Avanco Resources Limited Q3 production results impress

Zeus Capital

Avanco Resources Limited (ASX:AVB) looks on course to exceed its 2017 full-year production targets after a 3% quarter-on-quarter increase in copper output at its Antas mine in Brazil in the three months to 30 September. Quarterly output of 3.7kt took the year-to-date total to 10.8kt. Annualised, this puts Antas ahead of the upper end of management’s 2017 guidance range of 13.5-14.0kt (and our estimate of 14.2kt). With gold also ahead of budget (8.9koz year-to-date, versus full-year guidance of 9.75-10.5koz and our 10.5koz) and market prices for both commodities buoyant so far in Q4, we consider the risks to our full-year revenue forecasts lie to the upside. US Dollar-denominated C1 cash costs rose by 7.5% in Q3, owing mainly to strengthening of the local currency, and look likely to come in around the upper end of full-year guidance of US$1.35-1.50/lb. But with copper currently above US$3.00/lb the mine maintains an impressive operating margin, enabling Avanco to build cash while also advancing its growth initiatives. An updated resource/reserve for Antas and a scoping study for the CentroGold project are both due before year end, with a feasibility study for Pedra Branca to follow in H1 2018 – these are significant near-term milestones which we believe should add value and provide positive momentum for the shares.

Another solid quarter at Antas: Q3 represented Antas’ best production performance of the year so far, with copper output up 3% q/q to 3.7kt and gold output up 6% to 3.1koz. Annualised, the year-to-date production rates for both are ahead of the upper end of management’s full-year guidance range of 13.5-14.0t copper and 9.75-10.5koz gold (versus our 2017 full-year estimates of 14.2kt copper and 10.5koz gold). C1 cash costs in Q3 were up 7.5% to US$1.57/lb owing mainly to strengthening of the local currency (though importantly, underlying costs in Brazilian Real are stable). This takes year-to-date C1 costs to US$1.51/lb, just ahead of full-year guidance of US$1.35-1.50/lb copper (and our estimate of US$1.41/lb). We will review our forecasts as Q4 progresses, but with copper and gold both trading above our assumptions for the period we consider the risks to our revenue estimates lie to the upside (offsetting any potential negative impact to our forecast margin from potentially higher USD costs).

Cash builds: The higher quarterly production together with further strengthening of the copper and gold price resulted in record quarterly free cash flow generation from operations of US$7.2m. This enabled Avanco to build its cash position by 8% to US$28.5m whilst also investing in it its project pipeline – US$2.6m was spent on exploration and evaluation work during the quarter and US$2.0m was spent on accelerating the acquisition of 100% ownership of the CentroGold project. A scoping study of the latter is due by year end, as is a revised resource and reserve estimate for Antas (which we expect will prolong the currently scheduled life of the mine).

Investment view: Avanco is trading at a significant discount to our NAV estimate of A$0.18/share, which we see scope to increase as CentroGold advances. We believe this should narrow as copper continues to firm and as Avanco further optimises Antas and de-risks and ultimately develops both CentroGold and the Pedra Branca project.

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