Avocet Mining - Souma strength

Whilst many established gold producers have faced operational difficulties, Avocet Mining (LON:AVM)recently released third quarter 2010 results illustrate progress across all areas. Revenues for the quarter were US$77.5 million, an quarter on quarter increase of 19% whilst underlying earnings of US$27.9 million was over 12% higher. In addition Avocet has been helping itself operationally boosting gold production by 28% quarter on quarter to 67,792 ounces whilst reducing total cash costs by 12% to US$619 per ounce over the same period. Most encouragingly, when downward production revisions for gold miners are commonplace the group remains on track to meet or exceed production guidance of 220,000 ounces for the full year.

For those unaware, Avocet Mining is a gold miner with assets in West Africa and South East Asia. It operates three gold mines - Inata, (Burkina Faso, West Africa), Penjom (Malaysia) and North Lanut (Indonesia). The company also has a pipeline of exploration projects in both highly prospective regions. Africa is fast becoming the focus for Avocet and accounted for almost three quarter of underlying earnings during the quarter. The outlook for the group's higher cost South East Asian assets is uncertain and with a strategic review underway a trade sale can not be ruled out. Management is keen to focus all its efforts on the Belahouro district, where the Inata mine has provided encouraging results.

Since an upward revision of resources and reserves at Inata in September (as well as increased production forecast), results from the nearby Souma Trend have provided further reason to cheer. Souma is situated around 20 kilometres away from Inata and after recent extensive drilling is now known to host a resource of 561,100 ounces. This increase takes the total resource in the Belahouro permits to 2.4 million ounces of gold and with a 200,000 metre drilling programme underway we expect further upward revisions.

In terms of future deposits and targets, Avocet has been very active in its hunt for the Inata of tomorrow. In Guinea, Mali and South East Asia, Avocet continues to seek new impetus and is making significant progress on several projects. One note of caution is that Avocet has the second largest hedge book in the industry. At the end of October the company had 362,019 ounces hedged through forward sales contracts at an average of US$970 per ounce, down from the original total of 400,000 ounces to be sold over an approximate four year period from September this year. The hedge came into being as part of the project finance terms with Macquarie Bank related to the purchase of Wega Mining. Management is considering its options with regards the elimination of the hedge, which will cost around US$100 million.

Avocet certainly has the balance sheet to consider such an undertaking. Net gearing is low and interest cover healthy. The group has embarked on the disposal of non core exploration assets whichhave brought in over US$10 million to date and at the end of the third quarter Avocet's cash balance stood at over US$46 million.