Avocet Mining Share Discussion Threads

[hudson64] 05/3/2013 09:17

This should be interesting on Thursday.

[shovelandspades] 26/2/2013 23:54

Good example of the gold hedging; http://goldsurvivalguide.co.nz/why-are-gold-mining-producers-reducing-their-gold-hedge-books/

[ninja 19] 26/2/2013 23:00

My target been reduced to 4.3p

[lej2] 25/2/2013 16:08

My own spreadsheets left me with no doubt on Feb 14th that the future cash flows here were dire going forward to 2014 and beyond, enabling me to make a sell decision very quickly that morning. The reduction of the Mineral Reserves announced at the same time as the reduced production forecasts were frankly astounding. Have any of the more experienced mining investors here ever seen such a reduction in Mineral Reserves?

[onceabroker] 25/2/2013 16:00

Paul

Many thanks for the reply.

I see that they are looking at a approved rate of recovery going forward in combination with the reduced resource. They have a 2.2 to 2.3g per tonne to the current 2.0 and below for 2012 estimate.

Looking at the company momentarily on a 12 month basis, rather then the LOM, there is potential for a significant increase in value if the Hedge is reduced from the current cash to a satisfactory and more manageable amount. The use of current cash to pay partial Hedge makes sense, even a partial improvement will make the forecast figure's much better then they are today. If that is possible, then there may be a smaller RI just for cash reserve basis.One thing is for sure though, they should try and announce Hedge 'plan' in the forthcoming accounts release, for the benefit of shareholders value!

Best regards

John

[polaris] 25/2/2013 15:11

John,

The only way out of this in the long term is to eliminate the hedge as then the company can go forward without the millstone around its neck. Without a renegotiation the hedge will take 33% of forecast production during the period Q1 2014 - end Q2 2018. That is one hell of a lot of uncertainty unless the pog stays strong and costs under control. Q by Q costs have been steadily rising from $773 in Q4 2011 to $1246 in Q4 2012, FY averages from $693 in 2011 to $1000 in 2012. While the costs were below the hedge then it just meant reduced positive cashflow from operations, but all ozs were profitable. Now that is not the case as the hedge is at $950. That gives me a problem going forward, especially with the forecast of lowered production continuing.

I suppose the question is how much should they try and reduce the hedge if not totally? Is 5k per Q OK: 20% of forecast 2014 - June 2018 production? That would reduce the hedge by 52.5k over the period of the hedge and cost in the region of $35.5m by my calculations including the time value of the contracts at $1595 pog. That would be the whole current cashpile (i am assuming that cashpile has continued to be eaten into as previous 3 Qs), though i agree that there should be $30-35m in cashflow from operations this year to add to that going forward. Best case scenario is that AVM have $35m in cash at year-end and 18Q of 5k to pay on the hedge - 90k at $950. They would then have no other debt outstanding.

2014 - 2018 remains contentious in my opinion. 100k of production with 20k at $950 and the rest at spot. Costs for 2013 are pencilled in at $1050-1100 and i see no reason to lower that going forward. Let's say $1600 for pog and zero cost pressure over the period (i don't believe this for one minute btw) and mid-cost of $1075:

20k oz lose $175 per oz = $3.5m loss
80k oz profit $525 per oz = $42m gain
total operating cashflow is $38.5m

With current costs that would be EBITDA of $3.5m for the year from 2014-2018. Sure they can cut costs for cap-ex and exploration but where are the replacement ozs coming from for the reserve? They have no chance even with zero cost pressure to build up a cash reserve for bringing a new mine into operation or expanding current operation.

Look again at the cost pressure - 44% rise in one year due to almost 19% fall in production. That should be constant this year but what happens in 2014 - 2018? They forecast another 26% fall in expected production. That must impact the fixed costs for plant operation. Let's try a few numbers:

$1600 pog and $1200 operating costs = operating cashflow of $27m
$1600 pog and $1300 operating costs = operating cashflow of $17m
$1600 pog and $1400 operating costs = operating cashflow of $7m
All of those would lead to losses with current cap-ex, admin and exploration costs.

Is it not unreasonable to expect costs to rise if production is lowered? If the previous year is anything to go by then you should expect costs pressure in excess of 40% for the lowered production from 2014.

I assume a rights issue as there is no motivation for the bank to be nice here. They just take the asset back as the collateral and sell it again. AVM shareholders get nothing in that scenario.

Of course, if gold goes to the moon then AVM should be relatively safe as long as the cost pressure is less than the %age rise in gold as the hedge doesn't hurt that much.

FY figures will shed some light on this as will the Q1 numbers in early May. If costs are not under control then it will get nasty very quickly. Once again i look back to the WEGA acquisition and the fact that all this could have been mitigated by a single $20m or so payment to offset the hedge.It could all have been so different.

Regards,

Paul

[onceabroker] 25/2/2013 14:27

Andy

The link is:




Or if you go on the company website it is on there on the right of the home page


How are you by the way, have not spoken to you for a while.

Best regards

John

[andy] 25/2/2013 13:58

john,

What was the source of the article you posted above please?

It read well.

[onceabroker] 25/2/2013 13:42

Paul

A good summary.

