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When we run out of cash

Bob Moriarty
May 19, 2009

What happens when we run out of cash? It's a serious question that hasn't been asked. The US government has committed something like $13.6 trillion dollars in bailout funds, securities swaps and giveaway programs. What if there isn't $13.6 trillion spare cash in the world to fund it?

Times, they are going to get interesting.

I've made it clear over the last couple of years that the safest bunker is to be in gold, silver or shares of producers. Gold and silver are insurance policies. You wouldn't go without an insurance policy on your car or your house, why would you go without insurance on your financial future, indeed, maybe even your life?

Own some gold or silver that you can put your hands on. If nothing else, if the world somehow gets brighter tomorrow, it's a great savings program.

Hint, that light at the end of the tunnel isn't a brighter tomorrow, it's a train wreck headed our way. If you want to make money, I can think of nothing safer than gold and silver producers.

I just came back from a weeklong trip where I traveled about 35 hours just to visit for 5 hours on a property in Mali. It was one of the shortest site visits I have ever made and one of the most interesting.

I've tried to make the point many times in the past that the most important element of making a stock purchase is the evaluation of management. It's also about the hardest because it's so subjective. Basically, bad management can screw up the best project and often do. Good management takes lemons and makes lemonade.

This short visit to lovely scenic Mali proved both theories.

A Canadian junior called Nevsun took over management of the Tabakoto gold project in Mali in 1997. It was an immediate hit as the stock surged to a market cap of over $700 million some ten years ago. I remember reading a recommendation by Doug Casey in the late 1990s saying Nevsun was an easy five-bagger. It seems to me the stock was about $6 a share at the time.

By 2001 you could pick up the entire company for under $2.5 million as the shares crashed to a low of $.25. In 2002 Nevsun paid $9 million for the nearby Segala gold project, intending to mine both properties at the same time. In 2003 Nevsun began mine site design and construction of the $170 million dollar project. Actual physical construction began in 2004, aiming at mill completion by mid-2005.

Nevsun management wasn't up to the challenge and fired the mine construction contractor in January of 2006. They finally completed the mill and the first gold pour took place in April of 2006. By September of 2007 Nevsun announces their intent to sell their Mali assets after putting the mine and mill into care and maintenance.

That would be a really good example of how to not run a mining operation. Even the Gods didn't approve. When Nevsun shut the operation down in September of 2007, gold was $670 an ounce and four months later was topping $840.

I've used the quote before; Napoleon said that he would rather have his generals be lucky than skillful. You can always beat skill but you can never beat luck.

Avion Resources (AVR-V) on the other hand has both luck and skill in abundance. Avion bought the project from Nevsun in March of 2008 for a paltry $20 million. Remember, Nevsun dropped $170 million into the mill and their exploration program.

Here's what Avion got; they bought 80% of the Segala and Tabakoto gold projects in Mali. The government has a 20% carried interest. They got a 2200 TPD mill in essentially brand new condition and as many as 2.5 million ounces of gold at a .5 GPT cutoff. The projects are subject to a 3% NSR that can be bought back and a 6% gross royalty to the government of Mali.

It was one of those good news, bad news stories. Upon announcement of the deal, the shares of AVR shot up to $.68 apiece. Avion did a 60 million-unit placement in May 2008 at $.50 to fund the acquisition, a major 15,000-meter drill program and mill startup. But the crashing stock market took hold and the shares crashed to below $.04 in November. Avion was caught between a rock and a hard place. They needed money for startup and no money was available.

It's tough times that define management. Avion came through like a champ. As they progressed with a brilliant drill program and plans for restarting in February of 2009, cash demands mounted as the value of the company and the shares decreased with the slaughter-taking place with deleveraging. In November they traded for as little as $.035 a share, down some 95% in four months.

But Avion is run by some of the brightest guys in the business and they fully understood the value of what they had. Their drill program was coming up with incredible results, 13.56 g/t over 22.5 meters [pdf], 73.5 meters of 2.72 g/t [pdf] and 26.94 g/t over 16.9 meters [pdf].

