13th Jul 2005 07:00
Avocet Mining PLC13 July 2005 AVOCET MINING PLC PRELIMINARY AUDITED RESULTS FOR THE YEAR ENDED 31 MARCH 2005 Year to Year to Year to Year to Year to 31 March 31 March 31 March 31 March 31 March 2001 2002 2003 2004 2005 US$'000 US$'000 US$'000 US$'000 US$'000 Turnover 36,672 36,500 48,547 68,844 71,060Gross profit 3,864 4,010 6,788 17,064 18,559Operating profit/(loss) 1,951 (14,712) 4,407 14,304 15,936Pre-tax profit /(loss) 289 (15,671) 3,647 15,592 15,803Profit/(loss) after tax and minority 38 (15,662) 2,157 11,280 11,686interestsBasic earnings/(loss) per share 0.06c (23.84c) 3.03c 12.20c 11.26c Gold produced (ozs) 99,750 107,340 134,580 179,930 172,938Total cash cost (US$/oz) 225 225 219 232 278 • Operating profit up 11% at US$15.9 million • Retained profit up 4% at US$11.7 million • North Lanut mine in Indonesia brought into production • ZGC interest increased to 75%; turnaround started • Bank debt fully repaid • Penjom gold resources increased by 54% over last 2 years • Significant exploration results in Malaysia and Indonesia ________________________________________________________________________________For further information please contact:Avocet Mining PLCJohn Catchpole (Chief Executive)Jonathan Henry (Finance Director)020 7907 9000www.avocet.co.uk CHAIRMAN'S STATEMENT A continued rise in the gold price during the year to 31 March 2005 has onceagain seen the Group achieve record profits. Although gold production wasslightly down on last year's figures, there were a number of notableachievements. Penjom, in Malaysia, which is wholly owned by the Company,continued its strong production and profitability, and extended its mine lifewith further exploration successes. The restructuring of our subsidiary inTajikistan, now named JV Zeravshan LLC (ZGC), has given us a majority interestin the company sufficient to invest in a turnaround of ZGC's operations. Alsoduring the year, our Indonesian project in North Sulawesi, North Lanut, in whichwe have an 80 per cent interest, was brought into production. Operationally wehave strengthened our organisation with a number of senior management changesand the way we run the Group's business units. With these achievements weexpect that gold production will increase in the current year to over 200,000ozs. Further enhancing the Company's future is an expanding explorationprogramme, the commencement of feasibility work on two mature projects owned byZGC and a debt-free balance sheet. It is with pleasure that I report on our results for the year to 31 March 2005together with an update on the Company's progress. The Gold Market 2004 was an excellent year for the gold price, with December seeing gold reach aseventeen year high of US$454/oz. Although gold traded at below the US$400/ozlevel in the middle of the year, this was short lived and for the majority ofthe year prices remained above this key level. In 2005 we have seen the goldprice trade in very close alignment to the US dollar until recently when theprice has once again started to ratchet itself up. We have commenced deliveries into our outstanding spot deferred hedge position.At the end of June the outstanding position had reduced from 80,000 to 66,000ozs with an average delivery price obligation of approximately US$300/oz. Wehave committed to deliver at least 4,000 ozs per month into this hedge positionfor this fiscal year. Financial Results A nine per cent increase, to US$414/oz, in the average realised price of allgold sales from the Group's three operations allowed turnover for the Group toincrease by three per cent to US$71.1 million. This, together with thecommencement of revenues from our new mine at North Lanut in Indonesia, morethan offset a four per cent decline in sales from Penjom of 119,197 ozs and a17.5 per cent reduction from ZGC of 45,787 ozs. With sales from North Lanut of6,108 ozs, the Group sold a total of 171,092 ozs of gold during the year. Gross profit increased for the fourth consecutive year by nine per cent toUS$18.6 million giving a gross margin of 26 per cent. A higher realised goldprice more than offset increased cash costs at Penjom and ZGC. Penjom's cashcosts were US$203/oz with cash costs at ZGC increasing to US$439/oz. Cash costsat North Lanut were US$500/oz, reflecting the start up phase of the mine and thetime lag before gold production flows from the heap leach pads. The total costof gold sold by the Group was US$319/oz, inclusive of US$32/oz for depreciationand US$12/oz for the amortisation of Penjom's deferred waste stripping costs. Operating profit increased 11 per cent to US$15.9 