Avocet Mining Share Discussion Threads

[pecker1] 19/1/2006 10:30

HOT,

re your post 1829 about "nothing more than gamblers" - LOL!

Any company that takes such a derivative position 3 years out on a very substantial part of its current production as the gold bull market unfolds is taking a punt on the price of gold.

Equally, a company that avoids derivatives is taking a punt that they will be better off accepting whatever the market price will be years out from now rather than trying to guess it and setting limits on both the upside and downside.

Both types of company will be doing their best on the productivity front.

One offers full exposure to the upside and to the downside, the other does not. Thankfully, both kinds of companies exist allowing the investor to make their choice.

As to AVM, the decision provides positive cashflow benefits by exposing more of their output to the spot price than if the hedge had continued to be run down at 4K oz pm. In the next year or so, this will be all about the benefits of the decision. What AVM chooses to do now will be key - my preference as I've said before is to speed up production. Because the hedge will be gone quicker it might also offer the prospect of earlier dividends. The disadvantages of the decision will only become apparent if and when gold challenges $700 within the next 3 years.

[phillis] 19/1/2006 09:31

Investing in DYN will allow them to show what?
A balance sheet investment or perhaps an associate. So what?

What are they going to do to produce more than 200k oz a year on their own account?

Production increases are needed quickly

[saucepan] 19/1/2006 07:49

"* Positioned for further growth through mergers and acquisitions" was a key bullet point in the company's December 2004 slideshow (i.e. more than 12 months ago).

To me, this clearly signalled intent at that time. We saw a little of such activity in 2005 (e.g. reference Dynasty in Western China). But I think there are very good odds of much more to come in 2006. I, too, would not be surprised if something has been progressed in the background already and yesterday's announcement was, in part, appropriate pre-positioning.

[brad1] 18/1/2006 23:30

Well I've mulled this one over and the only conclusion I keep on coming to is for AVM to make a relatively quick move into a new prospect. Maybe they have done some calculations, but cant be published till complete, for the news we were waiting for as suggested in interims and rapid expansion now proposed. Only speculation of course. What would this have rose today if the market wasn't subdued? Looking forward to movements over next 2/3 weeks as may suggest the short-medium term trading range.

[kojak78] 18/1/2006 21:26

500 and 800 is impossible.

gold price 550
450 = 81.8% of 550
reverse of 81.8% is 122.2% (81.8%*122.2%=100%)
122.2% * 550 = 672 = reverse of 450 at gold price 550.

Perhaps they made the deal at higher gold price and therefore the upper side is 700.

I think the deal will look very clever in the next 30 to 60 days. But what in 2007? What with gold prices above 700?

Then again the 20,000 oz hedges at 305 or so would have been delivered into from mid-July to mid December, who knows where gold prices will be then. I guess *average* 600. Which means we have saved 6 mio so far and a few months above 700 won't matter as long as losses remain below 6 mio.

And we have these 6 mio this year. 6 mio can make a big difference, opportunity costs! They could be worth 12 mio for 2007 which would mean at average gold price of 800 we can stay 6 months above 700 without a loss to Avocet. Or the whole year 2007 at average gold price 750 and still no loss because of the deal.

[holdontight] 18/1/2006 19:56

In the days to come, this move by Catchpole will be seen more and more positively. The next couple of years are going to be extremely volatile for gold, imo, and he has demonstrated an ability to be responsible and to develop a sustainable but nonetheless ambitious company. I always ask myself what I would have done, and whilst I would have preferred 500 and 800 (!), this remains a very astute move. Those gold bulls who say that such action is wrong are nothing more than gamblers.....NOONE can foresee the future! What we now have is greater control of the bottom line, via reduced risk exposure, allowing greater focus on what really can be influenced, which is productivity!!

[holdontight] 18/1/2006 16:37

That would take the P/E at today's level to ca 8.......certainly not over valued is it! P/E should be 30, imo (based on exploration potential and increasing production, which I expect to be nearer to 300000 in 06/07 than 200000), which would give a share price of £4.85 ish.

