Avocet Mining (AVM)

Fat Prophets rate Avocet Mining (AVM) as one of the most attractive gold companies listed on the LSE. The miner has a robust production outlook, and the prospect of reserve upgrades should boost leverage to the rising gold price.

Avocet's mines in Indonesia, Malaysia and Tajikistan have targeted production of 300,000 ounces by 2006. Whilst the company's most recent half year interim result disappointed with production falling 9 percent on 2003 to 82,000 ounces and cash costs increasing 14 percent to US$271 per ounce, we remain buoyed by an increasing production and earnings profile.

Annual gold production at Avocet's flagship Penjom mine in Malaysia is now around 120,000 ounces, with total cash costs averaging US$200 an ounce over the last 12 months. Results from ongoing exploratory drilling continue to impress with the company recently reporting a 27 percent increase in mine reserves to 810,000 ounces. Given drilling results to date we are expecting further production and reserve upgrades over the next 12 months. AVM is also endeavouring to extend the four-year life of Penjom by drilling underneath the existing open pit.

The 75 percent owned Zeravshan Gold Company (ZGC) in Tajikistan has disappointingly underperformed expectations with production of 23,000 ounces and cash costs of US$427 an ounce in the 6 months to 30 September. The cost blow-out was due to production shortfalls, and higher prices for energy and steel. We are confident however that cash costs will trend downwards as a result of modifications currently being made to processing techniques. We are encouraged by the likelihood of further significant improvements in the performance of ZGC over time following AVM's commitment to invest US$10 million in the mine. Avocet plans to ramp up production to 100,000 ounces per annum, extend mine life by 6 years, and lower cash costs to less than US$250 by 2006.

We are excited by the growing potential of AVM's 80 percent owned North Lanut project in Indonesia. Production commenced last October with forecasted annual output of 50,000 ounces and operating costs of less than US$200 an ounce. Management has indicated that production could rise to 80,000 ounces in 2005/2006, with cash costs as low as US$150 per ounce. While North Lanut has a life of just five years, we believe that a well directed exploration campaign in the surrounding areas will uncover addition gold resources and ultimately extend the mine's life.

We are also heartened by management's efforts to underwrite future production growth. Avocet has committed US$5 million to annual exploration expenditure, and has identified 20 exciting prospects around the three operating mines. Avocet has also continued to extend its reach to other parts of Asia, with the recent agreement of a joint venture in a highly prospective exploration area in New Guinea. Three primary targets have already been identified, with initial drilling to commence in the coming months.

Based on the miner's progress to date we are confident that AVM can achieve targeted annual gold production of 300,000 ounces by 2006. While the lives of Avocet's three mines are relatively short, the surrounding exploration blocks are highly prospective. We expect AVM will continue to shore-up additional resources (currently 6.2 million ounces) and extend the respective mine lives over the coming year. We do not regard the miner's valuation fundamentals as overly demanding with a historic price earnings ratio around 14 times - and upward earnings revisions likely to be underpinned by reserve and production upgrades over the next 12 months. In addition with minimal hedging in place we believe Avocet offers significant leverage to a rising gold price.

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