million. However, operatingcashflow declined by 26 per cent to US$17.1 million, mainly as a consequence ofthe build up in supply inventories at ZGC and gold inventories at Penjom. Thiscash flow more than covered scheduled debt repayments of US$6.0 million andfunded an increase in capital expenditures from US$12.2 million to US$17.2million. This capital included the completion of development of the North Lanutmine, ZGC's partial refurbishment and gold exploration by the Group. The Group's pre-tax profit for the year increased marginally to US$15.8 million. Although the Group continued to expand its activities administrative costsreduced by five per cent to US$2.6 million. Profit after taxation and minorityinterests rose four per cent to US$11.7 million, whereas earnings per sharereduced eight per cent to 11.3 cents per share following the additional sharesissued at a September 2003 equity placing to fund the construction of the NorthLanut gold mine. The Group's year-end cash balances decreased by US$11.5 million to US$12.1million whereas its net current assets fell by only US$1.7 million to US$22.9million. With its strengthened balance sheet, the Company obtained a US$10million revolving credit facility from Macquarie Bank of Australia which remainsundrawn and a U$1 million overdraft facility from Barclays Bank which alsoremained undrawn at the year-end. For the first time for many years, the Group had no debt at the year-end. Operations and Projects Penjom Production at Penjom, although short of last year's record, was a healthy119,850 ozs, some seven per cent ahead of internal predictions. Estimates ofore resources once again proved to be conservative for the year, understandablegiven the mine's complex geology, with ore grades and ore tonnes exceeding thosemodeled by 28 per cent and 20 per cent, respectively. This made for lessdepletion of the ore reserves than expected. Plant recoveries were maintainedat approximately 90 per cent, although mill throughput was down by six per centfrom the previous year, mostly due to down time while a new Knelson concentratorwas installed in the gravity circuit during the first half of the year. A revised mining plan was adopted mid year on the basis of interim explorationresults which added 210,700 ozs to Penjom's ore resources. In order to accessthe larger resource, the stripping of waste was accelerated which was partiallyaccounts for the increase in the average cash cost for the year to US$203/oz.This reduced to US$196/oz during the second half of the year, as improvementsmade to the plant during the first half came on line. It should be noted thatlike all mining operations globally, Penjom has seen a marked increase in theprices of its main consumables over the past two years. Diesel and keroseneprices have increased in excess of 100 per cent; steel for grinding media by 46per cent; and cyanide by 22 per cent. These alone account for over 20 per centof total costs at the Penjom operation. The underground exploration drive, or E-Drive, into the east wall of the mainKalampong pit was successfully completed during the year. This showed theviability of future underground operations at Penjom and also, through diamonddrilling from underground, proved the continuity of the Penjom mineralisationoutside current pit limits. In March 2005 the E-Drive was closed, as scheduled,as the east wall of the main Kalampong pit was extended in order to incorporatenew open pit reserves into the mine plan. Exploration drilling throughout the year (and continuing into the currentfinancial year) continues to identify resource expansions at Penjom. The 10most significant results received from reverse circulation drilling during theyear have been, using a 100 g/t top cut, 12m at 16.5 g/t, 6m at 34 g/t, 8m at 30g/t, 8m at 35 g/t, 9m at 38 g/t, 9m at 17 g/t, 7m at 46 g/t, 7m at 31 g/t, 4m at174 g/t and 6m at 43 g/t. This should add significantly to the reserves atPenjom, which will be updated later this year. The current life-of-mine plancontains 395,550 ozs as of 31 March 2005. ZGC In November 2004 our interest in ZGC was increased from 49 to 75 per cent withthe formation of a new holding company in Tajikistan, JV Zeravshan LLC, in whichthe government of Tajikistan now owns 25 per cent. However, completion of thisrestructuring had been expected some time ago and its delay caused us to holdback much needed capital investments. As a result, the capacity of ZGC's miningfleet was insufficient for the removal of waste to meet planned ore productionfrom the Jilau Main open pit which is the mainstay of future gold productionfrom Jilau's operations. Instead, low