Description

Avion Gold Corp. is a Canadian-based gold company focused in Mali, West Africa. The Company has an 80% interest in the Tabakoto and Segala gold projects in Mali. The company is fully-financed and is expected to reach or exceed a capacity of 100,000 oz by 2012. We expect Avion to generate positive operating cash flow from  its first year of production (2009) and we believe shares of AVR have upside potential of over 48% based on adjusted P/CFPS (target 8x 2010 at $1100/oz gold) and EV/Oz ( target $120/Oz to M+I Oz discounted by 25%, plus Inferred discounted by 50%). 

This upside potential is net of a 25% discount for company specific risks (operations in Mali and logistic issues). However, there would be reason to believe that if the company executes on plan and gold remains in a bull market that this discount may be overcome, thus adding upside to our fair value.

Profile
Production: Gold production at AVR’s projects commenced in Feb 2009. Production guidance for 2009 is 50,000 ounces, rising to 72,000 in 2010 and over 100,000 ounces by 2012. As with many mining projects during the first year of operation, AVR’s operations had various challenges in production ramp up. The latest of these issues happened two months ago – the main access road to the Tabakoto/Segala gold mine had been degraded by a lengthy period of heavy rainfall, resulting in the near cessation of transport truck movement on the road and caused a temporary shutdown of milling operations. In early October 2009 AVR successfully completed road repair operations and plans to further improve the road in late 2010 in order to improve access and reduce weather-related issues during the rainy season. The above mentioned issues forced management to cut 2009 production guidance by about 10% to 50koz.

The latest production rate reported by AVR was 6,278 ounces of gold during twenty-five days of October 2009 (excluding the first 6 days of weather related interruptions). For the last two months of 2009 management expects production over 7000 oz/month and is on track to meet the revised target production of 50koz in 2009.

Production upgrade: In Q2 2009, AVR initiated project expansion studies with the goal to evaluate the ability to (1) establish a mine capacity run rate of 100,000 ounces per year by 2010; and (2) quantify a schedule of equipment required and a mine plan to produce the annual equivalent of 200,000 ounces per year in 2011. The project throughput is expected to increase by adding plant capacity to its site infrastructure in Mali (possible addition of crushing and grinding equipment, and related gold recovery capacity). The expansion studies are expected to end in Q1 2010 while potential capacity upgrade is expected to be completed by end of 2010.

Resources: Avion has Measured and Indicated Mineral Resources of 1.21 million ounces of gold grading 3.48 g/t Au and Inferred Mineral Resources of 1.14 million ounces of gold grading 3.50 g/t Au. In addition, in November 2009 AVR executed a definitive agreement to earn 75% interest in of Great Quest's concessions located adjacent to the south and west sides of the AVR's Tabakoto property.

Exploration program: The 2009 drilling program is nearly complete with approximately 100 drill holes totaling 21,000 metres drilled with results released for 16 drill holes to date. These holes will form the basis for an updated resource for the Segala Main zone that Avion expects to have completed before year-end.

Assets' history: Avion purchased the Segala and Tabakoto gold projects from Nevsun Resources Ltd. in May 2008, for US$20 million and a 1% net smelter royalty (NSR). The acquisition price included all infrastructure, including a plant capable of processing from 2,100 to 2,700 tonnes per day, diesel generators, camp accommodation, tailings dam and office buildings. Nevsun placed the project on maintenance & care in 2007 and subsequently sold the gold project in 2008 as the project failed to meet the estimated grades and costs.

Investment Positives

• No debt - AVR has no financial debt on its balance sheet and just completed a $20M capital raise which, along with cash on the balance sheet, should fund capex in 2010. (Though exact capex plans are not finalized.)
• Exploration program - Ségala/Tabakoto deposits are open along strike and at depth. AVR has almost completed its 21,000 metre exploration program for 2009. An updated resource estimate is expected by 2009 end.
• No hedging - currently does not hedge for gold price risk.

Investment Risks

• Country risk - Mali -
• Single project - single project makes the company vulnerable to unexpected negative events.
• Logistics issues - Heavy rainfalls during Q3 2009 degraded the main access road to the Tabakoto/Segala gold mine, resulting in the near cessation of transport truck movement on the road. While management is working on improving the access to the area and reduce weather issues during the rainy season, there are still weather related risks

Forecast
In our model we have production and costs assumptions in line or more conservative than those mentioned in latest presentation, technical report dated June 2009.
Gold price is assumed to stay flat at $1100/oz.

In determining CFPS we used 347Mn shares, resulting from 215Mn outstanding at Q3 2009 end, 57.5Mn share equity financing (incl. over-allotment), plus all outstanding options/warrants.

Valuation
We value AVR.V at C$0.67 based on adj. P/CFPS 2010 and EV/Oz (weighted 67%/33%) methods and applying a 25% discount for country and logistics risks.

In EV/Oz valuation, the M+I resource is discounted by 25% while inferred resource is discounted by 50%.
Adjusted P/CFPS valuation includes standard P/CFPS plus net cash per share.

Catalyst

-drilling results / reserve expansion (2009 drilling results by 2009 end, annual drilling programs)
-production expansion study results (by Q1 2010)
-company re-valuation if AVR will consistently meet its operating guidance and plans