LONDON () -- Geology has been kind to Kazakhstan. Although just 15 million people live there it is the 9th largest country in the world by area and is endowed with an abundance of most of the elements on the periodic table! There are reserves of at least 85 elements according to the Kazakh embassy, and it is among the world's top ten producers for uranium, chromium, zinc, manganese, bismuth, fluorine and copper.
History, arguably, has not always been so kind. From 1949 until 1989 the USSR used an area of steppe in North East Kazakhstan known as the Polygon or the Semipalatinsk Test Site, as their primary testing site for nuclear weapons; some 460 tests were conducted.
The testing site was closed in 1991, and in the mid-nineties, following tests by the International Atomic Energy Agency, Hans Blick declared that it had only normal levels of radiation. However among the many consequences of the weapons testing era are several of note for the mining sector.
Firstly there is an extensive roads system criss-crossing the region even though the area is remote and the population is low.
Secondly, although the area is mineral-rich (described by SRK Consulting as 'a remarkable concentration of precious and base metal prospects') it was not explored during the Soviet era so there has been little modern exploration and there are not the extensive databases of geological data that exist in other parts of the Former Soviet Union (FSU).
Thirdly the government of Kazakhstan, who were concerned about the environmental legacy of the testing, struck a deal in the mid-nineties with Idaho-based Earth Search Sciences Inc [OTCBB:ESSE]. Under the deal ESSI would use their revolutionary technology - airborne hyperspectral imagery, (effectively a digital camera on a low-flying place which can be used to map the different materials on the earth's surface based on their spectral characteristics) - to overfly the Polygon to assess environmental damage in return for a share of the mineral rights in the 120,000 square mile area.
Frontier Mining Limited
In the event Earth Sciences decided that the time was not right to pursue the mineral discoveries. The gold price was low and in the aftermath of the Bre-X scandal it was difficult to raise capital for exploration. The Kazakh partners however, keen to continue with the exploration, approached individuals within Earth Sciences and Frontier Mining Limited [AIM:FML] was incorporated in Delaware in the U.S. in 1998 to explore and develop gold and copper deposits in Kazakhstan. The company stayed in private hands for a number of years while the gold price was low, but in 2004 it listed on AIM and has since raised lb14 million on the market in three offerings.
It now has 100% ownership of four projects in the Polygon area and an exploration licence comprising:
- Naimanjal: a producing gold and silver mine, with lead and zinc at depth which has been producing gold and silver since September 2005 and is targeted to produce 25,000 ounces of gold this year tripling to 75,000 ounces in 2008. It has a measured and indicated resource to JORC standards of 150,000 ounces of gold and 3.4 million ounces of silver. There are at least six other known deposits in the complex and the management team believe that these contain the potential for 2 million ounces of gold.
- Koskuduk: a pre-feasibility near-surface gold deposit with a resource of 250,000 ounces of gold measured to Russian C1 and C2 standards, and the potential for 1 million ounces. The initial production rate could be 25,000 ounces per year.
- The Baitimir pre-feasibility copper porphyry deposit: with associated gold and molybdenum mineralization. Preliminary resource estimates suggest an inferred resource (to C2/P1 standards) of 840,000 tonnes of copper at 0.4%.
- Three further copper/gold deposits and numerous prospects along a 25-kilometre trend (Beschoku, Kotansor, Yubileiny): originally mined in the days of Imperial Russia in the late nineteenth century, have high recovery rates and are amenable to low-cost SX-EW extraction technology.
- The Baltemir exporation stage gold prospect: gold occurs in a 1-kilometre wide quartz veins extending 7 kilometres along strike.
Details of the projects are tabulated below.
The company had $6.1 million cash in June 2006. It has been cash flow positive since August 2006 and is now debt-free. Its immediate priorities are to get Naimanjul running at a steady state production and to make production decisions on Koskuduk and Beschoku.
Investment Case
So why invest in Frontier Mining? In addition to the bullish outlook for the commodity markets here are seven possible reasons.
- The geology of the projects is favourable: The projects have oxides near the surface which can be exploited quickly and relatively cheaply to generate cash which can then be used to fund deeper exploration work for the sulphides. Management believe that the potential of the project areas is huge, potentially with more than 3 million ounces of gold and 1 million tonnes of copper.
- Kazakhstan has a stable government which is supportive of foreign investment and mining: Since declaring its independence from Soviet rule in 1991 Kazakhstan has had just one president who was elected in 1991, 1999 and again in 2005. It has enjoyed strong economic growth, averaging 9% per annum over the last 5 years, it was the first republic in the Former Soviet Union to repay its debt to the IMF doing so 7 years ahead of schedule, it enjoys price stability and a favourable investment climate and has attracted the highest levels of foreign direct investment in Central Asia. A article with the self-explanatory title, "" provides a good summary.
- The Management team has considerable experience of mining and of operating in Kazakhstan: The CEO and CFO each have 10 years experience of working in the country. Almost all other staff are Kazakhstanis.
- Frontier owns four projects across several commodities: where most other mining companies in Kazakhstan are just single projects or single commodities.
- There are unlikely to be any major environmental issues primarily because the company operates to international best practices and is not looking to cut corners but also because the region is remote and the population low.
- Frontier uses standard mining equipment and has enough of it. While not immune to the equipment shortages felt elsewhere in the mining sector Frontier source local equipment wherever possible. The trucks come from Belarus and have spare tyres!
- The company has been cash flow positive since August 2006.
Risks
On the downside Frontier is subject to the same risks faced by all mining companies. And as with any junior it has faced some teething problems in moving from the exploration stage to production - there has been some slippage of production below target at Naimanjal. However according to CEO Brian Savage the company identified the issues, dealt with them quickly, and 90% of the troubles are now behind them.
Operating in Kazakhstan is not an unequivocal plus either as far as investor sentiment is concerned. In the eyes of the public the recent Box-office comedy Borat may not have enhanced the image of Kazakhstan; although, as discussed in the Economist article "A New sort of Beauty Contest" it certainly has raised general awareness of the country. Of more impact perhaps in the business community has been the "Stan" effect with some investors failing to distinguish between the seven Stans and deterred from investing because, for example, of the recent troubles experienced by Oxus Gold [AIM:OXS] in Uzbekistan.
Valuation
About 60%-70% of Frontier's shares are owned by U.K. institutions. Encouragingly three of these have fund managers who were rated as number one in their sector and the top six shareholders are holding the maximum that they are allowed to hold in their portfolio. Only a small proportion of the original investors have sold their stock which perhaps demonstrates faith in the long term potential of the company but has had an adverse effect on liquidity and price. At present Frontier Mining is trading at 16 pence, just 1 pence above its September 2004 IPO price of 15 pence, though it peaked at 42 pence in March 2005.
Evolution Securities valued the shares in September 2006 at 65 pence per share on the basis of its gold assets alone assigning a value of 20 pence alone to the current Naimanjal mine plus cash, 16 pence for Koskuduk, 18 pence for the Naimanjal satellites, 9 pence for Beschoku and 3 pence for Baltemir. The copper prospects could add a further 30 pence.
The market valuation is currently lb20.6 million ($40 million) which Brian Savage describes as woefully undervalued given the bullish outlook for metals, Frontier Mining's proven experience of Kazakhstan and in moving from explorer to producer, its cash flow and its very significant upside potential.
Keep watching for news flow which will be the main driver of the share price in the short to medium term.
