Avocet Mining continues calamitous fall after production issues

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After the trials and tribulations of Egyptian gold miner – Centamin Egypt over the last few months, it is the turn of fellow small cap gold player, Avocet Mining, to fall back to earth on production issues.

Avocet is a focused West African gold mining and exploration company with its primary operations in Burkina Faso and Guinea. The company is listed on the London Stock Exchange and the Oslo Børs.

Avocet currently operates one gold mine, Inata, in northern Burkina Faso, and has a pipeline of exploration projects in Burkina Faso and also Guinea. The deposit at Inata presently comprises a Mineral Resource of 3.46 million ounces and a Mineral Reserve of 1.85 million ounces. Inata poured its first gold in December 2009 and produced approximately 167,000 ounces of gold in 2011.

Avocet Mining fell over 30% on Friday after it announced gold production for 2012 was to be cut from 160,000 ounces to between 135,000 and 140,000 ounces as a result of excavator problems, ore processing issues and lower grades than expected. They also lowered production guidance for 2013 to around 150,000 ounces.

2012 cash cost guidance was increased from $800-850 an ounce to over $1000 an ounce. For 2013, lower production and higher equipment rental mean that cash costs per ounce for 2013 are now forecast to be $900 – $950.

The shares fell to 71p today, another 7% fall on broker downgrades. Nomura said: “Due to the collapse in margins and the increasing impact of hedged ounces, our earnings per share (EPS) forecasts fall by 64% to 6.6 cents.” Next year’s EPS forecast is cut by 16% to 15.7 cents. 

The 52 week high is 286p and the shares are now down 53% in the last week. The market capitalisation is £143 million at 71p. The earnings estimate of 9.8p for 2013, put’s the company on a forward p/e of around 7, in line with other small cap gold miners like Centamin.

Rising costs seem to be common feature of metal miners at the moment. For example, Aquarius Platinum was hit hard in recent weeks by a plunge in global platinum prices and rising costs in its South Africa mines as stronger unions demanded wage increases and equipment costs for mining machinery continue to increase ahead of commodity prices. 

With the gold price pretty much stuck in a range at $1550-1650 at the moment, miners can’t afford for their cost price per ounce to rise 15-20%. An expensive lesson for Avocet shareholders! 

Contrarian InvestorUK

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