Avocet Mining - Organic growth complemented by acquisition

Avocet Mining (LON:AVM) has demonstrated that it is serious with respect to its intentions to create an enlarged mid-cap gold mining house by completing a scrip-based takeover offer for Wega Mining, giving Avocet control of Wega's emerging Inata gold mine in Burkina Faso. The deal will complement Avocet’s existing two-mine production base and boost overall annual gold production to around 300,000 ounces. And what’s more, Avocet has announced enhanced Q1 FY2010 gold production that was in line with company guidance. 

The company has just announced first quarter gold production of 27,563 ounces from its operations at Penjom in Malaysia and North Lanut in Indonesia. Total gold production was 1% above the previous quarter of 27,374 ounces, which in turn was 2% above Q3 FY2009. All gold sales were into the spot market during the quarter, with an average realised price of US$925 per ounce. 

Gold production during the quarter at the company’s Penjom mine saw output of 15,664 ounces, 3% below the previous quarter.  However at North Lanut the trend of quarterly production and cash cost improvements continued during Q1 FY2010 and gold production at 11,899 ounces was 5% up on the previous quarter and was the highest for more than a year. The improvement reflected higher grades and an increase in tonnes processed, as the operation benefited from the new leach pad (HLP3A) which was completed during March 2009. 

Avocet recently launched a scrip-based offer for Oslo based gold miner Wega Mining.  Wega's main asset is its 90%-owned Inata project situated in northern Burkina Faso, West Africa, which is currently under construction. 

First gold production from the project was anticipated during Q3 2009, with full steady state production anticipated during FY2011. The project is forecast to produce more than 120,000 ounces of gold annually over an initial seven-year mine life.  

However, Avocet will make some changes to the design in order to ensure a more sustainable ramp-up and to avoid operational or maintenance problems once the operation reaches steady-state production. Although important for future operations, these changes are considered minor in the context of the construction project and the first gold pour is now expected in the October to December 2009 period.  

Wega Mining's other assets include the 27 exploration Licences in Burkina Faso, Guinea and Mali, including the Koulekoun gold exploration project in Guinea which has a NI 43-101 compliant gold Mineral Resource of 666,500 ounces, a 58.1% stake in TSX Venture Exchange-listed Merit Mining, and a 35.6% stake in base metals company, Metallica Mining AS. 

We reiterate that we are positive about the proposed deal, as it delivers on key elements of Avocet's acquisition growth strategy that was adopted by management way back in 2007. The proposed tie-up between the company and Wega represents the creation of a brand new, mid-tier gold company that will boast annual production approaching 300,000 ounces. 

So putting the entire package together, the new enlarged Avocet will have a portfolio of three operating gold mines, comprising Penjom, North Lanut and Inata. From a production perspective, we anticipate future production upon full commissioning of Inata of around 280,000 ounces of gold during FY2011. 

Avocet currently trades on a modest price-earnings multiple of around 12 times 2010 consensus earnings estimates, falling to around 7 times 2011 earnings estimates.