Avocet Mining (AVM)

Avocet Mining (AVM) remains one of our preferred exposures in the junior resource sector. The company's valuation fundamentals are compelling in our opinion. Avocet has a robust production outlook, and the likelihood of reserve upgrades should underpin leverage to strength in the gold price. Although third quarter production fell 9 percent from the previous year to 44,712 ounces, we remain confident in the outlook for future earnings growth.

Quarterly gold production at the Penjom mine in Malaysia fell 11 percent to 28,576 ounces. This decline was due primarily to planned plant overhauls. Encouragingly, the miner remains focussed on extending the four-year life of Penjom by drilling underneath the existing open pit.

The 75 percent owned Zeravshan Gold Company (ZGC) in Tajikistan delivered third quarter production of 11,437 ounces, a 9 percent dip on last year. Volumes have been hampered somewhat by an expansion programme which will ultimately boost the mine's long-term performance. Avocet is investing US$10 million in the mine, and we are delighted to hear that target capacity will be achieved within the next fifteen months. 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.

We remain excited by the growth potential offered by Avocet's 80 percent owned North Lanut project in Indonesia. Management expect to reach forecasted annual output of 60,000 ounces within the next three months. The company believes that production at North Lanut could rise to 80,000 ounces in 2005/2006, with cash costs as low as US$150 per ounce. Although North Lanut has a life of just five years, we anticipate this will be extended by a well directed exploration campaign in surrounding areas.

We remain confident that Avocet can realise targeted annual gold production of 300,000 ounces by 2006. While the lives of group's three mines are relatively short, the surrounding exploration blocks are highly prospective. Avocet has committed US$5 million to annual exploration expenditure, which should underpin resource (currently 6.2 million ounces) upgrades and the extension of respective mine lives.

We do not regard the miner's valuation fundamentals as overly demanding with an historic price earnings ratio of around 12 times. We expect upward earnings revisions will be driven by reserve and production upgrades over the next 12 months. An added attraction is that Avocet has minimal hedging in place which increases leverage to a rising gold price.

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