Small Talk: Going for gold over the long term with Avocet Mining

By Nikhil Kumar

Gold bugs must be pleased. Recent weeks have seen growing concern about the outlook for inflation, with signs of price pressures showing up on both sides of the Atlantic.

The combination of higher inflation and sluggish growth poses a dilemma for central bankers, who must balance moves to stimulate the economy with steps to keep a leash on prices.

The outlook in Asia is also troubling, with both Chinese and Indian authorities tightening policy to curb rising prices.

All this bodes well for gold, which offers a hedge against the twin perils of inflation and lacklustre growth. January proved slow, with gold prices retreating off the highs struck at the end of last year. But with the US Federal Reserve's $600bn quantitative easing programme promising to underpin near-term gains, prices have begun climbing once again.

On Friday, fresh Chinese moves to curb inflation – the central bank raised lenders' required reserves by 50 basis points – drove the gold prices back towards $1,400 an ounce. And it is against this bullish backdrop that the gold group Avocet Mining will post full-year figures this week.

At first glance, Avocet's share price appears well geared to the mood in the gold market. The graph shows that the shares are up more than 100 per cent since the beginning of 2010. Not bad, you might say, except that, at 218p, the shares remain well below the levels targeted by analysts.

Evolution Securities, for instance, reckons that, after factoring in the recently announced plans to dispose of its South-east Asian assets, Avocet is worth 215p a share. Include the company's goal to double its reserves at its Inata gold mine in West Africa in 2011, and the shares could be worth 270p, they say.

While acknowledging the pitfalls of putting a price on exploration success, Evolution's scribblers believe that an exception is in order, given the prospectivity of the Inata area. To be cautious, they took an average of the two valuation, which gives a target of 243p – well above current levels.

They aren't alone in aiming high. RBC Capital Markets is targeting 330p – more than 100p above the current price. So, why do the shares remain relatively weak? Though hard to work out for certain, two factors spring to mind.

The first is the sale of the South-east Asian assets mentioned earlier. Some in the market are no doubt awaiting the completion of the sale, which is due later this year and which will allow the company to wholeheartedly focus on its West African operations.

A successful resolution, one that is in line with the plan laid out by Avocet when it unveiled the deal last year, should help to drive confidence in the shares.

The second factor is the hedge assumed by the company in connection with an acquisition in 2009. As RBC noted last month, the hedge position, which ties Avocet to selling a chunk of its production at a fixed price that is below the current market price, "could act as a limiter on the share price".

The disposal will net around $200m for Avocet, meaning it could potentially reduce the hedge with the proceeds. Whether or not it does so will not be known until the deal is completed, when Avocet will decide what to do with the haul.

Without second-guessing management, it is worth remembering that even if it leaves the hedge untouched, by focusing on growing production Avocet will gradually dilute the impact of the commitment. In other words, the long-term story looks attractive, hedge or no hedge.

SMEs and the City

Small businesspeople face a variety of challenges when setting out on their own, not least securing new contracts.

With this in mind, the City of London Corporation will announce this morning a doubling of its investment in a programme that helps small businesses to win a piece of the City supply chain.

The so-called "Ready to Supply the City" support programme will offer help in the form of round-table events with City buyers, one-to-one advice and the like. It will also offer young businesses the chance to take part in workshops where they can sharpen their technical training and brush up on how to present to prospective clients.

The increased commitment – the Corporation will pump in £300,000 – is timely, and comes as small businesses face up to pressures posed by the Government's spending cuts. The expansion follows a successful first phase in 2009, and aims to helps 300 small businesses to become "tender ready", equipped with the skills needed to exploit the many opportunities in the City.