Liberum & VSM Buy notes on AVM – pretty much what we have been saying…

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Avocet Mining

Light at the end of the tunnel


2012 Full year results

Event: Avocet has announced full year 2012 numbers which are in line with Liberum numbers (revised down February). Gold production of 135k ozs (2011:167k ozs) generated EBITDA of $48.3m and PBT $18.3m off cash costs of US $1000/oz (2011: US $693/oz). Crucially cash costs now higher than the average $950/oz hedge on 25-33% of production. The company highlights an increase in total company resource to 8.7 million oz. Resource growth at Tri-K and Souma are complimented by positive metallurgical testwork results at Souma and Inata. The Tri-K project feasibility study underway with Mineral Resource expanded to 3.22 million oz.

Importantly, the business has announced that the ‘constructive nature’ of discussions with Macquarie and other financiers gives them confidence the business remains a going concern. The company confirmed it is looking at a financing which could involved equity and/or debt, so we stick with our view that it would be c.$30m equity and the rest in debt.

Liberum view: Avocets issues are well publicised and understood by the market. The operational progress at Inata and Souma are positives but will continue to be outweighed by the discussions on the releasing the business from the hedge. The going concern assessment should be read as a positive and give confidence that the turn around is achievable.

Recommendation: The company is trading on a trailing 2012 EV/EBITDA of 0.6x and profitable on an underlying basis. We estimate that at current spot prices, the total cost of hedge liability is $112m (vs. cash of $55m at Y/E). However, to release the pressure, Avocet would only need to buy 50k ozs (total hedge 181k ozs) for US$32m. We feel the market will now start to accept that the company has good prospects of raising this sum with both debt and equity. Assuming $20m of the hedge is replaced with unhedged debt, the business will trade on 0.5X NPV assuming a smaller equity raise. BUY#

VSA Morning Miner, 07/03/13

This Morning’s News

Avocet Mining (AVM LN)

Avocet released full year results with 2012 production of 135Koz down from 167Koz as the Inata mine falls towards its long term target of 100Koz per annum – probably for 10 years +.  This fits with a reduction in Inata’s Reserves, also confirmed this morning, from 1.85Moz to 0.92Moz. A very disappointing reassessment of the orebody which has completely transformed the company from expansion to contraction.
At the year end the Group had cUS$50m net cash down from US$105m at the start. In fact operations generated cashflows of US$53m but after US$13m dividend, US$32m in exploration, US$35m in plant investments and US$24m in debt repayments, the cash position was halved. Since two of these numbers are largely discretionary, it is annoying to say the least for shareholders that Avocet is now looking for funding to reduce its hedge book.
On that subject this morning’s statement maintains that it is looking at its own funds, debt and equity (the latter seems very strange) to help with the hedge refinancing. It is also intent on developing Tri-K which could be very expensive. Both of these things are a significant drag on the share price.
Avocet owns assets with much more value than the market cap. Despite the hedge book, at US$1500/oz gold or lower,  it can survive and generate positive cashflow. It needs to cut back on discretionary spending, strengthen the balance sheet and it should then re-rate.

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