Our favorite gold stock, Avocet Mining, is looking battered!   But things look like they’re about to turn. A recent trading statement delivered positive news.

And a few days ago, Avocet promised to announce profits of $47-$52m for the year to end March.   While precise figures will have to wait for the full announcement in July, this will do nicely to be going on with. Last year profits were only $23m.

Reassuringly dull

Low costs…rising production… politically relatively stable locations… prudent management – the Avocet story is reassuringly dull.

It wasn’t always so. Until recently, they operated in such locations as Tajikistan. Avocet got out of that country – much to the relief of the shareholders.   Now Avocet is mining and exploring in Malaysia - it owns 100% of Malaysia’s Penjom mine, the country’s largest gold producer. It also owns 80% of the North Lanut gold mine in North Sulawesi, Indonesia.

The trading statement also announced the latest gold production figures. These came in 10% better than the same time last year, at 157,907 ounces. The average price received was 26% higher.

While those numbers went up, costs went down. Cash costs are 10% lower than a year ago, at around $316 an ounce. In fact Avocet is one of the cheapest gold producers.

As CEO Jonathan Henry commented: “In the current inflationary environment it is especially pleasing to be able to report continuing cost reductions which firmly place Avocet in the lowest quartile of global gold producers.

“Meanwhile the strong gold price has improved margins and our operations continue to generate significant cash that we are investing in our portfolio of production, development and exploration assets.”

Those profits do not even include money from disposals. There is another $21m from the sale of a prospect in Malaysia.

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Management is playing it safe on the gold price. It has prudently set up a cap arrangement on 190,000 ounces of production from January 2010 to July 2011 at $755 an ounce. And it has placed put options on 400,000 ounces at $600 an ounce between April this year and July 2011. So it has protected its profits even if the gold price does not hold at current levels.

Rising capacity and loads of cash

Not that this kind of arrangement pleases everybody! Some of the investment message boards have carried grumbles at its complexity.

For the board, it is a reflection of having lived through $350 gold. The effect of that was nasty even for low cost producers. The directors prefer to take out insurance – just in case!

Production is rising nicely. Avocet’s Bakan project in Indonesia will be commissioned in 2009. Based on the current mine plans, Avocet should produce around 170,000-200,000 ounces a year for the next five years. There are ten new exploration projects in Indonesia, and a number have been showing “excellent” drilling results.

Capacity will likely expand beyond what Avocet currently indicates, as exploration projects mature.

There is a load of cash - $122m at the year end – and no debt. But that cash is a bit of a two-edged sword!

Institutional shareholders don’t buy gold miners for their cash. They want that money put into producing gold.

Pressure is now on for an acquisition

While Avocet has produced deals in the form of exploration projects and has steadily increased the resources and reserves in its portfolio, that’s not enough!

It’s in a hurry to increase production. Avocet wants to reach an annual production level of 1 million ounces. And it wants to do this while it can still enjoy the current high gold price. Hence the pressure for acquisitions.

Avocet already has an interest in approximately 27% of Dynasty Gold Corporation, and a 19% interest in Monument Mining. Both companies are listed on the TSX Venture Exchange in Canada.

Jonathan Henry has given the reassurance that the board is discussing potential acquisition opportunities. As a 1% shareholder himself he also has a vested interest in growing Avocet as fast as possible. But the pressure is on.

Keep looking!

Erin and Isabel

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