Stan Bharti of Desert Sun fame is the Chairman of the Board, John Begeman the President and CEO of both Valencia Ventures and Avion was formerly VP of Western Operations for Goldcorp and COO of Wolfden Resources, Chris Bradbrook former VP of Corporate Development for Goldcorp is the VP for Strategic Development. Actually the whole company looks like they got started at Goldcorp.

Avion's excellent technical team managed to put the deposit into production in a few short months, starting in November and in production in February. Andrew Bradfield is the COO with over 25 years experience putting mines into production all over the world. Don Dudek is the Avion VP of Exploration with discoveries in both Canada and Mexico on top of his 25 years of experience. I will say it was the cleanest and smoothest mill operation I've seen in years. They did a great job.

With their backs to a wall, management of AVR agreed to sell 40% of the Segala Gold project to cash rich Dynamite Resources for $5 million in late October to get them over the hump into production. In addition, they announced a private placement for $3 million in December at $.08 a unit.

Issuing shares for pennies apiece can be company killers as Novagold learned last fall. Avion went from a tiny number of shares when the deal was announced to two hundred million shares by the time we showed up on site two weeks ago. But all they did is create a lot of opportunity for those investors who could still count while markets were crashing around them.

The plans for getting the mill back up and running and the drill program continued at full speed. Avion intended to begin production - at a yearly rate of about 75,000 ounces - in February. They met their target on both production and drilling some 15,000 + meters of core. In early February Avion and Dynamite announced their intent to merge with one Avion share buying 1.33 of a Dynamite share. That merger closed about a week ago and Dynamite is no longer.

Just this week Avion held their formal Grand Reopening with the President of Mali as the Guest of Honor, the Minister of Mines and Governor of Keyes and the Canadian Ambassador to Mali.

I think much of the price of the stock for the last few months has been based on the issue of just how many shares would be outstanding at the end of the day. It was a pretty convoluted deal with borrowing money from one source and selling a major share in a prime project to another company and finally merging. But after management sat down and went over what they did and why, it all came together.

Face it, no one, including yours truly, accurately forecast just how bad the markets were going to collapse. But collapse they did and if you were in the midst of a cash intensive project, it was time to sink or swim.

Avion was swimming like a champion. When our group went through a briefing at the mine, the numbers generated by Avion were outstanding. Pre-mill commissioning estimated grade at 2.45 g/t. The budget called for 5,198 ounces to be produced in Feb-Mar, they produced 20% more at 6,211. They budgeted for $825 gold and got $914. They estimated a cost per ton of material processed at $73.20 and achieved $41.50. Their estimated cash cost for an ounce of gold was $1,031 and they managed to produce gold for $512 an ounce.

Startup costs are always high, that's part of the process. They are achieving better numbers today than Nevsun was after a year of production. That's nothing short of incredible.

Avion is using a two-part process for producing gold and is evaluating a third. As much as 65% of the gold produced today comes through the gravity circuit with the remaining 35% coming from the CIL plant. Their team looked over the Nevsun 43-101 numbers and realized that by lowering the cutoff grade, they could almost triple the number of ounces of gold. With the current mill, the cutoff grade of 1.2 g/t from the open pit and 2.0 g/t from underground gives about 1 million ounces in 43-101 resources. That number goes up to about 2.7 million ounces if you lower the grade to .5 g/t and add the additional zones that were drilled off recently and not yet included in the initial resource released in January of 2009. Look for an updated 43-101 with much higher numbers shortly.

The oxide gold is very amenable to heap leaching and Avion is in the process of determining if they can add a heap leach pad and convert what is now considered waste rock into ore. Nevsun was trying to mine using a 15-1 strip ratio and the cost of fuel was killing them. Most of that overburden could have made good for a heap leach operation.