grade ore from stockpiles had to be usedto supplement mill feed causing a 19 per cent decrease in the average grade ofore processed and an equivalent drop in gold production, to 44,240 ozs, whencompared to last year. Combined with significant increases in the prices ofdiesel, steel and cyanide, which now account for approximately 30 per cent oftotal costs at the operation, this pushed unit cash costs well above US$400/oz. Reasonable progress was made with respect to the development of a dump leachingfacility intended for the processing of low grade ores which would otherwise berejected as waste from open pit operations. Following successful trials, and apositive scoping study, this low capital cost project has been largely completedfor an initial capacity to treat 2.5 million tonnes of ore annually at anexpected cash production cost of under US$200/oz. ZGC owns two gold projects with well developed ore resources. Taror, which isnear Jilau's operations, is an underground mine containing over 1.8 million ozsof gold resources. It contains mostly complex, refractory ore which containscopper in the form of chalcopyrite which caused a previous operator to abandonthe mine in the early 1990's. Chore represents a less refractory deposit whichhas been partially developed from underground and has an ore resource containingover 0.9 million ozs. A pre-feasibility study conducted by the Company'spredecessor in 2000 showed that, for a base case, the development of a 500,000tonne per year combined operation for Taror and Chore using biologicalpre-treatment could add annual gold production of 130,000 ozs over a 16 yearlife with average cash costs of US$170/oz, after copper credits, and a capitalcost of approximately US$70 million. During the year, underground operationswere restarted at Taror in order to selectively feed Jilau's plant. However,results have shown that a dedicated process system would be more economic andpilot scale testwork is now planned, using third party consultants, on variousprocesses that should be less capital intensive than those previously proposed. During the past year, although the focus was on operational issues, explorationwork in the area of Jilau's operations did identify small low-grade resources atLaylee and Vera, and a potential resource expansion to the south of theKhirskhona open pit. We remain confident that there is further scope to addsignificantly to the reserves at Jilau, where the current life-of-mine plancontains 1,059,100 ozs as of 31 March 2005. North Lanut Following our decision in September 2003 to build a new mine in Indonesia,construction was completed in September 2004 and gold production commenced aheadof schedule in October 2004. The North Lanut gold mine is the first foreignowned gold mine of any significance in Indonesia to commence production in oversix years. The Indonesian government has been keen to attract further foreigninvestment in the country. However, recent proposed amendments to the mininglaws as well as the Indonesian's government handling of the much publicisedNewmont Mining Corporation Buyat Bay case, have shown that there is some way togo before foreign investors return in their droves to Indonesia. With anestablished base in the country, this should be seen as an advantage andopportunity for the Company. Following a particularly wet rainy season during the first quarter of the mine'soperating life we spent the majority of the last six months bringing operationsat the Riska deposit to their rated capacity.. A number of senior managementchanges have been made in order to bring in appropriately qualified personnelfor mining operations following a period of construction. A mining fleet hasbeen ordered for delivery in the first half of this year. We have seen somedelays in the delivery of a number of pieces of equipment due to increaseddemand from a buoyant global mining sector. Meanwhile the operation has beenworking under an inefficient mining fleet with multiple contractors. This hasdisrupted the production of ore for processing on the dump leach pads and had anadverse effect on gold production during the start-up phase which was 8,900 ozscompared to a projected 16,000 ozs. Exploration within the area of operations included in-fill drilling of theEffendi deposit which increased its estimated resource by 16,000 ozs to 118,000ozs and gave indications of a further resource expansion. Resources ofapproximately 50,000 ozs were also delineated for the Talugon deposit. Thelatest life-of-mine plan as of 31 March 2005 contains 304,100 ozs. Exploration Projects and Joint Ventures In Malaysia, the