Vatukoula Gold's improving grades boost underground mining operation

This morning’s quarterly results are a sign that Vatukoula Gold Mines' (LON:VGM) big investment into underground mining is starting to pay off.

Vatukoula today revealed a significant quarter-on-quarter rise in profit from £0.2 million to £1.7 million. This is a result of a major jump in production after mined gold grades improved.

At 15,684 ounces, quarterly gold production was up 47 per cent. Sales also improved with 14,588 ounces being sold at an average price of US$1,684 an ounce. 

Underground mining is central to the firm’s long term future and these practices are becoming more effective at the Vatukoula site, chief executive David Paxton told Proactive Investors.

“This is the first quarter that we are starting to see production building up from underground sources,” Paxton said.

Paxton reckons the current level of production can be maintained in the short term and a bit further down the line it will step-up again to the target of 25,000 ounces per quarter by the second half of 2012. 

“We have spent the last twelve months getting the infrastructure underground and making sure we are getting that right.” Establishing the underground infrastructure has been detrimental to the mines output, he explains. 

The work has thrown off some production revenue as the underground development has progressed along the mine’s flat-line ore-body. However this is lower grade material rather than the higher grade ore targeted by the mine plan.

“This has really knocked our underground mined grades over the past year. 

“But we’ve seen more and more tonnage from higher grade underground mining this quarter. As you can see our average head grades have risen from 3.19 to 4.55 grams per tonne.”

The improved grades have also eased some of the pressure on the mine’s cash costs, which dropped from US$1,479 to US$1,381 an ounce during the quarter.

While this remains high by industry standards Paxton is confident that the continued development of the underground mine will bring down cost significantly going forward.

VGM is aiming to bring cash cost below the US$800 an ounce marker. Paxton believe this will be achieved towards the end of 2013.

The mine’s output and mined grade will be crucial for VGM to succeed. Particularly as the mine’s operating cost per tonne is currently exposed to high oil prices, which make it more expensive to get the ore out of the ground.

Specifically the firm uses large diesel generators to power the mine and therefore it is one of the mine’s biggest costs. “The rise in the oil price from US$80 to US$100 makes a big difference to us,” Paxton said.

“At the moment we really are oil dependant. So we are looking a biomass project to reduce our exposure to the oil price.”

In this morning’s results VGM revealed that the Fiji Sugar Corporation and the government and agreed a mandate to explore the financing options available for the development of a 38 megawatt biomass power plant.

Paxton explains that the project will be funded by international finance organisations on a standalone basis. VGM will not be playing a significant part in the funding, although it may contribute a small amount of equity, he added.

It is expected that the financing may be completed as early as March next year and after that the biomass plant would take between eighteen months and two years to build.

The biomass plant could potentially offer VGM a substantial cost saving on its current power arrangements according to Paxton.  “The cost of power from the biomass power plant could be about 19 Fijian cents per kilowatt hour, and we are currently paying 54 cents. So it could be a massive saving for us.”

This potential saving would be over and above the ‘per ounce’ cost savings associated with the underground development, which is based on the current operating environment and a US$100 a barrel oil price.