The team on the ground in Mali is much the same as Nevsun employed. Avion was smart enough to know that they needed the local knowledge that Nevsun was kind enough to pay for. The only difference between profit now and losses under Nevsun is management. I was as impressed by Avion as I was unimpressed by Nevsun.

The government of Mali knows the value of gold to the country. Mali, after all, is the 3rd largest gold producer in Africa. They have a 20% carried interest and a 6% NSR and will be getting corporate taxes. But a giant part of the deal with Nevsun was also buying the $170 million dollar tax deduction and at least a 3-year tax holiday. It will be a long time before Avion has to pay corporate taxes.

There are some issues that Avion can't do much about. Mali isn't developed and Avion must bring in all their fuel. They are forced to use expensive diesel generators for power. That's another screaming reason to consider the far lower energy required by a heap leach operation. The government is driving a new road from Dakar in Senegal to Bamako in Mali that will pass right by the mine. That will lower a lot of their transportation costs.

The share structure got really convoluted and I suspect is about the only thing holding back the price of the shares. It's difficult to determine just how many shares are outstanding. I'd like to see Avion do some work on their website. They have a wonderful story and the website doesn't' do a good job of telling it.

Right now Avion has 200 million shares outstanding after the merger with Dynamite. AVR has about 75 million options and warrants mostly out of the money. If all the options and warrants were exercised, it would bring in about $30 million in cash. In addition, Dynamite had about 30 million options and warrants now out of the money that if exercised would bring in $13 million. Dynamite had about 80 million warrants at $1 that expire in August of 2009 and almost certainly will not be exercised. So at the end of the day, Avion has about 305 million shares on a fully diluted basis.

That's cumbersome and there was some discussion about doing a roll back and getting the number of shares down to a more manageable level. I subscribe to the theory that it's very important to get the share price above $3 a share. US stockbrokers cannot recommend a stock below $3 so staying a penny stock is the kiss of death. They intend to be the next mid-tier gold producer but at some point being a penny stock will hold them back.

By doing a rollback, I suspect they would have a billion dollar market cap a year or more before they could if they stay in the below $3 range. If you look at the share price of Novagold, Silver Wheaton, Silver Standard or Goldcorp, when the shares went above $3 they took off as the brokers brought in ten times more potential buyers. That's a management decision and that's why they get paid the big bucks.

Avion is on an aggressive program to increase both the number of ounces produced and the number of ounces in a 43-101 resource. They are estimating a target production rate of 200,000 ounces yearly in 18 months. They have also just signed a Letter of Intent to purchase a property just south of their Tabakoto project from Great Quest with a 43-101 resource of 324,000 ounces.

Just this week Avion announced the purchase of 16% of the shares of Midlands (MEX-V) in an all share deal. Midlands has a 43-101 resource of about 400,000 ounces of gold in two projects in Central Ghana near the giant Newmont 8.7 million ounce Akyem deposit.

Avion purchased the assets in Mali from Nevsun for about $.20 on the dollar. By bringing in a seasoned management team, they got the mine and mill back up and running in short order and are in positive cash flow right now. It's a clean and smooth operation for a startup and I was very impressed with the caliber of all of the people I met at the project. I've believed for years that you can learn a lot about an operation just by observing the attitude of the people on the ground. Everyone I met had a positive attitude and they were proud as peacocks of the work that they had already accomplished.

AVR is on an aggressive program of defining more resources in Mali and rationalizing the assets they already own. Like most of the people on the tour, when I saw what they had, I picked up my phone and bought some shares. This is going to be another Desert Sun, only much bigger.




Avion Resources is an advertiser. We own shares in the company and as such can be reasonably expected to be biased. The company is easy to work with and quick to answer questions so I encourage all potential investors to do their own due diligence.

Avion Resources Corp
AVR-V $.345 (May 15, 2009)
AVRCF-OTCBB 198.4 million shares
Avion Resources website

Bob Moriarty
President: 321gold

321gold Ltd