Avion Gold continued its sell-off, falling nearly 25% in three days since releasing itsQ3/11 results. Sure earnings missed, but adjusted EPS of
.02 compared to
.03 certainly doesn’t seem to justify a sell-off of
this magnitude. Canaccord Genuity Precious Metals Analyst Steven Butler was particularly surprised by the markets reaction,
given Q3/11 was weak due to temporary issues. Further, production had been pre-released and grade results had indicated the
potential for materially higher cash costs on a sequential basis. As a result, production numbers seemed generally in line with
what the market should have expected. Total cash costs of $925/oz were sequentially higher than the $639/oz reported in Q2/11
but these costs were driven higher mainly due to temporary issue (non-recurring items impacted cash costs by an estimated
$251/oz). Importantly, costs were just $35/oz higher than Butler expected. The stock was likely also weighed down by
production guidance for the year, which was revised to 92,000-95,000 oz in 2011 (from 95,000-100,000 oz previously). This
has been attributed to a lower grade zone of transition material encountered within the Dioulafondou open pit (lower grade than
estimated by the geologic model) that also presented metallurgical challenges that temporarily lowered mill recoveries to 88%
from 96%. Management indicated that the problematic zone has now been mined out and ore grades have now come back in
line with the block model. Further, mill recoveries have also returned to normal levels. Butler expects costs to stabilize over the
next several months as the Tabakoto expansion and underground ramp-up progresses. Despite some operational risk associated
with the ongoing Tabakoto expansion/underground ramp-up, he continues to see good re-rating potential and valuation upside
following the delivery of the expansion at Tabakoto, a potentially larger resource at Hounde (late 2011/early 2012) and the
completion of a Preliminary Economic Assessment study for Hounde (2012). Butler believes the shares have been materially
oversold at current levels and it seems AVR management agrees. The CEO and CFO stepped into the market on Wednesday,
buying a total of 210,000 shares at price of $1.83-$1.88 on Wednesday. The CFO continued buying on Thursday, picking up
110,000 shares at a price $1.71-1.81.