In spite of missed production targets, Canaccord Genuity analyst Steven Butler is maintaining a buy rating on Avion Gold Corp. (TSX: T.AVR, Stock Forum) with a target for the stock of $3.
In a weekly precious metals report, the Canaccord Genuity managing director and senior analyst also named four “most undervalued” gold stocks based on the share price versus the value of the underlying commodity (gold). They are Aura Minerals Inc. (TSX: T.ORA, Stock Forum), Keegan Resources Inc. (TSX: T.KGN, Stock Forum), Golden Star Resources Ltd. (TSX: T.GSC, Stock Forum), and Osisko Mining Corp. (TSX: T.OSK, Stock Forum).
Avion is a West Africa-focused gold producer which owns an 80% stake in the Tabakoto and Segala gold mines in Mali. It is also drilling on the 100%-owned Hounde Group concessions in neighbouring Burkina Faso, which it acquired in October 2010 after issuing 10.3 million shares to Avocet Mining Plc.
On Thursday, Avion was trading at $2.14, giving the company a market cap of $939.1 million, based on 439 million shares outstanding (464.6 million fully diluted). The 52-week range for the stock is $2.57 and 73 cents.
Last week, Avion said third quarter production from its flagship Tabakoto and Segala open pit operations amounted to 21,687 ounces, 17% below the targeted 26,100 ounces.
However, Butler said his stock price valuation and forecasts for Avion remain unchanged.
The Toronto-based company attributed the production shortfall to long delays in getting parts and supplies through customs at the port of Dakar, Senegal and through the Senegal/Mali border.
“This resulted in lower mechanical availablility of the open pit mining fleet, and consequently lower grade ore was processed, the company said. Production at the site was also affected by heavy rainfall, which also reduced access to higher grade ore from the Tabakoto mine’s Dioulafoundou open pit. The bulk of the company’s production comes from the Dioulafoundou open pit.
As a result, the company expects to produce between 95,000 ounces and 100,000 ounces this year. That’s down from the previous target of 100,000 ounces.
However, Avion expects annual production to increase to 160,000 ounces in 2012, an amount that exceeds Canaccord Genuity’s current estimate of 147,000 ounces, Butler said.
With a US$16 million drilling program under way, the company is developing underground mines at both Tabakoto and Segala. Its medium term goal is to increase its annual production to 200,000 ounces.
So far this year, Avion has completed 28,400 metres of drilling on the Hounde property in Burkina Faso, which is set to become the fourth largest gold producing country in Africa . Key players in the region include Iamgold Corp. (TSX: T.IMG, Stock Forum), and High River Gold Mines Ltd. (TSX: T.HRG, Stock Forum).
“Our valuation and forecasts are unchanged at this stage and will be revisited when we publish our 2011 third quarter scorecard later this month,” Butler said.
“Despite the weaker than expected production results in the Q3/11, we continue to see good re-rating potential and valuation upside following the delivery of the expansion/underground ramp-up at Tabakoto, a potentially larger resource at Hounde (late 2011/early 2012, and the completion of a preliminary economic assessment study for Hounde (2012).
However, while Butler is maintaining a buy rating on Avion, he said he believes the ongoing expansion and underground ramp-up at Tabakoto increases the company’s risk profile in the near term. The stock is therefore being removed from the Canaccord Genuity Focus List, he said.
Tabakoto is located about 200 kilometres south of the city of Kayes, and consists of seven deposit groups and stockpiled ore.
Separately, Canaccord Genuity ratings for the four “most undervalued stocks” are as follows:
Aura Minerals (speculative buy).
Keegan Resources (speculative buy)
Golden Star (hold)
Osisko Mining (speculative buy)