Vatukoula Gold Share Discussion Threads

[2350220] 16/3/2012 10:50

What a great post.
Well thought out and balanced.

Great stuff.
Thanks Yanzui for posting it on here, and thanks too, to Charleyduck for a great article.

John

[nielsc] 16/3/2012 10:31

yanzui,

I think I have read bits of that post previously.

I did say around 16k oz which in my mind is between 15-17k oz. So I would say we are fair close in agreeing what the production might be. The H1/H2 split of 30/35k oz seems achievable. Just hope they can meet their production targets and possibly even exceed them. It will be a first :-)

Cheers,
Niels

[roguetreader] 16/3/2012 10:24

Yanzui
Thanks fo the CD post
RT

[flyingswan] 16/3/2012 09:48

Why is VGM flat today and other Gold Producers like CRND moving up rapidly? The Market is a funny place IMHO

[yanzui] 16/3/2012 09:32

Don't think i've seen this write up on here.

Posted by Charleyduck on the Motley Fool site: Good read.

From the 29th February 2012.

Vatukoula Gold Mines (VGM)
A producer of gold for 70 years.
They lost private investor support last year.
They should recover it this year and next.

Gold? I see the gold price is dropping 5% as I type - $1,785 to $1,690 in six hours - typical!– a different big discussion point – but in my view it will hold in the $1,600 to $2,000 range for a year or two yet. Something to watch though!

Size of VGM business? - £48 million revenue last year from producing 52,000 ounces of gold at their operation on Fiji.

Reason to pick it for this year's competition? – Recovery of investor's trust – the start to be demonstrated this year.

Reason to pick it as an investment for a longer, two or three year, term? – Recovery to the historic levels of production achieved by the previous owners which was between 100,000 and 140,000 ounces of gold every year for the 18 years 1988 to 2004.

Therefore a double recovery story rather than a breaking new ground story...... "Should be easy then?" ....... Not so far, it seems.

Will it win the competition? I do not think so, but a top twenty finish would be nice. 150% increase on the 70.25p to 175p at the end of the year ought to be possible – IF they do what they say this time.

Basic data
The mine has been producing gold and for more than 70 years (7million ounces)
It has been 100% owned by VGM since 2008
It has 790,000 ounces of gold Reserves in a Resource totalling 4.2 million ounces of gold (1.4million measured; 1.3million indicated; 1.5million inferred)

Income last year was £48million
Current Market cap £72.5million
Shares in issue 88.56 million
Current Share price at close 29th Feb 2012 was 81.9p (70.25p at start of competition)
Cash at year end £6.2million
No debt
Net loss last year of £2.3million after a profit of £4.5million the year before

Listing? - On AIM, and planning to also be on TSX later this year


So the opportunity here is for a double recovery – but at what risk and what went wrong last year?

Like others, I have been invested here for two and a half years. Last year was not good. A "learning experience", they say – maybe - but not good for the pocket over the last year! The signs are that this year the payback from a series of initiatives will, at last, take effect.

Firstly, for those new to VGM, here is an overview of the business extracted from the Annual Report:-

"The Vatukoula Gold Mine is located in the northern part of the main island in Fiji, approximately ten kilometres inland from the coast and within the Tavua Basin. The mine is located at the foot of the hills that make up the Tavua volcanic crater. [My Note: It is extinct...!.... More than 3 million years ago – and the islands were then pushed away from the "ring of fire"]

The mine operates within three Special Mining Leases which covers a total area of 1,255 hectares. In addition VGM can explore on areas outside the current mining leases via Special Prospecting Licenses which covers over 19,000 hectares of the surrounding Tavua volcano.

The Vatukoula Gold Mine is currently both an open pit and underground operation, however in the medium-term it will become predominantly an underground mine. Underground production is sourced from four mining areas; Smith Shaft, Philip Shaft, R1 Cayzer Shaft and Emperor Decline. The Smith and Philip Shafts, and the Emperor Decline serve as the main accesses to the underground workings for personnel and materials, and are used for ore and waste haulage.

Once the ore is hauled to the surface it is crushed, enriched and refined at our on-site treatment plant, to produce Gold Dore. Gold Dore produced at the mine is typically 80% gold, 19% silver and 1% base metals such as copper and iron. The Gold Dore is sold to the Perth Mint in Australia.

