Vatukoula Gold Mines set to fight back

It is always encouraging to see directors showing their faith in their company's prospects by buying its shares and recent purchases by management at Fiji-focused gold miner Vatukoula (LON:VGM) are no exception.

The purchases by the company's chief executive David Paxton and executive chairman Colin Orr-Ewing, announced on 6 June, helped Vatukoula shares advance and overcome a six month low of 104.5p, attained on 3 June. 

Paxton bought 35,000 shares at £1.10 per share, giving a total cost of £38,500 for the transaction. He now holds 135,000 shares or 0.16 percent of the company. Executive chairman Ian Colin Orr-Ewing, meanwhile, acquired 35,091 shares at £1.10 each at a total cost of £38,600, giving him a 0.58 percent stake in the company.

Earlier today, the Vatukoula shares stood at 113p, down 1.75p, valuing the company at £95m.

Yet concerns remain over the company's prospects - its shares have lost more than 40% of their value this year alone.

The company’s primary asset is a wholly owned, producing gold mine in the Pacific island of Fiji. The mine boasts a reserve of 830,000 ounces with a measured, indicated and inferred resources of 1.4, 1.2 and 1.35 million ounces respectively. The interim statement in May provides clues as to the disappointing performance of the shares, with the company downgrading its production estimate for the year from around 75,000 ounces to 55,000 ounces.

The decision to downgrade production estimates was clearly a tough one for David Paxton, chief executive of Vatukoula but, he stressed, necessary.

It reflected, he says, serious difficulties the company had in advancing development of the mine using conventional technology:“We tried it for six months but it did not work. Once we were absolutely certain this was the case, clearly we had to make some tough decisions on the way forward.”

Post the interim statement the company decided to take the bull by the horns and go the down the route of high speed development. This involves much more powerful and bigger machinery including, for instance, a ‘jumbo’, a self-propelled, mechanised development drilling machine which has the capability of to dramatically increase the speed of the drilling/blasting cycle.

Paxton is currently finalising agreement for high speed development with contractor. The eight-month long development programme will cost in the region of $15-20 million but promises to allow the company access to richer material for processing on a consistent basis. 

While there is an issue with Fijian miners working for the company needing training in high speed development, Paxton says the contractor will be working on a double shift basis to work on development as well as train the miners.

Paxton is also keen to highlight the benefits that will eventually accrue from the company’s plans to build a biomass power plant. Vatukoula recently announced a £6 million fund raising to finance underground development and the power facility. A feasibility study for the plant is almost complete.

The plant, targeted for commissioning in late 2012, is expected to supply 10-15 megawatts to the Vatukoula mine and help reduce the company’s cash costs per ounce by up to US$ 140. Power is currently the company’s single biggest cost item.

For its half year to 28 February Vatukoula posted a pretax profit of £1.4 million, up from £1 million last time. Capital expenditure jumped to £4.5 million, up from £2.5 million, reflecting the development work. The cash balance at the end of period stood at £11.6 million against £8.3 million.  This excludes the recent £6 million financing.

In the wake of the results, analyst Tom Elder at house broker WH Ireland noted that the company’s continuing focus on development is having implications in terms of mining and delivering high-grade stope ore. This explains the fall is grade noted in interims for underground ore from 7.48 g/t to 5.97 g/t. He believes the high speed development being planned should help address these problems.

Elder added: “Vatukoula has a significant orebody in a global context and it additionally has many of the attributes that are attractive in a gold miner; a large high grade-resource base and plentiful near mine prospectivity. We believe the shorter term operating picture is clouding the true prospects of the mine, thus the company.“