Avocet Mining is a gold mine. Or to be precise, three operating gold mines, with significant resources, and some upside exploration potential. Yet if you'd invested in it two years ago, you would have lost half your money - despite the massive appreciation of the gold price.
It doesn't seem right. Avocet has had its problems - operational issues at both its more mature mines - and it's a relatively high cost gold producer. Cash costs in the 2009 financial year were USD 551 an ounce - that's pretty high. Some of that is due to low production levels in the year, as difficulties were encountered at both Penjom and North Lanut, so that fixed costs had to be spread across fewer ounces produced; the year before, cash costs had been only USD 316/ounce [1] . But some of it has been due to inflation in the company's input costs, and the addition of the relatively high cost Inata mine won't help matters in the short term.
Even so, the market's valuation of Avocet seems a bit churlish, so I thought it would be worth taking a look to see if there was some hidden value.
This year has seen Avocet double both its output and its resources through the April 2009 takeover of Oslo-quoted Wega, which owns 90% of the Inata gold prospect in Burkina Faso. It was an all share deal, worth £52.5m, and Avocet is now applying for a main board quote in Oslo (which, I've been informed, could mean that though Avocet is AIM listed in the UK, you'll be able to put it in an ISA).
Since Avocet's existing operations were in Malaysia and Indonesia, the acquisition has also given it exposure for the first time to West Africa, an exciting gold region with a lot of exploration going on. Inata is already producing ore, though the first gold pour isn't expected till January 2010. It is expected to have a 7 year life, which isn't long, but there is some exploration upside as drilling continues around the mine site.
The Penjom mine is Malaysia's largest gold producer, and was developed by Avocet in 1996 on a site where traditional alluvial mining had been carried out. Penjom has not been problem free recently; in particular, the grades actually produced are coming out lower than in the published resource model. It's a difficult…
