“Good management, good assets, good company”

Since announcing the sale of its southeast Asian assets in December 2010, as part of a strategic shift to wholly focusing on its gold projects in West Africa, Avocet Mining PLC (AIM: AVM.L) has had a lot of column inches devoted to comprehending how the sale will boost its share price.  Those column inches describe how well its projects in Guinea and Burkina Faso are shaping up and how its expert management team continues to kick goals conveyed to the market on all fronts. Having since hit all of the metrics it laid out for the first quarter, including progressing carefully and studiously with its Southeast Asian buyer, Brett Richards, CEO, reports that the mining house is pleased with the results.

“We’re proceeding on a number of fronts to get the sale through in southeast Asia and get through the first half drill programs in both Burkina Faso and Guinea, so that we can prove up our resource statement in the third quarter of this year for Burkina Faso and end of the year in Guinea to take us to the levels we stated—doubling our reserves in Burkina Faso and a two million ounce resource in Guinea,” he says.

“We’ve posted some great releases and we’re certainly very happy as to the progress we have made this year.”

In order to achieve the various ambitions the company has in place for the coming year—advancing its exploration work in Guinea towards establishing the company’s next operating mine, working towards the southeast Asian transaction and making such a large leap in reserves for Burkina Faso—it will be more imperative than ever for the team to draw on its foundations: Good management, good assets and a good company.

Towards a new mine in Guinea

As the most advanced of Avocet’s exploration plays, the company’s work in Guinea dates back from its acquisition of Oslo listed Wega Mining ASA (‘Wega’)—a company which had been active in the region since 2005. Avocet’s 100 per cent-owned exploration projects in the northeast of the country include the 986 square kilometres Tri-K block, made up of three primary exploration permits, which houses the Koulékoun, Kodiéran and Kodiafaran gold prospects. Richards says that as Avocet works through its drill program for Tri-K this year, it will advance its work further to feasibility and possibly commence construction in late 2012 / early 2013. On May 11 2011, the company announced that Koulékoun has reached 1.1 million ounces.

“Koulékoun is a large exploration permit within the Tri-K land package and we have a lot of optionality there. As a land package which could potentially house large or multiple operations, we just need to get through drilling at the three areas— Koulékoun, Kodiéran and Kodiafaran —to get them better understood and possibly advance them through scoping studies to see how best to develop them,” he explains.

“Guinea and Tri-K will morph over the next six months to be our next headline project. We’re working on understanding it better through drilling and assays results, and we’ll keep the market informed as those results become known, and the region becomes better understood.”

Work planned for 2011 in Guinea includes 48,000 metres of RC drilling, 19,000 metres of diamond drilling and an airborne VTEM survey of Tri-K—the latter, Richards says, will be out and in presentation in approximately three to four weeks.

“I’ve seen it and it looks very encouraging. It’s not like Inata’s VTEM survey; the geology and mineralogy are very different. There are also differences between Koulékoun and Kodiéran which we didn’t anticipate, but it is the reason why we will need to conduct further drilling and test work to better understand these deposits” he says.

“It may require taking a different approach with both of them and we may need to do some more metallurgical testing on Kodiéran...it’s now looking like we’ll start with focussing on a stand-alone mine at Koulékoun then look to expand production capacity elsewhere in the region at Kodiéran or Kodiafaran later on, if we can get the drilling and their respective resource base(s) up to critical mass.”

Simultaneous to the work underway in Guinea, the company has some exciting extensions at its Inata gold project, where it plans to double reserves, and has intentions to develop further production capacity in the surrounding area(s) of the Inata mining license, in the Bélahouro region sometime in the coming years.

Doubling reserves in Burkina Faso

At Avocet’s Inata gold project, drilling since December 2010 as part of a 200,000 metre campaign, has targeted expanding on known mineralisation at the Inata North, Sayouba and Minfo pits. Richards says that work underway has involved drilling out the northern extension quite substantially as the company aims to take its 900,000 ounces reserve up to 1.8 million.

“The resource estimate will probably come in slightly higher than it is currently, as we plan to convert a lot of the existing resources into reserves by drilling deeper holes and converting existing deeper resources to reserves, then remodelling and optimising it accordingly.  We have had to cut this field season of drilling short at Inata because of the strike, so it may lower our resources, but it doesn’t change the robustness of the ore body, and if we have to go back to finish infill drilling in the third quarter to achieve our target (and it makes economic sense to do so), then we will,” he explains. 