exploration programme over the last year has shown thepotential of additional Penjom style targets, with the identification of sixtargets for new tenement application in peninsular Malaysia. We have beenworking with the Malaysian government to remove impediments to modern goldexploration in the country caused by a difficult tenement situation as much ofland is tied up by oil palm and forestry interests. At the start of the year the Company consolidated its interest in DamarConsolidated Exploration Sdn Bhd to 100 per cent. Damar holds the Buffalo Reefprospect, located approximately 40 kilometres to the north east of Penjom, wherethe Company's past exploration has identified 92,500 ozs of gold resources. Themajority of these resources are represented by near surface oxide ore.Exploration was undertaken during the year with good results. Metallurgicaltest work is ongoing, prior to a decision on how to proceed with the property.Buffalo Reef could become a small satellite producer to Penjom. In Indonesia, within our Contract of Work (CoW) in North Sulawesi, we commencedthe evaluation of drill targets in the highly prospective Bakan District and weidentified future targets in the Pusian District. Elsewhere in Indonesia we commenced work on the Idenburg property, whichrepresents an expansion of Avocet's presence in Indonesia and possibly the bestexploration play in the Company's portfolio capable of producing a multi-millionounce, high-grade (7-10 g/t Au) reserve amenable to conventional CIL processing.By spending US$2.5 million over a two year period, we will earn a 51 per centinterest in the company that owns the Idenburg CoW, which includes explorationand mining rights over 108,600 hectares (approximately 420 square miles) in theIdenburg area of Papua Province (formally Irian Jaya) on the island of NewGuinea. New Guinea hosts some of the world's largest gold deposits, includingmulti-million ounce reserves at the Grasberg and Porgera mines. We have alsoobtained exploration permits over a 115,000 hectare area in South Sulawesi whichincludes a grass roots project with similarities to the Penjom area. Group Resources and Reserves Group Mineral Resource Summary(1) (ounces) Measured & Indicated Inferred TotalBalance at 31 March 2004 4,891,000 1,322,000 6,213,000Balance at 31 March 2005 4,668,000 1,625,400 6,293,400Additions after depletion 57,700 22,900 80,600 1 Includes minority interests. The above mineral resource is after 202,900 ozs depleted from the resource baseduring the year. It includes 2.8 million ozs attributed to ZGC's Taror andChore projects and does not include over 10 million ozs of gold categorisedunder the Russian system as C and P resources in a number of deposits at ZGCwhich we have yet to evaluate. The majority of the increase comes fromadditional resources established at Penjom, as ZGC and North Lanut concentratedon operational and start-up issues during the year. From the current balance of mineral resources for Penjom, North Lanut and ZGC'sexisting operations at Jilau, the Group's latest estimate of mine productionbefore processing losses is summarised below. Group Life-of-Mine Production at a US$400/oz(1) (ounces) Forecast at 31 March 2004(2) 1,922,405Depleted during the year 202,900Additions 39,205Forecast at 31 March 2005 1,758,700Including:Proven & Probable Reserves 1,350,100Inferred Resources 408,600 1 Includes minority interests. 2 Forecast from 31 March 2004 was based on a US$375/oz gold price. The resource additions do not include the anticipated expansion to the Penjomresource defined by drilling during the year. This expansion will be quantifiedby modelling and mine planning later in 2005. Outlook The recent break out of the gold price against its alignment of the US dollar,as seen over the majority of the last six months, is a positive sign for thegold price going forward. Although the fundamentals of gold continue to beremoved from short term pricing adjustments, a widening supply deficit,continued strong demand from Japanese investors, and now also China, providesyet more support for current price levels or a shift to higher levels. Penjom continues to perform well and the addition of further resources willallow us to announce further increases to the mine life in due course.Exploration success has vindicated the decision to spend additional money onexploration in and around the main open pit over the last two years. Thisyear's exploration budget for Malaysia is US$1.0 million. Included is 12,500metres of reverse circulation drilling in and around the Kalampong open pit. Weexpect ongoing exploration to continue to