VGM has onsite workshops, assay labs and produces its own power via diesel generators.

Vatukoula Gold Mines Plc. is a UK public company with its headquarters in London. The Group reports in Pounds Sterling (£) in accordance with IFRS as adopted by the EU."


What went wrong in 2011?

First an apology – In early 2010 I was very supportive of VGM, they were my pick for the NFSC that year and did ok (up 200% from 67p to 201p). Although I did a cautionary "it is unlikely to gain much from here" post on 7th November 2010, I was still optimistic for the year ahead and the longer term. Even during the setbacks in early 2011, as the price dropped progressively I remained optimistic that the management would deliver on their forecasts. I am sorry if the posts over that period encouraged you to buy in at those higher levels. I personally also added at that time in the 177p – 167p range in January, February and March. In April, Shanklin100 posted his doubts about management forecasts, but I favoured the management being given one last chance to meet their 75,000 ounce forecast. He was right to be sceptical and I was wrong. Sorry.

On 31st May 2011, they opened at 142p but then announced their forecast for the year of 75,000 ounces of gold would be reduced down to 55,000 ounces. A severe reduction considering the confident assurances two months earlier. They also announced that they had raised £6 million from Zesiger by a placing at 125p. That seemed low – but within a month VGM was down to 92p – investors had lost trust in the Company.

There followed several months of trying to find out exactly what was going on. Together with another shareholder, I met the CEO, Dave Paxton, in VGM's London office to get some answers to some serious questions. It was clear a major shift in management and strategy was underway – and whilst we were re-assured that the Company was not in irredeemable decline – it was difficult to be certain how long it would be before the changes took effect and how effective the investment they were making in the future would prove to be.

"Prove to be" rather sums up the position. We, and the vast majority of shareholders, had lost confidence and could not take forecasts or projections on trust in the same way as we did in 2010.

Their year end was 31st August and in September 2011 it was announced that they had still marginally undershot their 55,000 ounce forecast with production of 52,157 ounces. Despite income of £48 million they would go into bottom line loss having been in profit the previous year.

The planned recovery to historic production levels had clearly stalled.

What was the underlying problem?

There had been insufficient investment in underground development by the previous owners in the last few years of running the mine down to closure. Last year, no amount of pushing of the labour force by the then mine manager could get the production up. Perhaps the Executive Director who had been the mine manager 10 to 15 years ago also had too optimistic an expectation. He managed 100,000 ounces to 120,000 ounces a year ok back then after all.

The first quarter exposed the weaknesses. As an emergency measure the accelerated development was conceived.
This was insufficient and the second quarter was worse than expected. I guess they kept a brave face on it while planning more radical corrective measures. The then mine manager was coming up to retirement. Time to plan for, and perhaps head-hunt, a replacement. The new man would need to buy-in to new initiatives and procedures and hopefully bring some of his own.

Guessing with the benefit of hindsight, this process probably started in February/March and the new mine manager may have been selected by April/May. Normal notice periods meant he was unable to start until July. The old mine manager retired, perhaps a smidge early, in May/June. Dave Paxton, the ceo, was acting mine manager for a month before the new man, Dave Whittle, started in late July.

Once Dave Whittle was in place at the mine, the new procedures and initiatives that had probably been discussed in May, June and early July could be confirmed and brought in to action.

How they addressed this, is all set out in detail in the Annual Report which was published in December 2011.



The new procedures and initiatives, in brief

The Appointment of David Whittle as General Manager in July paved the way for a variety of operational improvements. They set about improving relationships within the workforce through a review of their mining operations in consultation with the senior mine operations teams. The objective was to optimise operations in the short and long term. They introduced a number of initiatives to reduce dilution and increase the grade mined.

As well as improving the motivation of staff at all levels, they introduced improved processes, such as split-firing of development drives to blast the ore and waste separately. Mining practices were improved such as the use of truck chutes to reduce the need for underground loaders, the reintroduction of sweeping teams to remove the remaining material in mined stopes, and the use of water cannons in the underground stopes to recover more of the fines.