“We have some exciting extensions around Inata where we’re going to be able to add value to our company by increasing our mine life, which is great, and again it’s really a case of watching this space in the next four or five months.”

There have been minor setbacks of late, Richards says, in reference to labour disruptions at the project. However, true to form Avocet has rectified that short dispute and intends to impress upon the market the lessons that come as part and parcel of such events.

“There are some issues that the country has right now which need sorting out. That will take time and patience but I think that will happen it if it stays on track. We were on strike for four days, which hasn’t affected our costs for the year, but will lower May and our quarter slightly which we’ll work to recover,” Richards says.

“I think it’s a subtle and humble reminder of where we are and that these things do happen. It’s just one of those signals to keep us aware of our surroundings, but we can’t lose focus on the task at hand as we continue to work hard to develop our land packages as fast as possible.  These issues are humble reminders of where we are.”

The company’s plans remain the same— to add ounces by drilling, to add value by doing the right things with the right people, and hopefully to see those efforts reflected its share price over 2011. Richards says that the market has seen a flurry of multiple compressions over the past six to eight weeks, with gold prices coming off a high of $1,575 an ounce but holding their own as stocks and equities have dipped substantially more. The brief disruption at Inata has reflected on the company’s share price, but likely to little real consequence, and Richards is confident that Avocet will be back to a more measured figure relative to its assets and its people in no time.

Communicating true value to market

In the coming weeks, Avocet will present its VTEM survey findings from Guinea to the market. In the coming six months, Richards predicts, both this project and TRI-K will amalgamate as the company’s next core focus venture. Next, there is the Southeast Asian transaction which the company has previously told the market ought to take place in around the second quarter, and Richards says that while he is comfortable with that prediction, dealing with the Indonesian government has its more fragile elements.

“We continue to state we are confident that we should complete the sale of our South East Asian assets in the second quarter 2011, and I’m still comfortable with that as nothing to date demonstrates that we won’t achieve that.  However, there have been several indications of the possibility of a slight delay, as a result of the behaviours of our recalcitrant partner, P.T. Lebong Tandai.  That being said, we are managing through the issues, and comfortable we should complete in the second quarter of 2011.  Once we complete the sale of our South East Asia assets, it is going to allow us to emerge a pure West African gold play – with a strong operating asset in Inata, and many exciting prospects in its exploration pipeline,” he says.

“Then we should see results in July of a good, solid second quarter and good cash flow generation.  The rainy season will be upon us in July and August in Burkina Faso and Guinea, and once it is completed, we will get rigs mobilised to commence drill programs for the next field season.”

Richards says that although the strike at Inata has demobilised drilling contractors from Inata and the Bélahouro region, he believes that they may have enough drilling completed at Inata north achieve their target.  “It (doubling of the reserves at Inata) will be close, because the drilling contractors pulled out during the strike, and will not re-mobilise before the rainy season, so we have to work with the drilling we have accomplished to date,” he says.  “If it makes economic sense to go back after the rainy season to carry out further drilling at Inata North—essentially to buff up the existing resource statement, we will do that - or we will use the time and resources to focus on other regional targets”, Richards says. Whatever decision is made, the company will continue towards pursuing to double the project’s reserves by the third quarter.

“We’ve taken steps to divest ourselves of Southeast Asia and we will deliver on that. I said we’d have three or four quarters of contiguous positive cashflow, and we deliver on that as well.  I don’t think anyone anticipated the political and social unrest coming from Burkina Faso, and it could slow down our ability to achieve our drilling metrics, but it doesn’t change the fact we have a very robust ore body that needs drilling,” Richards says.

“I think it’s about being organised as a company.  Having a good strategy, a strong board and strong management—coupled with exciting and highly prospective assets provide the boilerplate of a stable and reliable investment,” says Richards.

Considering Avocet’s multiples and financial metrics relative to those of its peer companies, the question arises as to why this vehicle is trading lower when the boilerplate Richards speaks of is so attractive—and is this company a standout buying opportunity compared to many another. The answer? A resounding yes, and as the southeast Asian transaction progresses, work in Guinea moves ever closer to possible initial construction in early 2013 and Inata’s reserves look ripe for doubling to target, the market continues to realise Avocet’s massive potential. 

www.avocet.co.uk

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