Avocet Mining Share Discussion Threads

[kojak78] 19/7/2005 15:08

@DesWalker

This company is undervalued big time. It should cost 3x to 4x the current price. In contrast to other mining stocks it is even adding more resources each year and has very competent management. Unfortunately nobody is left to buy. Everybody knowing something about mining stocks and knowing about Avocet has bought as this is the best deal in mining stocks in this decade. I've spent 6 years in thsi business now, I've bought very often the perfect stock for the time. Ranger Minerals (paid more in dividend than I paid for the stock), Normandy Mining, Ashanti, Gold Fields (tripled in a few months in 2001/2002) etc. But no deal was as good as Avocet. Even if gold was US$255 I would buy at current levels, that's how good the company is. But because everybody has loaded the truck there just isn't anybody left to buy more shares. We have to get more people to know Avocet. IMO a US listing would immediately triple the share price. Often such companies as Avocet are valued at premium ratings after a track record of good returns. I mean if you find 1.6 mio oz in 2 years and don't mine that much it makes much more sense to value based on p/e because production is permanent. Avocet is able to replace reserves.
My current (reduced) bet is 90,000 oz in the first half and 130,000 oz in the second, total cash costs US$235/oz, gold price US$425 in the first half and US$500 in the second for an average of US$470. Thats US$99/oz more for the 173000 oz of last years production and US$235/oz more for the additional 47000 oz. Gives 17.13 mio + 11.05 = 28.18 mio
Less 30% tax that's 19.7 mio more net earnings or 31.5 mio
The negative value of the hedge book will be on a yearly average (470-300)*0.066 mio = 11.22 mio So net earnings will very likely be ca. 20 mio or p/e 7.2

2007 will see further reduced cash costs of US$220/oz and production of 255000 oz. Average POG will very likely be US$520. That's US$65/oz more for the 220000 oz production of the previous year and US$300 for additional 35000 oz. 14.3 mio + 10.5 mio = 24.8 mio
Less 30% tax gives us 17.38 mio in addition to 2006 earnings of 31.5 mio.
2007 net earnings = 47.88 mio = p/e 3

2008 will probably stay the same, perhaps slightly more production of 260000 oz + 70000 oz of Taror (assuming Chore won't come onstream in 2008). Thats 75000 oz more at US$300 margin and after tax US$15.75 mio in addition to 47.88 mio = 63.63 mio = p/e 2.26

I will never sell a single share before they reach fair value.. time is working for us shareholders.

[deswalker] 19/7/2005 14:00

Is this going lower purely on the back of POG ?

I really don't get this stock. It looks so cheap to me but maybe I'm missing something. The Prelims and Indo update looked like the business to me but the market doesn't care. Please help me out. Why is this company not undervalued big time ?

[sandoval] 15/7/2005 22:33

I read an article yesterday saying that the ECB are selling off Gold whenever it reaches $440 to suppress the pog. Seems the States are working along the same lines. Could be a long haul by the sound of things.

[strongbow] 15/7/2005 17:35

Anything in Investor's Chronicle about the results??

[pecker1] 15/7/2005 13:13

Yesterday's results presentation now on the AVM website. Well worth looking at, particularly the exploration section by Peter Flindell. looks like plenty of news to come in the months ahead.

[kojak78] 14/7/2005 15:36

ZGC shape is becoming clearer, too.

Cash costs are 440 now for 44000 oz production. That is because of 20% lower grades. If new ore from the pit is treated production will climb to 55000 oz. Costs stay the same total and decline to 352/oz.

Dump leaching 2.5 mio t per annum of 0.7g/t at recoveries of 75% yield 42000 oz @ below 200.

(55000 * 352 + 42000 * 200)/ 97000 = 286 cash costs

Dump leaching will be so cheap because it is waste from the pit that will be treated.

Together with Penjom's 120,000 @ 196 and North Lanut's proposed 70,000 @ 160 that gives 287,000 @ 217, even lower thay my assumed 222 cash costs.

