Broker snap: Nomura cuts target for Avocet after 'teething problems'

3rd Jul 2012 10:50

Nomura has slashed its target price for FTSE 250 west Africa-focused gold miner Avocet Mining by nearly a half following the recent production downgrade and news of delayed project expansion."After a positive commissioning phase in which nearly all production and cost targets were met, the Inata mine is now going through significant teething problems," the broker said in a research note on Tuesday.A lack of machinery availability, harder-than-expected ore, slower progression of the mine plan causing lower grades and the increasing presence of preg-robbing carbon in ore at depth are among a host of issues which are affecting operations and subsequently recoveries. Meanwhile, the group said that the planned expansion of its Inata mine is now expected before the year-end.As such, the broker has reduced its full-year production estimates by 15% to 131k ounces of gold and increased its cash cost estimates by 25% to $1,081 per ounce.Nomura said: "Due to the collapse in margins and the increasing impact of hedged ounces, our earnings per share (EPS) forecasts fall by 64% to 6.6 cents." Next year's EPS forecast is cut by 16% to 15.7 cents.As such, the target price comes down to 120p, form 220p previously. A 'neutral' rating is kept."What appeared to be a funded production growth with exploration upside story will now see the narrative change as the Inata Gold mine will now go through a remedial bedding-down phase. With higher costs, lower production and higher capital costs, cash flows will likely be impacted significantly."The broker says that while these issues are likely "solvable", Avocet's potential to build a take-out premium "should provide some impetus to stop the fall in the share price."By 10:27, shares were trading 3.37% lower at 74.5p.BC