Regular readers will know that we were somewhat scathing of our competitors round at Shares Magazine following their misleading calculations over the hedge book liability in a piece they published last week (see here – http://www.spreadbetmagazine.com/blog/avocet-mining-shocking-financial-journalism-by-shares-magazi.html) and that we note has been corrected now.
We are covering AVM extensively in the next edition of our magazine, out at the end of next week in which we reason for the Buy case. Here’s a snippet –
It looks like they are going to bite the bullet on the hedge, and with a hedged price of $950 and a current gold price of $1600 (ironically the falling gold price actually helps them out here as it reduces the buy-back cost of the hedge) then on 173,250 oz’s, the cost of the entire buy back is around $112m. Of course they currently have circa $60m in cash and so if they bought back pro rata the reduction in reserves on the hedge (50% of this – approx $56m) then the net cost would be covered entirely by the cash. This would however leave a relatively flimsy balance sheet and hence the speculation that a capital raising is imminent. The difference to the P&L profile going forward would be somewhat enhanced though as they would be able to sell their gold production at the prevailing market price. In effect, Avocet, should they buy back the hedge in part or whole, would be making a call that the gold price is actually going to go higher.
Let’s look at the company another way, weighing up the Avocet’s asset base adjusted for both the hedge book loss and the Inata reserves reduction. The balance sheet lists the mines value at $270m, let’s be ultra conservative and cut this by one third. We also, in this exercise, write the intangibles down to zero and which is in the books at $50m. We are therefore reducing book value by $140m and which pre the write down is listed at $390M.
This results in an adjusted book value of $250m. Deduct again the hedge liability of $112m, and we get to $138m or around £90m at present FX rates – twice the current market cap.
However I slice and dice the numbers, it seems that for existing shareholders, if a rights issue is called for, and likely to be a 1 for 1 with a partial hedge buy back, then you should certainly take up your right. I see a similar situation to the Lonmin situation in which the shares shot up after the balance sheet was repaired. The company’s profitability profile going forward will be dramatically enhanced and the discount to book value should narrow (its peer group trades around 0.8 times book on average).
Of course there is the probability of a bid and a price of 40-45p would still be an utter steal in many analysts eyes.
We are highlighting this today as we have an uncanny habit of writing about a stock only for it to rise in the days ahead of the publication. The price action yesterday and today smells of a drying up of the indiscriminate selling pressure, largely by Blackrock. The key level to close above is 23.75p and we may have a run back towards the open low at 30p on the morning of the shock announcement last week. If we can get through 24p on decent volume then there may be something in the bid talk as, at this level – less than one half of tangible, hedge adjusted book value there is latent value however you splice and dice it.
The declining gold price in the short term alleviates the cost of the hedge buy back and so is ironically a good thing for AVM.
The only tempering issue is the Vampire Squid, Goldman Sucks moving from Sell to Neutral! I like it when they are sellers as it usually means Buy!!