adjust open pit resources upward andvalidate Penjom's eventual future as an underground mine. In the short termproduction costs are likely to rise as we develop a larger open pit andparticularly if consumable prices remain at current elevated levels. However,in the longer term, with ore stockpiles containing in excess of 153,000 ozs,overall unit cash costs will decrease. Penjom's gold production for the firstquarter of this financial year is estimated to be 29,000 ozs. At ZGC a new management team is overseeing the delayed capital improvement andexpansion plan. We expect to spend US$5 million this year on the mining fleet,plant and infrastructure refurbishment and the installation of a 2.5 milliontonne per year dump leach facility, a funding commitment reduced from earlierestimates. The dump leach facility should produce its first gold duringSeptember 2005. With Taror to be removed as a supplemental source of ore forJilau's plant, we have reduced our annual production target for Jilau toapproximately 85,000 ozs within the next two years. Nevertheless, ZGC'sperformance for this year should exceed last year's as it gears up for itsexpansion. Costs are likely to remain at current levels until higher grade orefrom the Jilau Main pit is mined and treated. We expect to see this in thethird quarter of this financial year. In the meantime, exploration continuesand pilot work will be undertaken on Taror and Chore. If this is successfulboth projects could add at least an additional 130,000 ozs of annual goldproduction to ZGC. ZGC's gold production for the first quarter of this year isestimated to be 9,700 ozs. As well as the review of Taror and Chore ore bodies, we have initiated a reviewof the ten million ozs of Russian category C and P resources on our landposition. This includes 7.7 million ozs around the Chore ore body where weintend to set up a field office. Our exploration budget for ZGC for the currentyear is US$2.1 million, including the Taror and Chore initiatives. It is always pleasing to bring a new gold mine into production especially afteran hiatus of almost ten years. The North Lanut mine in Indonesia will, webelieve, be the first of a number of ventures in Indonesia, which is a vastcountry with phenomenal gold resource potential. The mine has recovered aftera difficult start and the new management team are confident of producing inexcess of 50,000 ozs this year. The dump leach operation will be a low costproducer and we expect it to repay the Company's investment in less than twoyears. We expect that the replacement of contractors with our own mining fleetwill greatly improve the mine's operations. North Lanut's gold production forthe first quarter of this year is estimated to be 10,800 ozs. With Effendi adding to the resources at North Lanut and Bakan holding thepotential to become a stand alone operation we are confident our explorationdollars are well spent. For the current year, the Company has budgeted US$2.3million for exploration in Indonesia, US$1.1 million of which will be spentwithin the Mongondow CoW where North Lanut is located. We have commenceddrilling at the Idenburg Joint Venture in West Papua and expect to receiveinitial results from this programme shortly. We are also in discussions with anumber of parties regarding additional opportunities in Indonesia. With solid operational cash flow combined with zero debt and an unutilised US$10million credit facility from Macquarie Bank, the balance sheet of the Companyremains strong. As you will see in the notice of the Annual General Meeting, we are askingshareholders to continue to give the Company the flexibility to operate in adynamic environment. The resolutions are similar to those approved last year,which grant the Company the ability to issue up to 100 per cent of its issuedshare capital for acquisitions and to issue one third of its issued sharecapital for cash through a private placement. Although it is not the directors'current intention to avail of these facilities we wish to keep the ability tomove expeditiously should such an opportunity arise. Last year shareholdersapproved a restructuring of the balance sheet through a court approved processin order to be in a position to pay a dividend. To date the Company has notapplied to the courts, however it is our intention to do so during the currentyear. The Company's progress over the past year and the increasing scope of itsexploration and mining projects gives me increasing confidence for the futuresuccess of the Company. We remain dedicated to getting the most out of ourexisting assets and this could not be achieved