GOLDEN MOUNTAINS OF AZERBAIJAN

Despite a decline in gold prices in recent months, this most important reserve asset remains in demand. According to analysts, military-political instability in some regions of the world, a new round of “trade wars”, the credit boom decline in China, and gradual decrease of demand for the U.S. and EU government bonds can improve the situation in the gold market in the nearest half-year and make investors interested in this precious metal as a safe asset. In the long term, this thesis is supported by the depletion of deposits and a tangible reduction in gold production in the world. In this context, efforts of AzerGold CJSC and other companies operating in Azerbaijan to increase production and develop new deposits of precious metals are very promising.

Profitable trend

Weak demand for commodities and the subsequent changes in the global economy since the beginning of the energy crisis had a negative impact on the exchange rate of precious metals, particularly gold. Thus, if at the beginning of the pre-crisis period in 2013 the price of a troy ounce (31.1 g) was $1,676, it is currently sold for $1,242. In April-June 2018, another round of gold price decline was observed, which, according to some analysts, is due to negative statistics on China's GDP - decrease of economic activity in this country is directly proportional to demand for raw materials. The growth of American dollar’s rate, the sale of gold reserves by a number of central banks, and the weak demand for gold primarily in India, which is the world's largest consumer of jewellery, played an instrumental role in the decline of gold sales.

Nevertheless, experts believe that some factors are forming, which in the near future will influence the growth of interest in gold.

Thus, the analysts of Scotiabank believe that the end of the strengthening dollar and the ongoing trade wars can force investors to sell the U.S. government bonds. In this case, gold will regain its status of a reliable asset during the existing period of economic instability.

Famous investor and analyst Michael Pento thinks that the reduction in sales of the ECB government bonds from 30 to 15 billion Euros per month, as well as the aggravation of trade wars between the U.S., China and a number of other countries, the slowdown of the credit boom in China, and a record level of corporate debt in the U.S. (45% of GDP) will trigger the next financial crisis by the end of this year, and as a result, the gold market may become the main beneficiary in this situation. “Today is a real time to increase investments in gold, increasing its share in the investment portfolio of companies and banks to 5-10%. I do not think there is a big danger of further falling gold prices,” Michael Pento believes.

However, the most important and long-term trend, which guarantees a steady growth of demand for gold, is associated with a reduction in the world's reserves of this valuable metal. In particular, in recent years, gold mining companies can no longer discover new deposits with a high content of precious metals in order to compensate for the aging deposits. According to estimates of the extracting company Franco-Nevada, in the past 15 years only a few large deposits with a content of 15 million ounces of gold were discovered, compared to the 1970s and 1990s, when it was a common practice to discover deposits containing 50 million ounces of gold.

This means that in the future the supply of gold will decrease in the world market, accordingly the cost of this precious metal will inevitably grow. In these circumstances, investor interest to the development of numerous small and medium-sized gold deposits in the countries of South-Eastern and Central Asia, Turkey and, of course, in Azerbaijan is growing noticeably.

Gold, silver, copper

In Azerbaijan, which started large-scale industrial gold mining about nine years ago, the geological exploration activities are carried out systematically, new deposits of non-ferrous and precious metals are discovered. The country's prospects look very promising in this regard. Hence, the aggregate potential of all deposits in Azerbaijan is estimated at about 1,500-2,000 tons of pure gold.

A first twenty-five-year contract for the exploration and development of six gold deposits of Azerbaijan was signed between the government and an American company R.V. Investment Services Group LLC back in 1997. The share of Azerbaijan in the contract is 51%, Anglo Asian Mining PLC - 49%.

According to the contract, it is planned to produce a total of 400 tons of gold from these six fields.

However, extremely low prices for precious metals at the end of the past and the first years of the new century delayed the development of gold deposits. Large-scale industrial mining of precious metals and copper started only in mid-2009 at the Gadabey field when the world prices started to grow. Extraction of precious metals under the Production Sharing Agreement (PSA) has been carried out at the gold and copper deposit Gosha in Tovuz since the third quarter of 2013.

Over the years, the operator of the project, Anglo-Asian Mining PLC (AAM), has made notable progress in the development of gold deposits of Gadabey and Gosha. In summer 2015, the company also commissioned the gold mine Gadir, and started the development of the Ughur field in September 2017. After enrichment at the local plant, the concentrate is sent to Switzerland for refining. Some of the ingots sold in the world market under the Ayrim brand name are deposited in the reserve fund of the Central Bank of Azerbaijan in accordance with the PSA.

In addition to mining of precious metals, Anglo-Asian Mining PLC produces copper. In May 2014, AAM and the Swiss group Industrial Minerals SA signed a three-year agreement to sell copper concentrate extracted from the Gedabey field and processed at the company's flotation plant. In March 2016, a second contract was signed, which will be in effect until the end of 2018. Last year, AAM produced 9,330 tons of copper concentrate, and 587 tons during the first half of this year.

The volume of gold mining amounted to 33,300 ounces of gold, which is a 43%-increase compared to the same period of 2017. The extraction of silver amounted to 84.8 thousand ounces (decreased by 0.36%). Of these, 7.1 thousand ounces contained in the Doré bars. “The significant growth in production figures can be explained by the optimization of works and expansion initiatives that we implemented during 2017 and, most importantly, the beginning of production at the Ughur field,” said Reza Waziri, CEO of Anglo-Asian Mining PLC.

