December Q Production Report, 2017
Avanco Resources Limited (ASX:AVB) released its production report for the December (4th) Q. Although AVB achieved production guidance for copper and gold, production issues with blast hole drilling has kept costs higher than anticipated. Higher costs are likely through the first part of Q1 2018 but should stabilise and improve through Q2.
Higher open pit mining costs: AVB are still dealing with blast rig drilling issues in Stage 2 that has resulted in the mining being focused towards the periphery of the ore body where confidence in tonnes and grade are lower. As a result, lower ore tonnes were mined at a lower grade than predicted in the reserve model. Increased waste movement, lower grades stockpile adjustments during Dec Q resulted in increased unit operating costs q-o-q.
Production guidance achieved: However, AVB comfortably achieved FY17 copper (14,101 tonnes) and gold (11,366 ounces) updated production guidance. Management wisely dialled back the processing plant during December to undertake maintenance and to take the pressure off the open pit. This has allowed the mine to accelerate waste movement and replenish ROM stocks before the onset of seasonal rains. An updated resource estimate for Antas is scheduled for completion by end Q1 to define the FY2018 production schedule and FY18 production guidance. We anticipate lower production costs as FY18 progresses.
Operating Cash flow: AVB still made operating cashflow of US$2.1m for the Dec Q resulting in US$16.8m for the FY. However, US$5.6m was received post 31 December. AVB had cash of US$24.3m at Q end after having paid US$3.9m in capex, project and exploration costs plus US$2.0m for the accelerated acquisition of CentroGold.
Development studies on-track: AVB also increased resources at it’s Centro Gold project by 45% during the Q with the addition of a maiden resource at Chega Tudo. The Centro Gold Scoping Study is due for completion during Q1 with a decision on licencing anticipated by the end of Q2. The Pedra Branca Feasibility Study remains on track for completion by end Q2 2018.
New exploration project, Pantera: Subsequent to the end of the Q, AVB agreed terms for an option to acquire (100%) the Pantera Project from Vale at an acquisition cost of $0.04 per lb. Pantera is located 110km west of Pedra Branca and close to existing infrastructure. The project has the potential to significantly add resources and reserves and fits into AVB’s strategy for expanding its footprint of development projects in the Carajas of Brazil.
Slight change to Antas valuation: We make some changes to our forecast costs, recoveries and metal production for Antas to reflect higher operating costs in 1H 2018. We drop our valuation for Antas slightly to US$114.2m compared to our original valuation of US$124.9m. This drops our AVB valuation by 1c per share (rounded) to $0.22 from $0.23.
Recommendation: We maintain a Buy recommendation on AVB and a valuation of $0.22 per share, assuming development of CentroGold and Pedra Branca.
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