without dedication and hard workfrom our management and all our employees. To them my thanks and continued bestwishes for the future. Nigel McNair Scott 12 July 2005 CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2005 2005 2004 note US$000 US$000 Turnover Continuing operations 71,060 67,389Discontinued operations - 1,455' 71,060 68,844 Cost of sales (52,501) (51,780) Gross profit 18,559 17,064 Administrative expenses (2,623) (2,760) Operating profitContinuing operations 15,936 14,306Discontinued operations - (2) Operating profit 15,936 14,304 Net interest and similar charges (133) 1,288 Profit on ordinary activities before taxation 15,803 15,592 Tax on profit on ordinary activities (5,601) (3,849) Profit on ordinary activities after taxation 10,202 11,743 Equity minority interest 1,484 (463) Profit for the financial year retained 11,686 11,280 Earnings per share 1 11.26c 12.20c Diluted earnings per share 1 11.06c 12.02c CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2005 2005 2004 US$000 US$000 Fixed assetsNegative goodwill (1,501) -Positive goodwill 637 682 (864) 682Intangible assets 3,644 2,204Tangible assets 35,770 26,017 38,550 28,903 Current assetsStocks 19,563 13,195Debtors due within one year 3,392 2,129Debtors due after more than one year 2,685 4,563Cash at bank and in hand 12,079 23,626 37,719 43,513 Creditors: amounts falling due in less than one year (14,808) (18,942) Net current assets 22,911 24,571 Total assets less current liabilities 61,461 53,474 Provisions for liabilities and charges (2,453) (3,275) 59,008 50,199 Capital and reservesCalled up share capital 41,389 41,070Share premium account 43,258 43,210Other reserves 17,909 17,909Investment in own shares (713) (443)Profit and loss account (44,497) (56,226) Equity shareholders' funds 57,346 45,520Equity minority interests 1,662 4,679 59,008 50,199 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MARCH 2005 2005 2004 US$000 US$000 Net cash inflow from operating activities 17,092 23,036 Returns on investment and servicing of finance Interest received 311 287Interest paid (411) (604) Net cash outflow from returns on investmentand servicing of finance (100) (317) Taxation (5,219) (3,550) Capital expenditure and financial investmentPurchase of tangible fixed assets (12,785) (9,033)Deferred exploration costs (4,395) (3,159)Sale of investments 367 - Net cash outflow from capital expenditureand financial investment (16,813) (12,192) Acquisitions and disposals Purchase of investments (476) -Net cash movement from sale of subsidiary undertakings (22) (137) Net cash outflow from disposals/acquisitions (498) (137) FinancingProceeds from issue of ordinary shares 367 16,344Costs of issue of ordinary shares - (863)Investment in own shares (311) -Repayments of borrowings (6,020) (5,994)Capital repayments on finance leases (23) (315) Net cash (outflow)/inflow from financing (5,987) 9,172 (Decrease)/increase in cash (11,525) 16,012 STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES AND RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE YEAR ENDED 31 MARCH 2005 2005 2004 US$000 US$000Statement of total recognised gains and losses Profit for the financial year 11,686 11,280Exchange translation adjustments 43 2,513 Total recognised gains and losses 11,729 13,793 Reconciliation of movements in Group shareholders' funds Total recognised gains and losses 11,729 13,793New capital subscribed 367 15,481Investment in own shares (270) -Net change in shareholders' funds 11,826 29,274 Opening shareholders' funds 45,520 16,246 Closing shareholders' funds 57,346 45,520 Notes to the Financial Statements 1. Earnings per ordinary share The calculation is based on profits of US$11,686,000 (2004: US$11,280,000) andon a weighted average number of shares in issue of 103,828,557 (2004:92,441,188). The fully diluted calculation of earnings per share is based on profits ofUS$11,686,000 (2004: US$11,280,000) and on 105,639,036 shares (2004:93,839,044). 2. Financial Information The financial information set out in this preliminary announcement does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985. The consolidated balance sheet at 31 March 2005, the consolidated profit andloss account, consolidated cash flow statement and other primary statements andassociated notes for the year then ended have been extracted from the Group's2005 statutory financial statements (which have not yet been filed withCompanies House) upon which the auditors opinion is unqualified, and does notinclude any statement under Section 237 of the Companies Act 1985. 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