Companies: AVM   

Some companies change their spots more convincingly than others. Avocet Mining spectacularly fell from grace in the late 1990s when its attempt to thrive as a major producer in a volatile tungsten market dominated by China met with failure. The shares, which had peaked well above £2 on the Full List, at one point fell below 10p and friends were few.

Today Avocet, which transferred to AIM four years ago at 13p after annual losses of £10 million, presents a notably different picture to the market. It is making money, has successfully tapped the City for funds and is seen as poised for a dramatic acceleration in profits growth.

Now fully focused on gold, the company increased output from Malaysia, Indonesia and Tajikistan 20 per cent to 208,530 oz in the year to March. It has set itself the target
of becoming a one million ounce annual producer.

Avocet increased its gold reserves 62 per cent to 2.76 million oz in the last financial year and increased its (less certain) resources 17 per cent to 7.2 million oz. Against this background, the company made £9 million pre-tax on revenues 26 per cent ahead at
£50 million.

The pre-tax figure was a mere 2.5 per cent up on the previous year, helped by a £600,000 write-back of earlier environmental clean-up provisions for a tungsten mine closure in California. Margins were squeezed by an overall eight per cent increase in cash production costs to $300 an ounce – still half of today’s market price of gold.

Cash costs rose 19 per cent to $242 an ounce at the 100 per cent-owned Penjom mine in Malaysia, at present Avocet’s star producer, yielding nearly 118,000 oz last year, which also brought a 41 per cent extension to its expected life. By contrast, costs fell 60 per cent to $200 an ounce at 80 per cent-owned North Lanut in Indonesia, which produced 52,520 oz and is seen as having the fastest growth potential.

Production costs reached an uneconomic $634 an ounce at the company’s early-stage ZGC operation in Tajikistan. But that reflected pre-stripping of waste and dump leaching of low-grade ores and City analysts see costs there falling to (a still high) £480 this year.

Current prospects enabled Avocet to raise £30.5 million at £2 in May to develop a major new mining project at Bakan in Indonesia and advance progress at Penjom. Company watchers at broker Mirabaud Securities expect Avocet to achieve gold production of 470,000 oz, nearly half of its eventual goal, by 2010.

John Catchpole, who became chief executive of Avocet in 2000, played a key role in the company’s transformation. However, family issues obliged him to resign
last month.

Catchpole has been replaced by former finance director Jonathan Henry, who has often represented Avocet to institutions. Eric Vessel, who was responsible for turning round a then-ailing Penjom in the 1990s, has been made chief operating officer.
The City has welcomed both appointments, though it still regrets Catchpole’s abrupt departure. ‘Henry has good people skills and Vessel is well respected in mining circles,’ comments one analyst, arguing that ‘the company has good “tier two” management.’

One of the London market’s few junior producing gold companies, alongside Peter Hambro, Highland Gold Mines and Randgold Resources, Avocet could increase pre-tax profits nearly fourfold to £35 million this year, according to house broker Evolution. With increased reserves, Bakan due to start producing in two years and the £30.5 million placing proceeds, the path to expansion is clear.

Continuing buoyancy in the gold price is clearly important to market perceptions of Avocet’s prospects, though the company has limited its ‘downside’ risk by buying put options at $450 an ounce for 120,000 oz of its annual production and selling calls at $700 an ounce. On Evolution’s estimate of 22p earnings per share this year, the shares’ prospective price/earnings ratio at 189.5p is an undemanding 8.6.