BAKU, Azerbaijan (ResourceInvestor.com) -- 2007 was a pivotal year for Avocet Mining. Management has shown its mettle by successfully ramping up production, scaling up operations and bringing down operating costs at its two gold mines - Penjom in Malaysia and North Lanut in Indonesia - bit the bullet and even booked a profit on the sale of stakes in projects deemed "non-core" and found the time and resources to explore and acquire new prospects that they believe will pave the company's way into the ranks of mid-tier producers. In addition, the company's profit margin and exposure to higher gold prices has grown while a gold sale price floor has been maintained by restructuring the terms of a gold option collar with Macquarie Bank.
Improving operations and higher gold prices resulted in Avocet posting a US$26.3 million profit for its fiscal first half, a 331% increase. Basic earnings per share more than trebled, rising 308%, to 20.92 cents. Adding to the profits tally and freeing up capital and resources, management also sold off the ZGC mine in Tajikistan, its interest in the Buffalo Reef prospect in Malaysia and its remaining interest in Primary Metals, Inc., freeing up capital and enabling it to focus the company's resources on its two core producing mines and exploring opportunities for organic growth and acquisition.
Growing Production & Greater Spot Market Exposure
All this activity puts Avocet in a good position to deliver even better results as 2008 progresses.
The company has US$112 million in cash and no debt on its books, as well as access to a US$25 million revolving credit facility from Macquarie Bank, which came along with the restructuring its gold option collar that resulted in an unrealized mark-to-market loss of US$10.5 million during the first half of the fiscal year. "This restructuring allows Avocet to benefit from the widely anticipated increase in gold prices for the remainder of 2007 and 2008," CEO Jonathan Henry stated in an Oct. 3 media release.
Put options for 460,000 - 10,000 gold ounces per month - struck at US$600/oz. and expiring between October 2007 and July 2011 set a minimum sales price for Avocet's gold production. Call options for 190,000 ounces at 10,000 ounces per month struck at US$755/oz. expire between January 2010 and July 2011. This leaves the company's production exposed to the spot gold price between now and January 2010. The collar was structured so that no cash outlay was required and it is not subject to margin calls or adjustments.
Gold production at Penjom and North Lanut totaled 82,830 ounces through Sept. 30, 2007, the first six months of fiscal 2007. Third quarter gold production through December totaled 39,248 ounces, a 15% increase compared to the 34,177 ounces for the corresponding previous year period, bringing the total through the last nine months of 2007 to 122,078 ounces.
Q3 gold production at Penjom fell to 18,253 ounces though total tonnage was up 41%, to 4.6 million, due to lower grade ore. Management expects to commission plant operations this month that will enable it to process 25% more ore going forward. Avocet also expects to release a revised resource and reserve estimate by the end of March.
Avocet's fiscal third quarter cash costs dropped 21% year-to-year to US$276 per ounce compared to US$351/oz.
The North Lanut mine, located on Sulawesi, benefited from higher grades and improved operating efficiencies. Q3 production rose 87% year-over-year to 20,995 ounces while cash costs dropped 29% to US$276/oz. This offset sharp rises in the price of diesel and reagents, as well as increased lime usage, which is used to control pH while ore is processed, management reported in a Jan. 30 media release.
Unit cash costs for the quarter at Penjom dropped from US$333/oz. to US$275/oz after adjusting for deferred stripping. Pit mining operations were focused on waste stripping that should facilitate additional ore extraction and extend the life of the mine. Excess stripping costs of US$3.4 million - US$186/oz - were deferred in Q3.
Penjom's unit mining costs decreased 22% to just over US$1/tonne as improved operating efficiencies more than offset increases in consumables and increased royalty payments, which, based on 7% of revenue, are indexed to gold sale prices.
"In the current inflationary environment it is especially pleasing to be able to report continuing cost reductions which firmly place Avocet in the lowest quartile of global gold producers. Meanwhile the strong gold price has improved margins and our operations continue to generate significant cash that we are investing in our portfolio of production, development and exploration assets," Henry commented.
In addition to expanding operations and controlling costs at North Lanut and Penjom, management is now focused on building up its prospect pipeline. "We now have an excellent pipeline of exploration projects with the potential to bring additional mines into our portfolio in a two- to five-year timeframe," Henry commented in Avocet's H1 report.
Exploratory and resource definition work is focused on prospects within the Banda and Palopo properties in north and south Sulawesi, respectively, acquired in 2007.
Initial estimates of JORC-compliant Measured, Indicated and Inferred Resources of 519,000 ounces - 16.87 million ounces grading an average 0.96 g/t at a 0.3 g/t cut-off grade - are expected to be published by the end of March in a feasibility study for the Bakan prospect. An environmental impact study has been approved and the company is in the process of acquiring the permits required to develop the resource.
Positive results from exploratory drilling at the Mangkaluku prospect in south Sulawesi were announced following discovery of significant gold counts by trenching. Results from 12 drill holes spanning 1,832 meters to evaluate two vein systems included intersection of a 2-meter interval grading 117 g/t Au at 34 meters depth and a 12 meter interval grading 3.51 g/t Au from 117 meters. Avocet has acquired a 90% beneficial interest in a 181-square kilometer national exploration license since the trenching results were announced in August and November 2006.
Results of a 34-hole in-fill reverse circulation drilling program have also upgraded the estimated gold resource at North Lanut's Riska deposit. A revised model has added 99,000 ounces to a new total resource estimate of 337,900 ounces gold, as per definitions in the 2004 JORC Code. Measured, Indicated and Inferred Resources at Riska come in at 7.32 million tonnes grading 1.44 grams/tonne (g/t) Au at an economic cut-off grade of 0.3 g/t.