Below is an excerpt from a piece by Shares Magazine’s contributor Dan Coatsworth that is a stark illustration as to why it is not just “anal”ysts who should be struck out of the industry given the collective value destruction they create (see post below on the Vampire Squid – Goldman Stinks).
Here’s what he actually printed on Avocet –
“A quarter of the miner’s production is loss-making, representing the 33,000 ounces it must sell at $950 per ounce under the hedge agreement each year. This is nearly half the price it would get selling into the spot market where the latest price is $1,648 per ounce.
It has 173,250 ounces left to deliver under the hedge agreement. At the $950 selling price, this equates to a $164.6 million liability. This is considerably larger than Avocet’s $93 million (£60 million) market cap.”
Anyone reading that and acting on it through fear, has reason to be aggrieved with Mr Coatsworth as the actual liability is not simply calculated through timesing 173,350 by $950 as it appears he as done, this is in fact madness to make such an elementary mistake, but in fact it should be calculated one of 2 ways –
1. Either through the difference between the hedged selling price ($950/oz) and the cash cost of production (around $1100/oz) – in effect this is the loss to the company whilst the hedge is run down over the life of the hedge and equates to a manageable $26m or
2. As appears to the case in Avocet’s case through buying back the hedge at market prices which around $1650/oz results in a loss of circa $700/oz and so a loss of $121m. However, the true loss over the life of the mine is not in fact of this magnitude as of course Avocet will be selling production at the new spot rate and therefore the loss reverts back (assuming spot remains around $1650) to the $26m.
We believe the market has monumentally over reacted to Avocet and at the current price of 26p it represents the best buy in the global gold mining (producing v exploration) sector. There’s a difference between short term difficulties and long term problems and we think Elliot Advisers – the hedge fund carrying almost 30% of these, will now push for a rival to take them out.
Adjusted book value accounting for the true hedge book loss and reduced Inata reserves at the current price is around 0.35 times – this is a total steal in our opinion and we are buying very heavily. Unlike most other publications, we put our money where our mouth is and certainly ensure we do our homework as our calls in Bumi, Lonmin, ENRC, London Capital Group etc in recent months pay testimony to!
We will flesh out our investment case in the next edition of our magazine due out in just under 12 days and if you’d like a copy then ensure to register on the right.
As I write, a saying from Tom Houggard who is being interviewed in the next edition of our magazine springs out at me – “There is never anything obvious in the markets. Traders get rewarded for the uncertainty they take on. When it is obvious, it is time to get out”. The uncertainty around AVM, compounded by misreporting is our opportunity.