[reefseeker] 18/1/2006 16:16

HoT; thanks for the analysis in #1826 although you really should carve out 30% for the tax charge.

Apologies for being a pedant, the maths is compelling anyway!

[holdontight] 18/1/2006 16:01

Year: 2006/2007 gold price ave US$550/oz; costs at $270
14000@313 (remaining old hedge) less costs = $602000
206000@550 (new put options) less costs = $57.58 million
Total: $58.182 million
Less $15 million o/heads = $43.182 million
1.77 US$ to £
= £24.397 million profit / 105 mill shares
EPS: 23.235p
P/E: 10 = share price £2.32
P/E: 15 = share price £3.49
P/E: 20 = share price £4.64
P/E: 25 = share price £5.81
P/E: 30 = share price £6.96

Positive news on either increased prod and / or reserves/resources, will see P/E to higher end of scale.

£5 is there entirely achievable, THIS YEAR!

IMHO, DYOR etc

[kojak78] 18/1/2006 14:53

13 Jul 05 Preliminary Results FY2005

Avocet seems to number the FY after the end year not the starting year of the period.

March 2005: end of FY2005
March 2006: end of FY2006
March 2007: end of FY2007

I hope I got it right.

[chipperfrd] 18/1/2006 14:30

Bit subjective I know, but, FY06 is April 06 to March 07, at least it is to me.

[kojak78] 18/1/2006 14:24

financial 2007 goes from April 2006 to end March 2007..

[holdontight] 18/1/2006 14:02

Kojak.....the old hedge will be eliminated by this July, yet you have assumedit is still there in your 07 figs

[saucepan] 18/1/2006 13:21

Thanks for the analysis, Kojak; great job.

[zaky] 18/1/2006 13:02

only when it was at 20p :-)

[chambeaj] 18/1/2006 12:57

I thought biswell said AVM was going back down to 45p

[kojak78] 18/1/2006 12:54

General assumptions:
US$15 mio overhead + capex + exploration
30% tax rate
105 mio shares outstanding
US$1.77/GBP
no new mines coming onstream next 3 years(Bakan, Taror, Chore)
share price 140p (for p/e ratio)

worst possible year: 2007 gold price crash to US$330/oz
14000@313 (remaining old hedge)
120000@450 (new put options)
86000@330 (balance at spot)
220000@394.40 (total production at average price received)
270 cash costs (slightly lower due to dump leaching startup, still waste stripping for Jilau)
((394.4-270)*0.22mio-15 mio) * 0.7 / 1.77 / 105 mio = 4.66p/share = p/e 30

best year: 2009? gold price 900
penjom 120 + zgc 85 + lanut 80 = 285000 total production
cash costs 200(stockpiles) + 350 + 150 = 232 average cash costs
120000@700 (new calls sold)
165000@900 (spot)
285000@815.80 (total production at average price received)
((815.8-232)*0.285mio-15 mio) * 0.7 / 1.77 / 105 mio = 57.02p/share = p/e 2.46

average year: 2008? gold price 550
253000 total production (average between 220000 and 285000
251 cash costs
gold price reseived = spot = 550
((550-251)*0.253mio-15 mio) * 0.7 / 1.77 / 105 mio = 22.84p/share = p/e 6.13

The worst case scenario will hit Avocet still very hard because of the huge capex and exploration costs. But p/e 30 at 330 gold price is still very nice if you remember that p/e 30 is the norm now at 550 gold prices.

And I don't see why AVM should not trade at p/e 10 at gold price 900. that would be ca. 560p. The average price paid per reserve oz should be between 350 and 400 for the average gold miner. That means AVM would need 2.5 to 3 mio oz. Taror/Chore feasibility should be out in the next 18 months and would bring us 2 mio oz in jorc reserves. Current jorc reserves are very low with 1.2 mio oz but this figure was misleading at all times, 1.8 mio oz scheduled for production is nearer to reality and Bakan could add 1 mio oz in resources and 0.5 mio in reserves. Either Taror/Chore alone or Bakan in conjunction with exploration success in Idenburg or South Sulawesi would be enough to justify share prices above 500p at gold prices above 900.

