan is also mastering the production of copper for which there is demand in world markets. In May 2014, AAM and the Swiss group Industrial Minerals SA signed an agreement for three years on sale of copper concentrate from the Gadabay deposit. AAM recently obtained from this deposit the first batch of copper concentrate weighing 125 t, half of which has already been sold to the buyer. It is expected that in the next few days the plant will start producing 150 t of concentrate a week, and in the longer term these volumes may increase several times over.

Alongside the industrial development of fields already known, new deposits of precious metals are being actively explored in this country. Not so long ago, new deposits of gold were discovered, particularly in Goygol District: the reserves in the explored gold field Tullalar are estimated at 80 t of gold and 290 t of silver. Yet another gold mine - Qosqar Dagi-Canaqci - has been found in Daskasan District, with 20 t of gold in potential reserves. A platinum deposit has been explored in neighbouring Samkir District: its recoverable reserves are estimated to be 50 t of platinum-group precious metals.

Developing the gold deposit Covdar in Daskasan District, where preparatory work is nearing completion, seems very promising. The consortium Azerbaijan International Mineral Resources Operating Com-pany was established in December 2006 to develop the field.

Overall, according to data from the Ecology and Natural Resources Ministry, with the commissioning of most explored deposits, this country will be able to produce more than 10 t of gold annually.