Initiation of Coverage
Avanco Resources Limited (ASX:AVB) is an ASX-listed junior copper and gold producer and developer focused on projects in northern Brazil. Two projects, the operating Antas copper-gold mine and the Pedra Branca copper-gold development project, are within the Carajás Region in Pará State, famous for its world-class IOCG copper and iron ore deposits. The third project, CentroGold, is in the neighbouring state of Maranhão. AVB successfully developed the Antas mine under-budget and within schedule, displaying considerable in-country project development expertise. Development of the CentroGold project and Pedra Branca would provide a first-phase production profile of 40,000 tonnes of copper and 140,000 ounces of gold. We believe AVB has one of the strongest production growth profiles of any junior copper producer on the ASX, is currently generating positive operational cash flow and is significantly undervalued. We place a Buy recommendation on AVB with a price target of $0.23 per share.
- Capable Management: DJC attended a site visit at AVB’s operations in Brazil mid-year. One of the key learnings that came out of our site visit was AVB’s demonstrated capability to successfully operate in Brazil, a jurisdiction where some other ASX-listed juniors have struggled. We are confident that AVB will bring the same level of expertise to the development of its other opportunities in Brazil.
- Antas production: Antas is AVB’s producing asset. We envisage continued copper production at circa 14,000 payable tonnes as the pit deepens with cash costs of $1.06/lb after gold credits and an AISC down to $1.56/lb resulting in EBITDA margins of up to 51%.
- CentroGold before Pedra Branca: AVB embarked on an accelerated acquisition and development program for its CentroGold Project. We believe the considerable value proposition provided by CentroGold will elevate CentroGold over Pedra Branca to be the second project brought into production. We estimate production of circa 100Kozs per annum at an AISC of approximately US$850 per oz.
- Upside from exploration and acquisition: AVB has ample opportunity to expand production at Antas. Recent exploration success proximal to the mine could materially lift production in our view. AVB has already estimated that production capacity could double by expending circa US$20m in capex on the Antas plant. Exploration success is also expected at Pedra Branca where the ore body is open along strike and down dip.
- Strong growth profile: We believe AVB has one of the strongest production growth profiles of any junior copper producer on the ASX by virtue of the projects it already has in its portfolio. A scoping study on CentroGold is expected in the coming months and an optimised DFS on Pedra Branca is expected in 2018.
- Recommendation: We place a Buy recommendation on AVB and a valuation of $0.23 per share, assuming development of CentroGold and Pedra Branca.