Vatukoula development plan will afford the company greater production flexibility

The accelerated underground development plan by Vatukoula Gold Mines (LON:VGM) will create some short term pain for the miner but it will eventually afford it some much needed “production flexibility”.

This is the conclusion of broker WH Ireland, which restated its 'buy' stance and 224 pence a share price target in the wake of today’s update from the group.

The process is designed to turn the mine into a 100,000-ounce-a-year producer and is set to continue right the way through to May.

“With its schedule of increasing development drives  available for future production, the company is increasing its production flexibility and therefore further increasing its operational  resilience,” WH Ireland analyst Tom Elder said in a note to clients.

“We reiterate this is highly desirable in the single-mine operation such as Vatukoula’s.

“Vatukoula remains on target to achieve its stated stage one production target of 100,000oz per annum,” he said. 

“The company is also continuing with its exploration effort, with the ultimate  goal of extending its reserve life significantly. We have few doubts that both these aims are highly achievable.”

The downside initially is that ore grades from the company’s wholly owned Vatoula Mine in Fiji have been lower in the first quarter of the company's financial year than they were in the previous three months.

Chief executive David Paxton said: "The first quarter has been focused on an intensive development program at the mine in order to overcome the historic shortage of operating areas and to prepare for the increase in production to achieve our long term gold production rate. 

"Development was increased over 100 percent. However the increase in ore mined was below plan, and gold production for this quarter was marginally lower than forecast.

"We anticipate that development will be maintained at this increased rate until about May 2011 and as a result, we plan to be continuing to deliver lower grade ore, and hence  we expect that gold production will be lower in the second quarter than the current  quarter."

The grade of the precious metal recovered dropped to 6.48 grams per tonne in the quarter starting September 2010 from 8.81 grams three months earlier.

Over that same period cash costs increased to US$1,047 an ounce from US$647, while net operating earnings fell to £3.2 million from £.5.5 million.

Ore mined and delivered increasd 12 percent to 80,914 tonne from 72,444, VGM said in an update to investors.

Collins Stewart’s John Mcgloin said: “While production numbers are down the news that development metres are up 100 per cent should be seen as highly positive and a flag that the company is progressing well to achieving its 100,00 ounce production target. 

“Adequate development is the crux for all underground operations and particularly so for VGM as the variability of the orebody means that it needs to have flexibility in selecting high and medium grade stopes to optimise production.”

The company is a rare commodity on the AIM market – a producing gold mine with a world class resource base.

The Vatukoula gold mine sits on a reserve of 630,000 ounces with a resource of 4.3 million ounces.

The shares, up 70 per cent in the last 12 months, were down 30.5 pence at 182 pence at 11.30am.