Avocet Mining - Out of Asia, into Africa

With the price of gold hitting new all time highs on the back inflation and sovereign debt fears, the search for gold has arguably never been so intense. Gold producers such as Avocet Mining (LON:AVM) are not only searching for geographic gold deposits but are scouring the markets for any depressed asset prices. Avocet’s purchase of Wega Mining last summer centred on the Burkina Faso Inata mine where a recently announced increase in resource has further vindicated the purchase.

During the opening half of 2010 Avocet made a pre-tax profit of US$11.1 million compared to a loss of US$4.5 million for the corresponding period of 2009 and the group’s African operations played their part. In addition underlying earnings almost doubled to US$28.7 million whilst operating cash flow rose 5% to US$13.7 million.

Operationally, the 98,000 ounces of gold produced is significantly higher than the 55,000 ounces from the comparable period of 2009. Production levels at both the group’s South East Asian assets fell and cash costs expanded however the group’s Inata mine in Burkina Faso chimed in with over 51,000 ounces at a cash cost of US$569 per ounce.

With total cash costs at North Lanut in Indonesia and Penjom in Malaysia at US$656 per ounce and US$949 per ounce respectively the relatively low cash costs associated with Avocet’s African jewel in the crown offer stark contrast to the Asian mines. However management are conducting a strategic review aimed at extracting the maximum value from these assets and exploration of the MIK deposit will bolster Penjom earnings contribution whilst work at the Rasik pit at North Lanut is scheduled to reach higher grade areas later this year boosting output helping cost control.

Inata though remains the main event and earlier this month, Avocet announced that the mineral resource at Inata had increased by 8% since the 2009 year end declaration to 1.84 million ounces of gold. Relogging and remodelling of previous drilling has pushed the resource number higher and in our view this is unlikely to be the last such increase.

Avocet actually plans to carry out further drilling of the deposit later this month with a view to expanding the resource base yet further and management are aiming to double ore reserves by mid 2011.

To this end, Avocet is looking to carry out a significant drilling programme that will provide an appraisal not only of the areas around the Inata mineral resource but also around the Inata mill. The aim is to kick off the drilling programme this month and run it through to June 2011.

The region looks as though it will be earnings accretive for quite some time. 

20km away from Inata, recent results from the Souma Trend have also provided Avocet with a significant boost. Avocet controls eight exploration permits in the Belahouro District surrounding Inata that cover a combined area of 1,660 square kilometres. Initial drilling at the Dynamite prospect comprised of 55 RC drill holes and have provided evidence that the Souma Trend hosts a considerable gold mineralization. 

This has been followed up by results from an additional 127 drill holes announced earlier this week which looked at another portion of the Souma Trend and provided further cause for optimism.  The results are so compelling that they may pave the way for an economically viable independent mining operation to the Inata gold mine.