Avocet Mining - shocking financial journalism by Shares Magazine

Below is an excerpt from a piece by Shares Magazine’s contributor Dan Coatsworth that is a stark illustration as to why it is not just “anal”ysts who should be struck out of the industry given the collective value destruction they create (see post below on the Vampire Squid - Goldman Stinks).

Here’s what he actually printed on Avocet - 

“A quarter of the miner’s production is loss-making, representing the 33,000 ounces it must sell at $950 per ounce under the hedge agreement each year. This is nearly half the price it would get selling into the spot market where the latest price is $1,648 per ounce.

It has 173,250 ounces left to deliver under the hedge agreement. At the $950 selling price, this equates to a $164.6 million liability. This is considerably larger than Avocet’s $93 million (£60 million) market cap.”

Anyone reading that and acting on it through fear, has reason to be aggrieved with Mr Coatsworth as the actual liability is not simply calculated through timesing 173,350 by $950 as it appears he as done, this is in fact madness to make such an elementary mistake, but in fact it should be calculated one of 2 ways - 

1. Either through the difference between the hedged selling price ($950/oz) and the cash cost of production (around $1100/oz) - in effect this is the loss to the company whilst the hedge is run down over the life of the hedge and equates to a manageable $26m or

2. As appears to the case in Avocet’s case through buying back the hedge at market prices which around $1650/oz results in a loss of circa $700/oz and so a loss of $121m. However, the true loss over the life of the mine is not in fact of this magnitude as of course Avocet will be selling production at the new spot rate and therefore the loss reverts back (assuming spot remains around $1650) to the $26m.

We believe the market has monumentally over reacted to Avocet and at the current price of 26p it represents the best buy in the global gold mining (producing v exploration) sector. There’s a difference between short term difficulties and long term problems and we think Elliot Advisers - the hedge fund carrying almost 30% of these, will now push for a rival to take them out.

Adjusted book value accounting for the true hedge book loss and reduced Inata reserves at the current price is around 0.35 times - this is a total steal in our opinion and we are buying very heavily. Unlike most other publications, we put our money where our mouth is and certainly ensure we do our homework as our calls in Bumi, Lonmin, ENRC, London Capital Group etc in recent months pay testimony to!

We will flesh out our investment case in the next edition of our magazine due out in just under 12 days and if you’d like a copy then ensure to register on the right.

 

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Additional cautionary signs for the market. Getting ready for the big short...

Regular readers of our blog will know that we have become a little more cautious in recent weeks as the market has had a storming start to the year. Almost all our picks - ENRC, Bumi, LMI, Japan, GBPAUD, Apple etc have been major outperformers and good profits have been reaped.

Well below is a chart of the S&P 500 together with the difference between the percentage of bulls and bears, according to the weekly sentiment survey by Investors Intelligence (II). When the number of bulls is far higher than the number of bears, it’s an indication of a lot of optimism in the market. We can see below that the high levels of optimism have, historically, had bearish implications for the market going forward. Certainly this was the case looking at 2011 and 2012.

Six weeks into 2011, the bulls-minus-bears was very near 40% (circled on the chart) - an extreme measure. The market went sideways after that, before eventually collapsing later in the year and giving back all its gains. Then, in 2012, the market was once again off to a great start, but this time the bulls-minus-bears was much less, right around 20%. The market continued higher and finished the year up about 13%. Currently, the optimism, according to this poll, is the near the 2011 level (marked by the red line). Any further strength going into this weeks expiry of options in the US will be our cue to get aggressively more short (thus far we have been playing it via Put Spreads centred around March and April expiries).

The expiry this week has a lot of open call options around the 1520 level - sellers of these calls will be keen to keep a lid on prices below this level so that they can collect the premium. If however there is a move through here then what is called “delta hedging” will come into play and they could force the market up quite sharply - perhaps towatds 1540. If this occurs going into the close of play Thurs/Fri morning then we will be selling short heavily.

 

Going back to 1990 and looking at those years when the S&P 500 was up at least 2% through the first six weeks of the year and tracking the returns going forward depending on whether the bulls-minus-bears was above 20% or below 20% is displayed in the table below. We can see that the returns are remarkably better when there is less optimism in the market. This is one indicator showing some cause for concern as the market is closing in on all-time highs.

 

Below is a cracking guide that we put together that looks at a possible end date for the current bull run, and also postulates upon the ideal level for one to get long on any imminent correction to capture the last of the returns from this bull market.