26 August 2016
Unaudited Interim Results for the six months ended 30 June 2016
Avocet Mining PLC ("Avocet" or "the Company") today announces its unaudited interim results for the six months ended 30 June 2016.
Highlights
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Q2 2016 gold production 21,086 ounces at cash cost of US$903 per ounce, compared with 20,528 ounces at US$925 per ounce in Q1
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H1 2016 gold production 41,614 ounces at a cash cost of US$913 per ounce, compared with 39,859 ounces at US$1,021 per ounce in H1 2015
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EBITDA of US$6.9 million in H1 2016, and net cash generated by operations of US$11.2 million, primarily used to meet loan repayment obligations at Inata
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Negotiations continue with financing partners for the Tri-K project in Guinea and the Souma project in Burkina Faso, with further announcements expected shortly
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Short term cost pressures in H2 from additional waste stripping and other factors. Production guidance is maintained at 75-85,000 ounces, at a cash cost of production of US$950-1,050 per ounce
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KEY FINANCIAL METRICS
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Six months ended 30 June 2016 Unaudited
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Six months
ended 30 June 2015 Unaudited
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Gold production (ounces)
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41,614
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39,859
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Average realised gold price (US$/oz)
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1,213
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1,203
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Total cash production cost (US$/oz)
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913
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1,021
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Profit/(loss) before tax and exceptional items (US$000)
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3,891
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(7,051)
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Profit/(loss) before tax (US$000)
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3,891
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(37,660)
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Earnings/(loss) per share (US cents per share)
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1.72
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(14.38)
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EBITDA (US$000)
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6,864
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(2,912)
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Net cash generated by operations (US$000)
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11,197
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8,949
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David Cather, Chief Executive Officer, commented:
"The first six months of the year have been positive for Avocet and the gold mining sector as a whole. After a sustained period of weakness, gold prices improved by 25% during H1 2016, leading to improved margins for producers, and renewed investor interest. At Inata, we managed to sustain production levels and reduce costs, generating sufficient cashflow to meet the mine's financing obligations. Meanwhile, discussions with potential finance partners for the Tri-K project have moved towards resolution, and I hope to be able to provide a full update in due course".
Registered Office: 5th Floor 15 Old Bailey London EC4M 7EF England Registered in England No 3036214 1
FOR FURTHER INFORMATION PLEASE CONTACT
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Avocet Mining PLC
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Bell Pottinger
Financial PR Consultants
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J.P. Morgan Cazenove Corporate Broker
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David Cather, CEO Jim Wynn, FD
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Daniel Thöle
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Michael Wentworth-Stanley
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+44 20 3709 2570
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+44 20 3772 2555
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+44 20 7742 4000
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NOTES TO EDITORS
Avocet Mining PLC ("Avocet" or the "Company") is an unhedged gold mining and exploration company listed on the London Stock Exchange (ticker: AVM.L) and the Oslo Børs (ticker: AVM.OL). The Company's principal activities are gold mining and exploration in West Africa.
In Burkina Faso the Company owns 90% of the Inata Gold Mine. The Inata Gold Mine poured its first gold in December 2009 and produced 74,755 ounces of gold in 2015. Other assets in Burkina Faso include five exploration permits surrounding the Inata Gold Mine in the broader Bélahouro region. The most advanced of these projects is Souma, some 20 kilometres from the Inata Gold Mine.
In Guinea, Avocet owns 100% of the Tri-K Project in the north east of the country. Drilling to date has outlined a Mineral Resource of 3.0 million ounces, and in October 2013 the Company announced a maiden Ore Reserve on the oxide portion of the orebody, which is suitable for heap leaching, of 0.5 million ounces. As an alternative, the potential exists to exploit the entire 3.0 million ounce Tri-K orebody via the CIL processing method. An exploitation permit was awarded for Tri-K on 27 March 2015.
CHIEF EXECUTIVE OFFICER'S REVIEW
The last few years have been extremely tough for the mining sector as a whole, with junior gold miners such as Avocet particularly affected by market conditions. By the end of 2015, the gold price had fallen from a peak of approximately US$1,900 per ounce in September 2011 to just US$1,062 per ounce. This fall put a great deal of pressure on Inata, the Company's operating mine in Burkina Faso (whose 2015 cash costs had been US$1,052 per ounce), and reduced the NPV of the Company's Tri-K project in Guinea and its Souma project in Burkina Faso at a time when investment was sought for both.
These pressures were felt across the industry as a whole, with producers often responding by high-grading operations, while investors restricted their focus onto larger-scale projects with more certain returns. For Avocet, this meant that refinancing was particularly difficult, and expensive.
A business review was announced in December 2013, which aimed to attract investment in, or realise value from, the Group's assets. However, the mining sector in 2014 and 2015 proved extremely uncompromising, and despite initial discussions with a number of parties, little substantive progress was achieved.
Since the start of 2016, the market has begun to show tentative signs of life, not least in response to an increase in the gold price, which by 30 June 2016 had risen some 25%. A number of financing and business combination transactions have also been announced in the West African gold mining space in recent months.
