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Why does Avesoro Resources look so cheap on paper?

By Gary Newman | Sunday 15 April 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

West African gold miner Avesoro Resources (ASO) hadn’t been performing as well as investors had hoped since it started production, but things finally seem to all be coming together now.

That is already starting to be reflected in its share price, and it is currently trading at the highest price we’ve seen since the recent share consolidation, of around 265p to buy, giving a market cap of around £212 million.

I know some are wary of buying shares that have already risen, but if this is now starting to head in the right direction then there should still be plenty more upside to come, and you can easily argue that it is also safer now that it appears to be turning things around.

Its main asset was the New Liberty mine in Liberia, the largest in the country, and it finally looks to have overcome some initial problems and has just achieved record production of 27,870 ounces for the first quarter of 2018.

The company also recently added to its producing assets by acquiring the Youga and Balogo mines in Burkina Faso with a deal worth $69.5 million in total - $18.5 million in cash and $51 million via the issue of around 2 billion shares (pre-consolidation).

So far that purchase looks to have been a good move as it has just announced record production of 40,218 ounces for the first three months of 2018, up 39% on the previous quarter and the highest amount ever processed at Youga since it was set-up in 2008.

Moving forwards, output is expected to continue to increase – a new tertiary crusher is about to begin operations at New Liberty and should increase throughput by 17% - and the company is expecting to meet full year guidance in the 220,000 to 240,000 ounce range.

With all-in sustaining cash costs of around $1,000 per ounce, and operating cash costs of $620-660/oz, it isn’t the cheapest producer around, but with gold at current levels that still leaves plenty of margin for profit. The management have vastly improved production levels and reduced operating costs at all three mines since it has been in charge.

The company had been making a loss – around $27.5 million for 2017 compared to $112 million in 2016 – but given the current economics it should have turned that around now and be profitable in the current year. It was cash flow positive on an operations basis in 2017, with nearly $11 million coming in, but it purchased new equipment during the period to increase output at New Liberty, and that also accounted for borrowings to increase to $134.1 million.

If all goes to plan this year and it generates the sort of profit that I’d expect, then the market valuation is going to look cheap on a PE basis.

But is often the case with these companies that too crazily undervalued on that basis, there is often a bit more to it, and with miners that usually comes down to the life of the resource. That certainly seems to be the case with Avesoro, as questions remain as to how many more years the New Liberty mine in particular has left. The company is trying to extend that via further exploration, and there is an option to extend the existing mining activity, but the costs of extracting gold from some areas aren’t that attractive.

Work this year though aims to prove-up a possible 275,000 ounces located below the current pit floor at New Liberty, but still within the $1,300/oz cut-off.

Other drilling will be taking place this year at its other licences within both Liberia and Burkina Faso to increase its contingent resources – including at Ndablama which has indicated and inferred resources of 515,000oz.

Overall measured and indicated resources currently stand at 2.3 million ounces, and with 1.2 million ounces of reserves. And that is where the problem for this company currently lies, as at current production rates it will have exhausted those reserves within the next five years.

That to me certainly explains why it appears to still be trading cheaply and at such a low PE, as it is yet to prove that it can replenish these reserves so that it is able to maintain a good level of profitability over a longer period of time.

I think that it has a chance of doing that if its exploration and expansion plans go well, and it should be helped if gold prices remain at current levels or higher, as many are predicting.

So, whilst I certainly don’t see it as being anywhere near as undervalued as some seem to be claiming, I can see potential here as a speculative buy based on both its likely cash flow in the next few years, plus the upside from expansion of its operations.


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