The only issue I have with some of your declarations is the following:

You seem to be pretty sure that the company want to buy the whole Hedge and not a partial buy back, listening to the conference call from the 14th, it was quite clear and repeated several times, that they were looking at a partial buy back of the Hedge and not all.

You have not placed into you calculations the benefits of a reduced Hedge going forward for the company.

You assume a rights issue around the current Sp? which is again presumptuous.

Within the conference call, a question was asked about cash, the answer given was, that across the company we had approx $55m (inclusive of restricted) with a further net cash income of around $35m for 2013, therefor a cash position, if no change to the Hedge, in the region of $90m was declared for 2013 year end.

I agree with your comment that we should await the results on the 7th to obtain a better understanding of the company's position, but on reflection of the company's cash/reserve/capex and debt, the current MC seems slightly on the low side would you not agree.

Best regards

John

[giant steps] 25/2/2013 13:01

Thanks Polaris, a most valued opinion

A worthy reminder from your post

"
AVM is dead in the water until the hedge issue is resolved and it could be very painful for current holders. There also remains in the background the long running saga of the litigation on the sale of the far east assets and any regional political uncertainty.
"

[polaris] 25/2/2013 12:57

Why would anyone bid anything right now? The reserve has been cut from 1.85m oz to 0.9 - 1.2m oz and the forward forecasts will be 135k oz or so this year followed by 100k in following years. AVM will be EBITDA positive in 2013 but dead in the water from 2014, due to the combined effect of the hedge and the increase in costs from the shortfall in production. Unless they get some seriously good news from the Souma trend then MacQuarie hold all the aces. They may choose to convert part of the hedge outstanding into shares in the company at a reduced price.

This from Q3 results 2011:
During the year, the Group continued to physically deliver gold to meet forward sale contracts in respect of the Inata mine in Burkina Faso. During the nine months ended 30 September 2011, 67,619 ounces were delivered to meet contract requirements. As at 30 September 2011, 222,750 ounces remained, with physical deliveries contracted at 8,250 ounces per quarter until June 2018, at a forward price of US$950 per ounce.
Following the substantial completion of the disposal of Avocet's South East Asian assets on 24 June 2011, the Group announced the restructuring and partial buy back of the forward contracts on 27 July 2011, with the result that the hedged proportion of production from its one remaining producing mine, Inata, was reduced from approximately 60 per cent to approximately 20 per cent. The restructure consisted of eliminating 58,432 ounces under the forward contracts at a cost of US$39.8 million and extending the delivery profile of the remaining ounces by four years to June 2018. At 30 September 2011 these forward contracts represented a mark-to-market liability of US$157.3 million based on a gold price of US$1,620 per ounce at that date.

We are now almost 6 Qs after that date and so the hedge will be 173k or so at the end of March 2013. Each oz had a liability of $706 in September 2011 based on $1620 per oz. That would give a liability around $115m at today's gold price with remaining hedge. Company had $51m of net cash at Sept 30th 2012, with a significant part of that restricted, due to the funding agreement with MacQuarie and the remaining Inata construction debt (due to be retired at the end of this Q). Cash position has been steadily falling during 2012: $77.5m Q1, $63.4m Q2 and $51m Q3. The results on March 7th will show that net cash is around or below the restricted cash and so AVM have a cashflow problem. This is not a position of strength to renegotiate with your funders!! Best case is some sort of rights issue but, even at 20p, the requirement would be to raise about $100m to clear the hedge and leave some cash for day to day operations (taking into account the cash position). That equates to around 65m GBP or 325m shares...cf the current in circulation of 200m. MacQuarie will not want these shares and so will want them to be passed on, hence the price could even be lower.

525m shares at 20p would be a capitalisation of 105m GBP. Let's see what the next few years of production mean with that in mind using $1590 for pog.

2013 on production of 135k oz at spot with costs of $1100 gives $66.15m of cashflow . Previous years show exploration at $15m, cap-ex at $10m and admin at $10m so the EBITDA would be around $30m - pretty good no?

2014 on production of 100k oz at spot with costs at $1100 gives $49m of cashflow and EBITDA of $15m - well that might still support a capitalisation of 100m GBP but it is a distortion. why? Fixed costs make up the majority of the operational costs, which are indirectly proportional to the production ozs. It would only take rise in costs of $150 (say 14%) to make AVM flat on EBITDA terms. The fall in production from 135k oz to 100k oz is 26%. That would lead to a cost per production oz of $1485, operational cashflow of $10.5m and a whopping EBITDA loss.

to get out of this circle AVM need exploration results to yield new ore that can be trucked to the existing plant. You can forget the expansion of the plant as AVM do not have the cash or the possible cashflow to cover this. Reserves are enough for 11 years and so i doubt you could put much of a premium on the rating.

I have been here for a very long time but my thoughts are now: why would Macquarie go through this at all and where are AVM going to find the external investors to put in the kind of cash that they need to eliminate the hedge? The collateral is the mine at Inata. WEGA found out the hard way what can happen when you do not have enough cashflow to meet obligations.

AVM is dead in the water until the hedge issue is resolved and it could be very painful for current holders. There also remains in the background the long running saga of the litigation on the sale of the far east assets and any regional political uncertainty.

Let's see what they say at the annual results.

Regards,

Paul