Burkina Faso - Inata Gold Mine and Souma Resource
At Inata, a number of measures had already been undertaken to reduce the cost base in response to lower gold prices, and an increase in spot rates provided a welcome benefit to gross margins. The mine continues to face numerous challenges, ranging from operational risks such as equipment availability and variability of recovery levels, to supply chain concerns such as the ongoing exposure to key creditors withholding critical supplies, as well as the fact that the mine has trade creditors of US$31.4 million and financial liabilities of US$31.5 million.
However, during the first six months of the year, the mine produced 41,614 ounces at a cash cost of US$913 per ounce, and generated Net Cashflow from Operations of some US$11.0 million, with which it was able to reduce the mine's financial indebtedness.
This represents a considerable achievement by the Inata team, and there is cause for cautious optimism for the future of Inata.
At the end of 2015, the life of mine had been expected to come to an end in 2017, however work undertaken in the year has extended this to 2019. Satellite deposits also exist which, for a modest amount of drilling, may provide further mill feed to extend this mine life still further.
However, costs are expected to be higher in the second half of 2016. This is a result of a combination of factors but particularly waste mining volumes increasing in order to access high grade ore at depth in North pit. This ore is known to be carbonaceous and will therefore require processing through the Carbon Blinding Circuit ('CBC') which will in turn require additional reagents and an increase in power. There will also be an increase in ore haulage costs from the newly opened Filio pits which are 7-8 kilometres from the process plant. Therefore in spite of H1 cash costs of US$913 per ounce, the overall cash cost forecast for the year of US$950-1050 per ounce remains unchanged, together with production guidance of 75-85,000.
The Souma deposit, a 0.7 million ounce resource located approximately 20km to the east of Inata, is likely to be a source of ore which could be trucked to the plant for processing. The Company is currently in advanced discussions with financiers with a view to securing the US$5-7 million needed to complete the drilling and test work to support the feasibility study needed for a mining permit application.
Tri-K project in Guinea
In the 2015 Annual Report released in April, we explained that the Company was in ongoing talks with regard to financing the Tri-K project in Guinea. Under the Guinean Mining Code, there are some important deadlines in relation to the mining permit, which was awarded on 27 March 2015: the Government has the right to impose penalties of approximately US$100k per month if construction has not commenced within 12 months of the date of the award of the permit; and if construction has not commenced after 18 months (ie by 27 September 2016), the Government has the right to withdraw the permit.
Despite the approach of this deadline, the Company is in advanced talks with interested parties and expects to be able to announce a deal before this time. The Government has been kept abreast of all discussions in this regard, and have indicated their support for the transaction details under consideration.
The Company is aware that not only will a financing deal on Tri-K provide a road map to developing the project into an operating mine, but it will also ensure that the Company is able to retain its interests in Guinea, which are secured in favour of an affiliate of Elliott Management. The loss of these assets could therefore have a significant and negative effect on the Going Concern of the Company - see Note 1 to the accounts for further details.
Further details regarding these discussions will be announced in the coming weeks.
Corporate and head office
During the first half of the year, Inata remained unable to provide funding to pay for head office and corporate costs, largely due to the need to service its own external debt obligations, in particular a short-term loan with Coris bank entered into in November 2015. As a consequence, the Company was forced to obtain an additional US$1.5 million of debt funding from an affiliate of its largest shareholder, Elliott Management, bringing the total balance owed to Elliott to US$25.0 million at 30 June 2016.
As the majority of this funding is secured over the Company's Guinean assets, it is clear that the successful conclusion of the Tri-K financing negotiations is key to addressing this debt. In the near term, a portion of any cash consideration from the disposal may be applied to reducing the debt; longer term, it is anticipated that the Company will realise value from its interest in a larger, successful gold mine, either through a disposal of its residual interest, or preferably through access to a portion of the cashflows from a producing asset.
The repayment of the Coris loan by July 2016 meant that, although the final tranche of Elliott funding of US$200k was drawn down on 25 July 2016, the Company expects to be able to draw funding from the Inata mine to cover head office and corporate costs until the completion of the Tri-K transaction, details of which are expected to be announced before the end of September.
2016 has also been a busy year for the Company in terms of corporate actions, with a number of matters being put to shareholders for approval. Some of these have been driven by compliance, including the need to approve the adoption of FRS 101 in the 2015 accounts, and the share consolidation exercise chiefly driven by the need to comply with minimum share price requirements of the Oslo Børs.
Conclusion
The Company has continued to operate during a difficult period which has now lasted for several years. Much work remains to be completed, including financing negotiations over the Tri-K project in Guinea and the Souma deposit in Burkina Faso, while the Inata gold mine remains exposed to a number of operational and supply chain risks. With a US$25 million loan repayable on demand due to Elliott Management, the Company remains in an uncertain financial position, particularly in the event of the Tri-K transaction not reaching a successful conclusion.