Avocet Mining - Strong first quarter production

Management at Avocet Mining (LON:AVM) is certainly not short of ambition. The miner is looking to firstly establish itself as a mid tier producer (with consistent output of 300,000 ounces of gold per year) and will then look ramp up production five-fold to 500,000 ounces by 2014. If the opening quarter of 2010 is anything to go by, management's confidence in achieving these objectives is not misplaced.

Indeed, output came in at just under 45,000 ounces, a 73% year on year jump, with the better than expected performance at the group's Inata mine in Burkina Faso providing the boost. Gold output from Avocet's West Africa operations totalled just less than 20,000 ounces as a result of higher grades of ore milled as well as higher recovery.

Avocet also has assets in South East Asia which have recently been the source of heightened speculation. The company has confirmed that contrary to some reports, it has not reached an agreement to sell its Malaysian Penjom mine and Indonesian North Lanut mine in Indonesia, as well as exploration and development projects in Indonesia.

Penjom and North Lanut performed line with expectations producing slightly less gold in the opening 3 months of 2010 than they did in 2009. Output climbed to above 25,000 ounces and the assets have now produced a total of 107,000 ounces since April 1st 2009.

With Avocet's Inata mine boasting over 900,000 ounces of gold reserves as well as a 1.7 million ounce resource, it understandable why the company may want to focus on investing in its it production and exploration assets in West Africa. Speculation has placed a US$250 million price tag on its South Asian assets, however recent developments suggest it may take more to make Avocet budge.

At Penjom optimisation work continues on the revised resource model which was announced earlier this year whilst at North Lanut the company is continuing to mine and treat both the Rasik and Riska ore bodies with increased grade and recovery being achieved. In addition, Avocet is implementing various cost cutting initiatives to boost cash generation from the Asian mines and it is encouraging to note that output is expected to reach 9,500 ounces per month during the second half of 2010.

Undeniably though, Avocet's star attraction is Africa. Despite the huge reserve and resource base at Inata, Avocet is looking to press home the advantage by increasing exploration activity. The Belahouro group of licences cover over 1,600 square kilometres of ground surrounding the Inata mining lease and could provide the catalyst for a re rating. 

From a financial perspective, it is encouraging to note that Avocet stands on firm financial footing even in the absence of the cash which the sale of its Asian assets would generate. Gearing (debt to equity) sits at a comfortable 33% whilst interest cover is over 16 times.

Although the group remains a high cost producer (US$735 per ounce in Q1 2010) and has hedged 400,000 ounces of production at below US$1,000 per ounce, it has come through a period of operational uncertainty and can look to the future with increased confidence.

The group's rising profile in and around Inata suggests that plenty of upward revisions in resources and reserves lie in wait. And with plans to rein in total cash costs and expand cash margins there remains significant potential upside for earnings.