Avocet - SBM Conviction Buy
This results in an adjusted book value of $250m. Deduct again the hedge liability of $112m, and we get to $138m or around £90m at present FX rates — twice the current market cap. However I slice and dice the numbers, it seems that for existing shareholders, if a rights issue is called for, and likely to be a 1 for 1 with a partial hedge buy back, then you should certainly take up your rights. I see a similar situation to the Lonmin one recently in which the shares shot up after the balance sheet was repaired. Avocet’s profitability profile going forward will be dramatically enhanced and the discount to book value should narrow (its peer group trades around 0.8 times book on average).
Potential Catalysts One intriguing element in this story to me is the name Elliot Advisers who sit on the shareholder list. For those of you who do not know who Elliot are, they are an activist based hedge fund that typically takes stakes in struggling firms and they hold currently around 27% of Avocet — the vast majority, sadly for them, being acquired for well in excess of one pound.
So underwater on the position are they, that I wouldn’t bet against them agitating for the company to put themselves up for sale or actively solicit a bid for the company. Potential names put forth by industry commentators are African Barrick Gold, Semafo or indeed a Chinese player. With the valuation parameters we have presented here, it is inconceivable to us that the slide rule is not being run over the company given the very large disjoint between the company’s fundamental value and the short term difficulties centred around the hedge book that have so decimated the market cap. The other alternate is that the company takes in a strategic partner in some of their prospects. Unless the asset base is completely bogus, again from a corporate activity perspective, what better time to gain exposure to valuable gold producing assets, particularly with the gold price relatively depressed for the first time in several years? Bearing in mind all the above, SBM makes Avocet Mining, in the same vein as our calls on ENRC, BUMI and Lonmin where the asset base v market cap was so dislocated, a Conviction Buy. We disclose that we are long the stock.
CHART - AVOCET MINING
March 2013
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