Avocet Mining sinks on likely Inata reserve downgrade

Shares in gold miner Avocet Mining fell following a mixed third quarter update in which it said that an anticipated reduction in the Inata Mineral Reserves at its Inata mine now makes expansion unlikely in the short term.

David Cather, Chief Exectutive Officer explained that the company is re-estimating the mineral reserves at its Inata mine in Burkina Faso, using current cost levels and the lower forecast metallurgical recoveries that have been estimated as a result of metallurgical testwork.

He said: "These factors are likely to negatively influence the estimate, with the result that Mineral Reserves are expected to decrease from the 1.85m ounces previously announced.

"Although engineering work has not yet been completed, the anticipated reduction in Mineral Reserves indicates that the significant investment that would be required for a new processing plant is unlikely to provide a satisfactory return. Accordingly engineering studies are now focused on optimising operations at the current plant, including more modest capital expenditure."

For the quarter ended September 30th, operational improvements at Inata, (of which it owns 90%), yielded an 11% increase in mining volumes.

Gold production was 33,067oz (Q2 2012: 32,917 oz) with cash costs of $937 per ounce in the quarter (Q2 2012: $1,006 per oz). Whilst cost savings were achieved on reagent consumption and operating efficiency improvements, overall cash costs reduced as a result of lower maintenance activity and less grade control drilling, both of which are expected to reverse in the fourth quarter of 2012.

Full year production guidance is maintained at 135,000 to 140,000 ounces at a cash cost of $1,000 to $1,050 per ounce.

Earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter were $6.3m, compared with $8.7m in the second quarter. Although cash costs were lower in the period, this was offset by adverse movements in both stockpile (as the mining schedule delivered less ore to the stockpile), and by gold inventory, reflecting the timing of gold pours, shipments and sales.

Negative working capital movements contributed to net cash from operating activities being $1.4m in the quarter, compared with $20.7m in the second quarter. In particular, the quarter on quarter timing of supplier payments accounted for a decrease in cash flow of $19.2m, as the positive movement in the second quarter of $11.6m was followed by a negative movement in the third quarter of US$7.6m. However, on a year to date basis, movement in its creditors is $1.5m positive, as quarterly movements offset each other.

During the third quarter, $8.9m was invested in capital expenditure, the bulk of which was on the second tailings facility at Inata, and only $4.9m on exploration.

At the end of the period, the cash balance stood at $62m, with debt reduced to $11m, leaving net cash at $51m, compared with $63.4m at the end of the second quarter.

CM