I believe a good buying opportunity is currently presenting itself in the shares of Avesoro Resources (ASO) and although it may go lower in the short term, I can see decent risk versus reward here for at least a medium term trade. Shares in this African gold miner are trading at pretty much the lowest price that we have seen since the 100:1 share consolidation back in January 2018, and even prior to that, in today’s terms it was trading higher. The share price now sits at around 155p with a market cap of just £126 million. The share price has taken a bit of a hit recently as a result of gold taking a bit of a dip and news emerging that one of its institutional shareholders, City Financial, had called in the administrators and by the look of things this fund was selling down many of its holdings – there were similar drops on a lot of the other shares that it held, along with persistent selling prior to, and around, the announcement. It didn’t hold a notifiable amount of shares in Avesoro – around 905,000 or 1.1% - and volumes have been low of late so it may still have more to come, and that could see this drop lower. Production here comes from the New Liberty mine in Liberia and Youga operation in Burkina Faso, and during 2018 produced over 220,000 ounces of gold. This constituted a 15% increase on the previous years production, although it was at the lower end of guidance, which had been set at 220,000 to 240,000 ounces for the full year 2018. It looks unlikely that there will be any production growth during this year and we could even see a dip, as guidance is set at 210,000 to 230,000 ounces, and looking even further into the future we may not see production levels going much higher, but we should see a much longer mine life.
The company recently completed a new pre-feasibility on its New Liberty, including updated mineral reserve and resources estimates, based on the transition to underground mining (rather than just the current open pit operation) after encouraging drilling results, and it also announced mineral reserves for the satellite Ndablama deposit. The underground operation would extend the mine life by seven years and is expected to cost circa $36 million in capex, and overall would give average production of 114,500 ounces over the next eleven years. During 2018 New Liberty produced just under 110,000 ounces, so we won’t see much of an increase on that, on an average basis, but at some point towards the end of the current open pit mine life, around 2022, that would have started to drop off sharply anyway. So an extension to 2029 will have a big impact, and on a post-tax NPV(10) basis would be worth $286 million, assuming an average gold price of $1,300/oz. There is also further potential upside from the 1.75 million ounces of measured and indicated resources which could be moved into the reserves category after further drilling takes place. This transition to underground mining is going to mean some shorter term pain though for the company as it means that all-in sustaining cash costs for 2019 are going to be high, possibly as much as $1,190/oz, and that will impact on profitability – but it is something that the market has been warned about, and as long as it keeps costs below that level I can’t see a problem – if it came in a lot higher though that would cause further downwards pressure on the share price at that point.
It is also unlikely that any significant growth is going to come from Youga, as guidance is for 110,000 to 120,000 ounces in 2019, compared to actual production of just over 110,000 ounces for 2018, and AISC is expected to $950/oz to $1,015/oz. That AISC is higher than I am expecting the figure for 2018 to have been when that is released (guidance was $805/oz to $845/oz), but on the positive side, extensive drilling was carried out during 2018 and an update on reserves at Youga is expected during the next few months. In order to fund the working capital required for the coming year it entered into a new unsecured finance facility with its largest shareholder, Avesoro Jersey, for an additional $10 million – at the start of the year it drew down $15 million of its existing facility to repay other loans that were due – which carries an interest rate of 8% and is due for repayment 12 months after the first drawdown. If drawn down, it would mean that outstanding loans of $32.7 million are due to Avesoro Jersey. Financially things don’t look too encouraging at the moment as Avesoro has generally been loss making, and I can’t see much changing there for the coming year as it is still spending money on developing its assets – total capex for 2019 is expected to be around $45 million.
But moving forwards, once the underground mine at New Liberty is completed, I would expect to see AISC reducing back to more reasonable levels, and the company to start making a net profit. The big risk here is that the gold price takes a proper tumble, and in that scenario it could find itself in financial trouble quite quickly, but the flipside is that any improvement in gold will see the company doing well in the future, especially now that the mine life has been extended and there is possibly further upside to come from more drilling of its resources. Of course with any natural resources company it is easy to get too focussed on the amount of the resource that it is producing and to forget that there isn’t much point in getting it out of the ground unless it proves to be profitable to do so – not just on an operational basis, but an overall net basis so that eventually the company is able to return money to its shareholders via dividends. For Avesoro I would say that the jury is still out on whether it will achieve this, but the potential is definitely there and I would argue that the market cap reflects that risk. Talking of risk, I would still rather invest in a company that is already producing – more than 200,000 ounces of gold per annum in this case - and is trying to make its operations more profitable with an extended lifespan, than I would an outfit with resources in the ground and no actual route to extracting them.
I wouldn’t necessarily be in a rush to buy as I do think that the City Financial situation could continue to be a drag on the share price here for a while, barring a sudden increase in volume for it to sell into or an ‘off the books’ deal for the shares it still holds, and I do think an even cheaper buying opportunity will present itself for those that are patient over the next few weeks. If you do get a chance to buy cheaply – even from the current price – I would expect to see upside over the coming months and even if you’re just in for a trade there should be a chance to make a profit if either gold rises, or the Youga reserves update shows a decent increase. Any good news and buying interest could see it rise fairly rapidly, given that so few shares are in public hands.
Filed under: Avesoro Resources, BB morons, Bearcast, Concepta, Staffline, Dignity, uranium, zinc, Brexit
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