Is this still a gold mine?

MiningA few weeks ago I wrote about Avocet Mining, a gold miner with its principal operation in Burkina Faso, West Africa. I concluded that it was an interesting but high-risk play because, as with all miners, its share price depends heavily on the market price of its mineral -- gold in this case. Mining value plays are generally higher risk than other value shares in my view for this reason and also, with Avocet being no exception, there may be political risks associated with the local areas involved.
It recently issued half-year accounts to 30 June, so it's worth taking another look in the light of these latest figures. Before I do that, though, one clear difference from my earlier piece is the share price. Then it stood at 66p, now it is 82p for a rise of 24% so I have already struck a little bit of gold there. Expect a lot of volatility in a share like this.

Okay, the accounts and the nasty stuff first. Avocet has suspended the dividend for 2012. Previously, I recorded that a payout of 6p had been forecast for this year thereby offering a very high prospective yield of 9.1% on the then price, but such hopes have now gone from hero to zero.

The 2012 eps was forecast at 8.4p but that has now been slashed to 5.2p, making a forward price-to-earnings (P/E) ratio for this year of a non-value 15.8 against 7.9 previously. A double blow resulting from both lower eps and a higher share price.

Net tangible assets at 30 June were $348m, which at the current exchange rate of $1.556/£ makes about £224m. With a market cap of £164m, AVM still trades well below tangible book on a ratio of 0.73, though this compares unfavourably with the 0.55 I calculated in my previous feature. Not unexpectedly a strongly rising share price will tend to out the price-to-book (P/TB) ratio, there having been little change in the asset value. In fact, that's exactly what the value player wants to happen.

And the final leg of the pyad quadruped, net cash is still present to the tune of $63.4m, equivalent to about £41m and a little less than the £48m earlier.

As before, I consider the key ratio here to be the P/TB and as I have said many times, I regard this as the lead value ratio. The amount per share is in the region of 112p, but with miners this calculation can fluctuate a lot because one of their principal assets is the estimated quantity and value of gold in the ground, which depends on the gold price -- itself very volatile. On the latter point, the market price of gold is now $1,604 per ounce against $1,565 when I first wrote about Avocet.

Elsewhere in the accounts, I note that its cash costs per ounce shot up in the second quarter to $1,006 from $850 in the first quarter. At the same time its average realised price was lower at $1,439 against $1,543. Thus profits were squeezed at both ends.

As if that wasn't enough, production fell to 32,917 ounces in the second quarter from 38,296 in the first quarter, both of which compare unfavourably with the same quarters last year.

In the light of all this, it is surprising perhaps that net profit after tax on continuing operations for the half year was $15.8m against $22.8m for the corresponding period last year. I mean it's well down, but not by quite as much as the above facts might suggest.

Looking ahead to the second half of this year, the directorspeak refers to improving operational performance at their principal mine, known as Inata. Gold production for the next six months is forecast to be between 64,000 and 69,000 ounces, with the fourth quarter representing more than half of this total for technical reasons. Those figures are somewhat below the 71,213 produced in the first six months. In future, they are hoping to expand production at this mine.

So what do I think of Avocet now following the latest results? Their situation has worsened from a value perspective in that eps will now be much lower for 2012 and the dividend has gone. And although it still trades below book, the discount has narrowed with the rising price. The net cash though remains.

However, P/E and yield are the weaker aspects of a value play. Not irrelevant but just less important to me than P/TB and net cash. Thus I still see some potential profit in Avocet, but my previous warning must remain in that this is a much higher-risk play than usual. In contrast to a typical value share, the price here is driven as much by the gold price and sentiment than by hard numbers and I recommend that advantage be taken of this by investors to realise any reasonable profit that arises.

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