* Considering share issue to buy back hedge book gold
* Closing hedge to cost up to $130 mln
* Says 35 pct downgrade to gold reserves likely
* Company could become takeover target - analyst
* Shares dive over 40 pct (Adds comments by CEO, finance director, analysts; updates share price)
By Sarah Young
LONDON, Feb 14 (Reuters) - Africa-focused gold company Avocet Mining could need a share issue to raise as much as $130 million after it said on Thursday its sole operating mine, in Burkina Faso, is not as big as it thought, nearly halving its London-listed share price.
The miner, already struggling after it slashed last year's output target, said its reserves would be downgraded by at least 35 percent, putting it under pressure financially to reduce a forward sales hedging deal and ease near-term cash needs, raising the possibility of a takeover bid for the firm.
Shares in the company hit their lowest level since 2003, down 44 percent at 28.7 pence at 1103 GMT, having hit a low of 25.98 pence earlier in the session, 88 percent down on the 12-month high and valuing the miner at around 58 million pounds ($90 million).
Avocet said that given the now smaller size of the Inata project in Burkina Faso and its lower future production profile the hedging arrangement with Macquarie Bank now looked burdensome.
As such, the company plans to reduce the hedging deal by buying part or all of it back in order to help maximise exposure to the mine's cash flow and help fund investment in new projects.
The outstanding value of the hedge is around $130 million, Chief Executive David Cather, who was appointed in July to lead the company's recovery, told Reuters on Thursday.
A share issue was being considered as one way to fund such a buy back but new debt or an investment by a new partner were also possibilities, he said.
Liberum analyst Kate Craig said that while a share issue or strategic partnership was possible, she saw a takeover offer for the company as the most likely outcome, naming gold miners African Barrick Gold and Semafo, and Chinese companies, which made a string of deals in the gold sector in 2012, as possible suitors.
"They are attractive assets in an attractive country within a highly prospective gold region," Cathers said.
"The reasons why predators might look at Avocet, are the same reasons that we feel we've got a very good investment case going forward."
Cathers said the company wanted to reduce the hedge by as much as possible, calling the indicative downgrade "the low point" for the company.
Finance Director Mike Norris added that a share issue would not necessarily be at the $130 million level as the hedging agreement obliges Avocet to hold $40 million in a cash reserve, a sum which could help part-fund the buy back.
Canaccord Genuity analysts estimated that the company could look to buy back around $50 million of the hedge book.
Initial discussions with Macquarie were constructive, Norris said. The company is also talking to the bank about arrangements to ease near term liquidity constraints.
The reserve downgrade, expected to be confirmed when a re-estimation of its reserves is completed in March will likely result in a significant non-cash impairment charge, the company said.
The company cited a more complex orebody than previously thought as the reason for the downgrade.
Avocet said that production in 2013 will likely be similar to the 135,000 ounces it produced last year but output after that to 2020 will be around 100,000 ounces per year, compared with analysts' expectations of around 140,000 ounces. ($1=0.6433 British pounds) (Editing by Greg Mahlich)