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Arabian American Development Company Reports Operating Results (10-K/A)

February 22, 2011 | About:

Arabian American Development Company (ARSD) filed Amended Annual Report for the period ended 2009-12-31.

Arabian American Development Company has a market cap of $114.21 million; its shares were traded at around $4.87 with a P/E ratio of 81.17 and P/S ratio of 0.97.

Highlight of Business Operations:

The Saudi government granted the Company a mining lease for the Al Masane area on May 22, 1993 (the “Lease”). The Lease was assigned to AMAK in December 2008. As holder of the Lease, the Company was, until December 2008, solely responsible to the Saudi Arabian government for rental payments and other obligations required by the Lease, as well as, repayment of an $11 million loan. According to the terms of the Lease, the Company would remain responsible for repaying the $11 million note to the Saudi Arabian government. However, as a condition of approval for transferring the Lease to AMAK in late 2008, the Ministry required the $11 million note to be transferred to the books of AMAK. The initial term of the Lease is thirty years beginning May 22, 1993, with AMAK having the option to renew or extend the term of the Lease for additional periods not to exceed twenty years. Under the Lease, AMAK is obligated to pay advance surface rental in the amount of 10,000 Saudi riyals (approximately $2,667 at the current exchange rate) per square kilometer per year approximately $117,300 annually) during the term of the Lease. The Company paid $117,300 in February 2007 and $117,300 in February 2008 which covered the rent in full through the end of 2008. AMAK paid the Lease fee in January 2009. In addition, AMAK must pay income tax in accordance with the laws of Saudi Arabia and pay all infrastructure costs. The Lease gives the Saudi Arabian government priority to purchase any gold production from the project, as well as, the right to purchase up to 10% of the annual production of other minerals on the same terms and conditions then available to other similar buyers and at current prices then prevailing in the free market. Furthermore, the Lease contains provisions requiring that preferences be given to Saudi Arabian suppliers and contractors, that AMAK employ Saudi Arabian citizens and provide training to Saudi Arabian personnel.

NESMA signed a back-to-back contract with CGM for the entire EPC contract. There is a possibility that CGM will sign a further contract with AMAK for the mine development and the operation of the entire facility. There is also the possibility that AMAK will contract the underground portion of the work to a separate contractor. The contract signed between AMAK and NESMA was for the sum of $110,828,000 and the surface plant subcontract awarded to CGM by NESMA is valued at $96,000,000.

In the 1994 feasibility study, WGM stated that there is potential to find more reserves within the Lease area, as the ore zones are all open at depth. Further diamond drilling is required to quantify the additional mineralization associated with these zones. A significant feature of the Al Masane ore zones is that they tend to have a much greater vertical plunge than strike length; relatively small surface exposures such as the Moyeath zone may be developed into sizeable ore tonnages by thorough and systematic exploration. Similarly, systematic prospecting of the small surface indicators of mineralization in the area could yield significant tonnages of new ore. Updates to the feasibility study were completed in 1996, 2005 and July 2009. The 2009 update indicates the current capital cost to be approximately $166.4 million. The updated operating costs are estimated to be approximately $63.24 per ton of ore milled.

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Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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