Is This Still a Gold Mine?

LONDON -- A few weeks ago I wrote about Avocet Mining (ISE: AVM.L) , a gold miner with its principal operation in Burkina Faso, West Africa. I concluded that it was an interesting but high-risk play because, as with all miners, its share price depends heavily on the market price of its mineral -- gold in this case. Mining value plays are generally higher risk than other value shares in my view for this reason and also, with Avocet being no exception, there may be political risks associated with the local areas involved.

It recently issued half-year accounts to June30, so it's worth taking another look in the light of these latest figures. Before I do that, though, one clear difference from my earlier piece is the share price. Then it stood at 66 pence, now it is 82 pence for a rise of 24% so I have already struck a little bit of gold there. Expect a lot of volatility in a share like this.

OK, the accounts and the nasty stuff first. Avocet has suspended the dividend for 2012. Previously, I recorded that a payout of 6 pence had been forecast for this year thereby offering a very high prospective yield of 9.1% on the then price, but such hopes have now gone from hero to zero.

The 2012 EPS was forecast at 8.4 pence but that has now been slashed to 5.2 pence, making a forward price-to-earnings ratio for this year of a non-value 15.8 against 7.9 previously. A double blow resulting from both lower EPS and a higher share price.

Net tangible assets at June 30 were $348 million, which at the current exchange rate of $1.556/pound makes about 224 million pounds. With a market cap of 164 million pounds, AVM still trades well below tangible book on a ratio of 0.73, though this compares unfavorably with the 0.55 I calculated in my previous feature. Not unexpectedly a strongly rising share price will tend to out the price-to-book ratio, there having been little change in the asset value. In fact, that's exactly what the value player wants to happen.

And the final leg of the PYAD quadruped, net cash is still present to the tune of $63.4 million, equivalent to about 41 million pounds and a little less than the 48 million pounds earlier.

As before, I consider the key ratio here to be the P/TB and as I have said many times, I regard this as the lead value ratio. The amount per share is in the region of 112 pence, but with miners this calculation can fluctuate a lot because one of their principal assets is the estimated quantity and value of gold in the ground, which depends on the gold price -- itself very volatile. On the latter point, the market price of gold is now $1,604 per ounce against $1,565 when I first wrote about Avocet.

Elsewhere in the accounts, I note that its cash costs per ounce shot up in the second quarter to $1,006 from $850 in the first quarter. At the same time its average realized price was lower at $1,439 against $1,543. Thus profits were squeezed at both ends.

As if that wasn't enough, production fell to 32,917 ounces in the second quarter from 38,296 in the first quarter, both of which compare unfavorably with the same quarters last year.

In the light of all this, it is surprising perhaps that net profit after tax on continuing operations for the half year was $15.8 million against $22.8 million for the corresponding period last year. I mean, it's well down, but not by quite as much as the above facts might suggest.

Looking ahead to the second half of this year, the directorspeak refers to improving operational performance at its principal mine, known as Inata. Gold production for the next six months is forecast to be 64,000 to 69,000 ounces, with the fourth quarter representing more than half of this total for technical reasons. Those figures are somewhat below the 71,213 produced in the first six months. In future, they are hoping to expand production at this mine.

So what do I think of Avocet now following the latest results? Their situation has worsened from a value perspective in that EPS will now be much lower for 2012 and the dividend has gone. And although it still trades below book, the discount has narrowed with the rising price. The net cash though remains.

However, P/E and yield are the weaker aspects of a value play. Not irrelevant but just less important to me than P/TB and net cash. Thus I still see some potential profit in Avocet, but my previous warning must remain in that this is a much higher-risk play than usual. In contrast to a typical value share, the price here is driven as much by the gold price and sentiment than by hard numbers and I recommend that advantage be taken of this by investors to realize any reasonable profit that arises.

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Stephen does not hold shares in Avocet Mining. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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