Avoca Resources 22 Feb 06

Gearing up for gold production in the second half of 2006

Avoca's attraction lies in its status as an emerging gold producer at a time of rising gold prices. Sensibly, the company is pursuing initial development of its Higginsville gold deposit by toll-treatment. This minimises risk by reducing capital charges and avoiding issues of project delays and cost over-runs. Avoca aims to pour its first gold in the second half of 2006.

"Avoca is likely to be producing gold at Higginsville before the end of 2006."

The recent pause in the upward trend has allowed AVO to consolidate the strong rally into October's all-time high of 73.5 cents. In our opinion the consolidation should prove temporary and enable the shares to form a solid support base.
Over the past week AVO has broken to the topside of a trading range. Located between 62.5 and 50 cents, the range had contained the shares for two months. In our opinion this indicates improving investor sentiment and clears the way for a retest of October's all-time high.

Avoca's flagship Higginsville gold project lies between the mining towns of Kambalda and Norseman, in the Eastern Goldfields region of Western Australia.

The Higginsville area produced more than 600,000 ounces of gold from open-pit operations and 25,000 ounces from underground by its former owners Samantha Gold and then Resolute Mining. Resolute sold the exploration rights to WMC Resources in 1999, who then sold them to Gold Fields as part of their gold business divestment.

Avoca acquired the project in June 2004 for $4.5 million cash and additional staged payments of $1.75 million upon delineation of 150,000 ounces of reserves. At the time of acquisition, the project had Inferred Resources of 4.89 million tonnes @ 2.8 g/t Au for 445,000 ounces, including a higher-grade component of 389,000 tonnes @ 7.59 g/t Au for 95,000 ounces at Poseidon South Extended.


Avoca has enjoyed considerable exploration success since project acquisition, the most significant being the Trident discovery in late 2004.

Trident sits 200 metres north of underground workings associated with the previously mined out Poseidon South open-pit. An intensive resource-drilling program during the first half of 2005 led to the compilation of an initial JORC-compliant gold resource in the latter part of 2005.

The total current resource at Trident is 2.99 million tonnes @ 5.0 g/t Au for 485,000 ounces. Significantly, more than 90% is in the Indicated Resource category, allowing for possible conversion to reserves.

Two steeply oriented lodes define the Western and Eastern Zones of Trident, along with a new, high-grade lode discovery known as Athena. The flat nature of the Athena Lode is in stark contrast to the Western and Eastern Zones and Avoca believes there is substantial potential for additional high-grade mineralisation further to the north and west of existing drilling.

A pre-feasibility study on the economics of mining the Trident deposit during the December 2005 quarter shows that at a benchmark gold price of A$620 per ounce, the Trident project can be developed as a five-year underground mine with a potential mining inventory of 364,000 ounces.

This represents an 81% conversion of the Indicated Resource category, which is very high by gold industry standards.

Metallurgical testing shows excellent recoveries averaging between 95% and 97% from conventional gravity separation and cyanide leaching.

Significantly, the pre-feasibility study does not include assessment of mining the very high grade Athena Lodes, which host some of the best mineralisation so far found in the Higginsville goldfield. Results released last week indicate the Athena Lodes extend at least 500 metres in strike length and an initial resource estimate is expected before the end of the current quarter.

Avoca has commenced a definitive feasibility study on the project and aims to begin underground development and production of the Trident deposit in the second half of 2006. The study will incorporate an upgraded resource estimate, as well as detailed geotechnical, metallurgical and underground mine studies.

Avoca has also commenced JORC-compliant re-estimation of the unmined open pit resources at Higginsville. The Pluto and Fairplay mines ceased production in the late 1990s at gold prices of around A$450 an ounce. Due to the low prevailing gold price, open pit development of several unmined, near-surface resources ceased. Given the current strong A$ gold price of A$750 an ounce, Avoca is investigating recommissioning previously closed pits as well as those pits that weren't commissioned in the A$450 per ounce price environment.

Sensibly, Avoca views toll treatment as the optimal means of generating near term cash flows. Accordingly, negotiations are underway with various possible third party toll treatment providers. In the current environment, the risk of capital over-runs with a stand-alone project and delays in procuring plant, equipment and contractors are high.

By following the toll treatment route, Avoca can commence production more rapidly and avoid substantial forward selling of its future production to meet financiers' demands. The company will however contemplate a stand-alone operation in the future. We would anticipate pre-production expenses of around $6 million to fund the Higginsville development.

A potential mining scenario could see annual gold production 70,000 ounces over an initial five-year period at a cash operating cost of A$350 an ounce. Based on a spot gold price of A$700 an ounce (current price A$750) this would generate net cash of $24.5 million annually to Avoca. Exploration success at Athena could provide sufficient tonnage to boost annual production up towards the 100,000-ounce mark.

Tony James has been appointed General Manager - Mining, to support Avoca's Higginsville development plans. He most recently held a similar role for LionOre Australia and has previous mine management experience at the Black Swan nickel mine, the Kanowna Belle gold mine and the Lennard Shelf zinc and lead mines.


With likely near-term gold production in the second half of 2006, Avoca Resources represents an attractive gold play. The decision to pursue toll treatment minimises risk and dilution for investors. There should be plenty of positive news to sustain investor interest, with an initial Athena resource estimate in March and results of the Higginsville feasibility study in August. We recommend Avoca Resources as a Buy to all Members around 67 cents.


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