[kojak78] 14/7/2005 15:22

Oops, error:
290 total costs gives +75%
3 mio oz reserves gives +50%
valuation compared to other miners give 110%
1.75 x 1.5 x 2.1 = 5.5

(2250 - 290)/131 = 15

15 x 15.5 = 82.5

Bull market high at US$2250 POG, US$222 cash costs, 3 mio oz reserves, valuation like Newmont = 0.79 x 82.5 = GBP65

[sandoval] 14/7/2005 15:19

Excellant analysis if I may say so.

[kojak78] 14/7/2005 15:09

I like to value Avocet based on production, not based on reserves. A company that is able to replace reserves should be considered to have inexhaustible reserves. Those companies deserve to be valued at normal p/e ratios of 19 or so. A example of such a company is old Normandy Mining, with the best exploration team in the world, properties like Ghana, Tanami etc.

Other companies are not able to replace reserves. For instance South African companies. Those should be valued based on reserves.

Although I think Avocet clearly belongs to the first category of mining companies one could at least take a look at valuation by reserves.

Avocet has 1.75 mio oz in resources scheduled for production. That's the figure that's most comparable to reserves of other gold miners as Penjom has complex geology and jorc-standard consistently understates reserves in such cases. Recent discoveries suggest "reserves" will climb to 1.9 or 2 mio oz.

Based on recent figures I come up with ca. US$350/oz total costs inclusive of all overhead costs. That's very very cheap as many senior miners have total costs (especially with exploration costs) north of 450 or 500. mining is far more expensive than one tends to think.

That gives us US$75/oz x 2 mio oz = US$150 mio = GBP 0.79 = ca. current market price

Now the interesting fact is that this model comes up with the current market price. Perhaps it is able to foretell price action much better than other models which suggest Avocet is undervalued by a factor of 3 to 4. Then again the same model gives a value of US$18/share to Newmont instead of the current market price of 38.. So I would say that gold miners have significant premiums to their fair value while Avocet is valued like an ordinary business.

Where to go from here? The most important thing is Taror. If Taror feasibility is successfull, reserves figures will suddenly be 3 mio oz instead of 2 mio. That means 50% higher share price. If costs decline by 56 US$ the model would give us 75% higher price levels.

All in all the model suggests 160% upside based on Avocet fundamentals. If valued like Newmont we would trade 110% higher. Valuation adjustment and fundamental improvement together mean 446% higher share prices. Each US$130 more in the POG yield another 100%.

So even the most conservative valuation model gives - assuming moderate fundamental success - 160% in the next year *minimum*. 446% average and 840% if POG is near US$520 next year.

If Avocet remains the Pariah of gold stocks, US$520 POG and Taror will still catapult the share price to +347% or GBP 3.53

The ultimate bull market high at US$2250 POG would be ca. GBP19.50 for Avocet and US$800 for Newmont.

The only problem with the model is that POG/XAU ratio would be at 1.5
3 is considered to be very expensive.
The reason for that difference is that gold stocks have leverage to the POG. But over time costs rise, too, because of inflation. That means gold stocks have leverage, but only in the short term. So we have fluctuations between gold stock prices and gold prices, but over time the ratio is constant.
The 80s and 90s were times when this was the case. But I think in times of real gold bull markets, when gold prices rise to real terms to higher levels without rising costs because of no inflation the Gold/XAU ratio won't work anymore.

In the end POG won't be 2250 because of inflation. Perhaps if the Dow goes down to that level, too. It will be much more like Dow 8000, POG 7000 and total production costs US$1000/oz.

[phillis] 14/7/2005 13:52

I seem to remember last time saying that the business wouldn't start to motor until ZGC was sorted out. Q1 forecast output for this operation is still poor so we are left to hope that the new operational management can win through. Let's hope so but although the reserves news is good the eps result and the caution over ZGC will continue to hold AVM back I think

[kojak78] 14/7/2005 13:27

Great results out and only pessimistic postings? 18 months doing nothing, 5% profit growth in 2006?

The basic facts are 173,000 oz production @278 and gold price 414.

