Reuters: Hot Stocks: UPDATE 2-Avocet cuts exposure to costly hedge, secures funds

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UPDATE 2-Avocet cuts exposure to costly hedge, secures funds Mar 25th 2013, 11:32 Mon Mar 25, 2013 7:32am EDT * Agrees deal with Macquarie to buy back hedged gold ounces * Hedge position to be eliminated by 2016 * Shares rise 21 pct By Sarah Young and Clara Ferreira-Marques LONDON, March 25 (Reuters) - Africa-focused Avocet Mining , battling to stabilise its finances after cutting the reserves estimate at its sole operating mine, has struck a deal that will allow it to fund two key projects and reduce an unfavourable forward sale deal. Shares in the gold miner soared 21 percent to 22.9 pence on Monday amid relief the company will not need to raise additional equity to help pay to reduce the forward sale - or hedging - arrangement with Macquarie Bank. While striking deals on future sales can give companies a secure revenue stream, they can also prevent them from taking advantage of rising prices. The price of gold has surged around 500 percent since 2000, as investors sought a safe haven during the global banking and euro zone crises. Avocet's prospects deteriorated markedly last month when it said it would cut the reserves estimate at its Inata mine in Burkina Faso, restricting its potential to invest in growth projects and putting it under pressure financially. That sent its shares tumbling more than 50 percent. "Whilst a reduction in the hedge book is likely to be taken as a positive, financing is likely to remain strained," Nomura analysts said in a research note. Avocet said it had agreed to a deal with its top shareholder and Macquarie that will see it buy back 29,020 of hedged gold ounces for $20 million, representing 17 percent of the previous total of 173,250 hedged ounces. It will also accelerate delivery of the remaining hedged gold ounces, reducing the hedge position to approximately 100,000 ounces by the end of 2013 and eliminating it by 2016. Avocet's chief executive David Cather told Reuters it was crucial the company had outlined its route to becoming an un-hedged producer. "Philosophically we would not wish to be a hedged-producer," Cather said, explaining the company had inherited the hedging arrangement from a takeover deal in 2009. "You've seen what's happening in Cyprus, and generally elsewhere in the euro zone, we think there's enough uncertainty that the gold price will hold up," he added. Gold prices are down 4 percent in the year to date, primarily due to investor expectations the Federal Reserve will curb its U.S. quantitative easing programme, and have fallen for the last five months straight. Avocet also agreed a loan facility with Elliott Management, its single largest shareholder, of up to $15 million, to help fund completion of a feasibility study at its Tri-K project in Guinea and corporate activities. "I think the market had jumped to what was proved to be an incorrect conclusion that we were only going to use equity as a way of refinancing the company," Cather said. Nomura analysts said repayment of the Elliot loan by the end of 2013 could put pressure on Avocet's balance sheet in the fourth quarter. Changes to the terms set by Macquarie for Inata's holding company have also released cash that will be used to fund exploration work at the Souma project in Burkina Faso. Link this Share this Digg this Email Reprints

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