Avanco Resources Limited (ASX:AVB) has reported a solid set of financial results for H1 2017, and looks on course to at least meet our full-year estimates, and potentially to exceed them should copper hold its recent gains. We will monitor our copper price forecasts as H2 progresses, but even based on our now increasingly conservative looking 2017 full-year assumption of US$2.60/lb (prices have soared to over US$3.00/lb over the past month), Avanco is trading at an undemanding EV/EBITDA multiple of 6.4x (dropping to 4.3x when looking forward to our 2018 EBITDA estimate, which assumes an average copper price of still just US$2.80/lb). The 2017 H1 results demonstrate that Avanco has consolidated upon its successful maiden year as an operator in 2016, and we expect the group to unlock further value over the coming months with a revised resource/reserve model for Antas by the end of this year (which we expect will extend the life of mine) and a definitive feasibility study of its next, larger-scale project Pedra Branca in H1 2018.
Production and revenue in-line: Antas produced 7.1kt copper and 5.7koz gold in H1, putting the 2017 annualised copper and gold run rates respectively 1% and 9% above the upper-end of managements full-year guidance range of 13.5-14.0t copper and 9.75-10.5koz gold (versus our 2017 full-year estimates of 14.2kt copper and 10.5koz gold). This resulted in Avanco generating gross revenue of US$46.1m in H1 (a period in which the copper price averaged US$2.61/lb), equating to 50% of our full-year estimate of US92.7m (which assumes an average copper price of US$2.60/lb).
Costs within range and trending down: C1 cash costs in H1 averaged US$1.49/lb copper (towards the upper end of management’s full-year guidance range of US$1.35-1.50/lb), but were trending down as the period closed (June costs were US$1.36/lb, and a cost efficiency programme has been introduced which is expected to unlock further savings). Avanco accordingly generated underlying EBITDA for the period of US$10.9m (versus our 2017 full-year estimate of US$25.7m, which assumes year-average C1 cash costs of US$1.41/lb). Free cash flow for H1 totaled US$9.5m, and Avanco ended the period with US$26.3m in cash and no debt.
Investment view: Avanco Resources Limited is trading at a significant discount to our sum-of-the-parts NAV estimate of A$0.18/share. We think this should narrow as copper continues its recovery (we use a long-term price assumption of US$3.00/lb from 2019) and as Avanco further optimises production at Antas and de-risks and ultimately develops Pedra Branca. With an EV that equates to 6.4x our estimate of 2017 EBITDA and just 4.3x our 2018 estimate, we feel Avanco’s shares have ample room to re-rate upwards.