[pecker1] 18/1/2006 11:44

Think we may get an increase in production quicker than most expect. The RNS mentions the extra cash as helping to underpin further expansion. So, for starters, I would expect the fast-tracking of Bakan into production by end 2007 and perhaps increasing output from Lanut (from Effendi ore?).

And might also get a dividend in the 2006/7 year which the institutions would probably like too.

[mjcrockett] 18/1/2006 11:42

Spooky, Macquarie have reduced their hedge requirement by 20,000 oz to 22,000oz - so once we get to July there will be none of the original hedge remaining. See Steve's post 1812 for the most likely explanation.

MJ

[references] 18/1/2006 11:27

Essentially, if AVM increases production to 240,000 ounces pa it will enjoy all the upside in POG upto $700oz, and then only half the upside thereafter, for a period of 36 months. At the same time the co. will be protected on 50% of the downside below $450oz.

Does taking some of the fizz out of gold price movements make the shares more or less interesting? I suppose this move merely increases the importance that management increase production which will therefore enable the company to enjoy more of the upside of gold if it goes through $700. Such efforts must be good for shareholders. Of course such increases will likely take 3 years to come through when the hedge will have expired anyway.

I suppose the safer earnings profile also enables the co to expand with greater confidence, further improving the prospects for greater production as well as making the shares more palatable to institutions with a lower risk profile than AVM's traditional shareholder base.

Therefore on balance, after my initial disappointment, I think this is good news. It makes the £5.50 target price (of Kojak or HOT perhaps) less attainable, but £2.50, say, very much more attainable. We need more Kojak/HOT calcs based on the new hedge, although those sums are a bit more complicated this time lads!

[spooky] 18/1/2006 11:21

O.K. lets take this step by step.They have bought 3 year puts on 100000 ounces at $450 and they have sold 3 year calls on 100000 ounces at $700.The result of closing out the hedge by July 2006 will increase next years profits by $4.5m because they will be achieving full price on all production.They should be left with a hedge of 42,000 ounces,but this has been reduced to 22,000 so where did the other 20,000 ounces go ?

[reefseeker] 18/1/2006 10:55

This mornings news makes AVM much more appealing to institutional investors who take a different perspective to risk than us PIs. That should mean a strong share price performance in the coming months. It also makes it easier for me to rationalise having all my (gold) eggs in this basket.

It also makes it more likely that I will diversify into other, unhedged, producers such as Goldstar if and when pog rises over $700 as they will have the leverage to ride the upside.

[stevie blunder] 18/1/2006 10:51

Spooky,

This is my take on it,

Avocet purchased put options at 700, on 10k

Avocet sold call options at 450, on 10k

The counterparty in both transactions was MacQuarie Bank, who, as I understand it also hold the 300 usd calls which constituted the hedge.

The price paid by AVM for the new PUTs at 700 was less than the price received by AVM for the new CALLs. That difference was settled by cancelling some of the outstanding hedge. ie "The transaction was entered into for zero cash consideration"


but I stand to be corrected.


Steve

[phillis] 18/1/2006 10:50

The $4.5 m enhancement comes I think from the "disappearance" of what looks like 50% of the outstanding hedge. There appears to have been a trade off with McQuarrie who have given up part of their hedge entitlement in exchange for the put and call options over the next 3 years.

Those of us old enough to remember gold at $850 will well remember it didn't stay there for long once all the chancers took their money off the table..

AVMs problem is still only 200k oz output

Would well settle for say 350k oz at$600

[holdontight] 18/1/2006 10:43

Have they not used the Macquarrie facility?
40000 X $250 = $10 million