Avanco Resources Limited Site visit – progress on all fronts

Zeus Capital

A recent visit to Avanco Resources Limited (ASX:AVB) projects in northern Brazil confirmed our belief that the group’s portfolio has significant growth potential, and that the company has a management team with the technical capability and local know-how to realise this potential. The Antas mine is on course to produce 13.5-14.0kt of copper at cash costs of US$1.35-1.50/lb in 2017, which we estimate could generate group EBIDTA of US$28m. This is enabling Avanco to internally fund reserve extension drilling at the mine and to progress feasibility study work at its two key growth projects, Pedra Branca and CentroGold. The former could be in production by mid-2020 and see Avanco grow group copper output to 40-50kt pa over the longer term. The latter could be developed as a c100koz pa gold operation by as early as H2 2019, subject to permitting resolution. With an EV that equates to 5.7x our 2017 EBITDA estimate (and just 4.3x our 2018 estimate), we feel this growth potential is far from fully reflected in Avanco’s undemanding current market valuation.

Antas performing well: Antas continues to build on its strong start to production last year, and looks well on course to meet management’s 2017 full-year guidance of 13.5-14.0kt copper and 9.75-10.5koz gold at cash costs of US$1.35-1.50/lb. Our operational forecasts are unchanged, but we have raised our copper and gold price estimates for H2 2017 after marking-to-market for recent positive movements – our 2017 EBITDA estimate rises to US$28m accordingly (up from US$26m previously).

Fuelling progress on projects: Cash flow is being reinvested in resource/reserve drilling in a bid to extend Antas’ life of mine – an initial drill programme is complete and will feed an updated mine plan later this quarter. It is also funding resource upgrade drilling and development study work at Pedra Branca and CentroGold. Avanco has been busy optimising the recent Pedra Branca prefeasibility study and we expect an update by year end, leading in to full feasibility study completion in Q2 2018. Subject to permitting and financing, this could see construction commence during 2019, and first production around mid-2020. As a simpler (and likely cheaper) open-pit development, CentroGold could well jump ahead of Pedra Branca in the timetable, subject to legacy permitting issues being resolved. Having recently negotiated an acceleration to the acquisition of 100% ownership in the project, we anticipate increased news flow around CentroGold, including a scoping study this quarter (building on the substantial body of historical work).

Valuation: Avanco Resources Limited is trading at a significant discount to our sum-of-the-parts NAV estimate of A$0.18/share (which see scope to increase with permitting and development study progress at CentroGold). We think this discount should narrow as copper continues its recovery (we use a conservative long-term price assumption of US$3.00/lb from 2019) and as Avanco further optimises production at Antas and de-risks and ultimately develops Pedra Branca and CentroGold.

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