In order to maintain high rates of extraction of precious metals, AAM plans to spend about $6m in 2018 on a new geological exploration and evaluation program in Azerbaijan. Under this three-year program, it is planned to conduct geological exploration works at abandoned and new sites to access new volumes of gold, to extend the minimum service life of operating mines to ten years, to increase inventory of company's resources and to open new mineral deposits. In particular, the program provides for the implementation of works on surface and underground drilling on an area of ​​43.5 thousand square meters. These works will cover three large deposits: the contract zone Gadabey in the west of Azerbaijan (mines of Gadabey, Ughur, and underground mine Gadir), the contract zone Gosha located 50 km from Gadabey, and also the contract zone Ordubad in Nakhchivan. In addition to the extensive drilling program, aerial photography will be conducted to study the potential of the Gosha and Ordubad fields.

In general, in 2018, AAM plans to produce up to 84,000 ounces of gold.

New goals of AzerGold

In June 2007, the parliament of Azerbaijan ratified one more agreement on the development of precious metal deposits: a 30-year PSA for the development of the Garadagh, Chovdar, Heydagh, Daghkesemen, Kohnemadan fields, and the fields of the Kurekchai basin. To develop this group of gold deposits, in February 2015, the state-owned AzerGold CJSC was established in Azerbaijan. Since 2016, the company started preparatory work at the Chovdar field. According to preliminary estimates, the industrial reserves of the Chovdar gold deposit in Dashkesan were estimated at 44.61 tons of gold.

According to the CEO of AzerGold CJSC Zakir Ibrahimov, due to the measures taken at Chovdar, repair and construction works for various purposes were completed in the shortest period, the mine's activity was restored and optimized, production switched to a round-the-clock regime. In April 2017, AzerGold signed an agreement with the Swiss company Argor-Heraeus starting the export of gold and silver from the field.

“In April-December 2017, due to the development of the field, our company exported 60.3 thousand ounces of gold and 86.4 thousand ounces of silver to the international markets, which brought us ₼131.5m. In the first half of 2018, exports amounted to 20.7 thousand ounces of gold, 28.2 thousand ounces of silver and income amounted to ₼47.9m. AzerGold's revenues reached ₼178m for the entire period of field development,” Z. Ibrahimov noted adding that the high figures allowed the company to increase the capitalization of the project independently and to pay off bank debts at an accelerated pace.

As a result of the sale of an additional 129,000 ounces of gold and 202,000 ounces of silver, which will be produced during the operation of the surface ore layer at the Chovdar deposit (the first stage will be completed by 2021), the country's economy will earn about ₼300m in revenues. In order to increase the productivity of the field in the subsequent period, active exploration and exploration work is carried out in the near and far areas of the site.

It is noteworthy that AzerGold, along with the sale of valuables on international markets, also makes efforts to sell Azerbaijani gold and silver in the domestic market and reduce the country's dependence on exports. “Starting from this year, the State Oil Fund of Azerbaijan (SOFAZ) will purchase the gold produced by AzerGold, hence contributing to form the reserve fund of Azerbaijan from Azerbaijani gold,” Z. Ibrahimov noted.

In parallel with the development of deposits, AzerGold continues the exploration of new deposits of precious and non-ferrous metals in Azerbaijan. “As a result of these works, the prospective gold ore section Aghyokhush was discovered on the territory of the Goygol region: the results of geophysical works were positive and by the end of 2018 we are planning to conduct drilling and counting of the reserves,” Z. Ibrahimov said. The specialists of the company also developed a primary plan of activities for the promising gold deposit Tulallar to confirm available reserves and conduct research. Along with this, drilling works are carried out to confirm the reserves of the Mazymchai deposit in the Balaken area. According to Z. Ibrahimov, some success was achieved during complex geophysical studies at the Ortakend site in Nakhchivan, where the first positive manifestations were recorded for copper, gold and other non-ferrous metals, and drilling and reserves were started.

To speed up exploration work and start development of deposits of precious metals in Azerbaijan, AzerGold CJSC considers various sources of financing, including the possibility of attracting foreign investors. In particular, such negotiations are being held with the Australian company Caravel Minerals, which shows interest in the fields in the Balaken region of Azerbaijan, in particular the polymetallic deposit Filizchai, the second in Europe and the tenth in the world for copper, zinc, silver, gold, and lead.

According to Z. Ibrahimov, during at least twelve-year development of the Filizchai field, we can expect earning about ₼3b for the country and opening more than 2,000 jobs.

Apparently, Filizchai is not the only promising deposit of non-ferrous and precious metals in the country. In recent years, new gold deposits have been discovered in Azerbaijan, located in the north-west of the country on the spurs of the mountain ranges of the Greater and Lesser Caucasus. According to the estimates of the Ministry of Ecology and Natural Resources, with the commissioning of the entire potential of the explored deposits, Azerbaijan can produce about 10 tons of gold per year. “In general, the total value of metals in Azerbaijan, according to preliminary estimates, exceeds ₼150b,” Z. Ibrahimov said.

It is known that gold does not fade, so the more it is found in Azerbaijan, the better for the economy.