At end of 2006 all mines will be running at full capacity, that means 120000 Penjom, 70000 North Lanut and 100000 ZGC or 290000 oz. Production costs 200/280/180 for the three mines and average of ca. 222 for all mines.

That's US$56/oz cost reduction and 117,000 oz more production. I assume that Avocet needs 8 months to get to full production and has only 4 months running at full capacity. That means we're only seeing 2/3 of the above mentioned improvements in this financial year, i.e. 78,000 oz more production and US$37/oz lower cash costs.

POG is higher, too. US$430/oz over the full year is a very very conservative estimate now (we'll see above 500 in the second half of this year). The optimistic case would be US$470/oz average for financial 2006.

Let's do the math:
173,000 * (414-278) = 23.5
251,000 * (430-241) = 47.4 = 23.9 more cash flow = 16.7 more net earnings = 15.5 cent/share more earnings = +137%
At US$470/oz POG it's 195% more net earnings or 33.5 cent per share (=p/e 4.2 in 2006)

I just do not see how one can say we'll see only 5% more net earnings in 2006. Even if Avocet covers the hedge book it will only reduce earnings by 8 cent or 71%.

So my guess for flat POG is that net earnings will rise 66% in 2006 and the hedge book will be history at the end of the year.

[taylor20] 14/7/2005 13:08

I don't know what you mean! Never failed to make money on broker forecasts ;)

As long as you do the opposite of what they recommend.

[goml] 14/7/2005 12:59

Broker Forecasts - if anything in life is worth ignoring.....

[taylor20] 14/7/2005 10:47

Evo yet to update their website, but have have a target price of 130p.



Currently not holding

[mr ashley james] 14/7/2005 02:08

Andy,

So do I which is why I am out of all AVM long trading positions today.

I am no longer trading US$ Zone Gold Mining stocks to the long side until later this year redirecting funds into RSA, Aussie and Euro plays and only investing in PGMs or specialty metals especially Industrial Metals in the main, preferably those with high barriers to entry or low (preferably nil)project gearing/debt.

The gold sector has too much paper in it, and far too much substandard paper sucking up the remaining limited investor funds.

Also considering completely pulling out of UK Mining sector in view broker/mm behaviour recently refer TMG.

AIM is littered with utter rubbish and the Europeans and many others seem convinced the next BRE-X will be born, bred and listed on AIM, I happen to completely agree.

My biggest wins have all come from overseas markets over the last six years and eventually enough is enough.

So adieu feeble London Mining Sector, funds better invested elsewhere me thinks in lands without Stamp Duty and Market Makers.

Best of Luck to all holders, my comments are not a reflection on AVM or it's projects nor it's inherent valuation.

Cheers

Ash:)

[jk8] 13/7/2005 13:01

Old Mr Scott does not sound quite as bullish as he has done in the past, "growing confidence" rather than lots of confidence - there is clearly lots of potential with AVM but it's not going to do much for at least 18 months. I'm personally hoping for a severe correction to the share price and an opportunity to buy and lock in (apologies to existing holders).

[pecker1] 13/7/2005 12:57

Ash,

Yes to the dividend. Thought they already had shareholders approval to double their share capital for acquisitions - perhaps the authority has to be renewed every year?

As to the private placement, I seem to remember some shareholders at the AGM a couple of years ago got very annoyed that they were not given the opportunity to participate and the institutions got all the gravy. So why not opt for an open offer or whatever it's called whereby shareholders can buy say one new share for every three they hold - quicker and cheaper than a rights issue I believe.

[andy] 13/7/2005 09:54

I agree, a decent set of results with plenty of promise for the future IMO.

I would like to see them reduce the oustanding hedge by half during the remainder of this year, and completely by this time next year.

[pecker1] 13/7/2005 09:06

Results better than I expected. Looks like the main drivers of the share price will be the POG and exploration success, particularly in the Idenburg property. A high-grade multimillion oz resource would do nicely.

[taylor20] 13/7/2005 08:15

Pretty much how I read it Hector, but then I seem to remember a couple of years ago thinking "I'd want to be a shareholder through 2005-2006"!

Of course the shareprice doubled since then...