All these improvements should help reduce their cash cost per ounce - by mining less waste rock and increasing the percentage of gold bearing ore.

As well as improved mining disciplines and processes, they made a number of senior management changes including key appointments in the Geological, Mine Planning, Maintenance, and Supply Departments.

In their annual Report they say that "We are confident that these actions will build a solid foundation from which to expand our production" and "With these appointments, we believe that we now have in place a management team with the required experience, professional skill set and hunger to develop the mine and deliver on its full potential."

Investors are waiting to see if these initiatives bear fruit.


What are their current forecasts?

In the RNS on 21st September 2011 they stated "We expect to produce approximately 65,000 ounces of gold in the financial year ending August 2012."
To August 2012: 65,000 ounces

To August 2013: 75,000 ounces (in the January 2012 Corporate Presentation, page 11)


To August 2014: 100,000 ounces (verbally at the AGM on 31st January 2012)



How will we know if the above initiatives will enable them to deliver on their forecasts this year?

I suppose they will only succeed in proving they have overcome their previous inability to deliver to their forecasts when they announce that they have indeed produced the 65,000 ounces they are forecasting this year.....but there may be already some tiny indications that they should succeed this year:-

Firstly, this year they have been much more cautious in their forecasting:-

It seems that in previous years, the gold production target has been largely influenced as a target by the then mine manager together with the then executive director who was the mine manager himself many years ago. Neither is now employed by the Company.

I was told that this year, in building up their forecast, – the old mine manager having left and the new mine manager having only just arrived - they started by asking the section leaders to build up their section plans in the form of tonnages they expected to bring up and an indication of the grades in their area; they asked the geologists to review the grade expectations and agree the reasonableness of the section forecasts. Having consolidated all those totals, the Main Board reviewed it and reduced the tonnages by 10% and reduced the gold grades by 10% to arrive at their formal forecast of 65,000 ounces.

Another indication that they may have been more conservative in their forecast this year came from conversations I had at the AGM on 31st January 2012. The Canadian Zinc Directors (non-execs at VGM) were at the AGM and I spoke with both. They said that, before listing in Toronto, VGM needed to get a couple of good quarters under their belt and be absolutely confident of meeting their forecasts in the future. He was very clear that if they got it wrong in Canada they would be punished even more severely than they were here in London last year. I spoke separately to Kiran Morzaria, VGM's FD, and he said exactly the same – so I believe that view to be strongly held by the whole Board.

So they have compelling reasons to have provided the market with a cautious, but not unreasonably low, forecast for this year.

There are some indications that they are delivering to this forecast. Q1 was reported in December and production was at 15,684 ounces, nicely ahead for the H1 30oz / H2 35oz split that might be a reasonable expectation [my figures, not from VGM].

Secondly, this year their reporting has been more prompt:-

Indications of a turn round in the Company are their quicker production of year-end figures, the quarterly update and the Annual Report. The Annual Report was some two months earlier than the previous year even though it was 30% longer and very comprehensive in its detailed reports.

Their year-end figures were also announced two months earlier (RNS in December 2011 – previous year had not been until the end of February) and their Q1 update was delivered in December rather than January.

These improved timescales indicate that their office administration has improved (and that they can meet the tighter timescales that will be demanded by the Toronto exchange.............when they eventually list there).

Thirdly, share purchases by fund:-

Zesiger, the fund that took 5% of the company in May last year in a placing at 125p, added more, and announced on 20th December that they were now over 9%. They must have better access than us to assess the effect of last year's changes and underground investment, and must like what they see.

Fourthly, the new mine management and initiatives:-

As mentioned above, the new, younger, General Manager of the Gold Mine on Fiji was appointed last July. In the annual report the ceo said that Dave Whittle "has vast experience in underground mining and has managed mining operations in the Pacific Islands. His underground experience will assist in placing the Vatukoula Gold Mine in the long-term sustainable position that we are looking to achieve."

And finally the underground development work should pay dividends this year.

As we know, the reason for the difficulty in accurately predicting gold production is the variability of gold grade in the seams – which are relatively narrow. In order to be more accurate in their forecasts, and to be more confident that they can maintain the higher production levels when they get there, they are doing significantly more underground development work than planned at the start of last year. It became clear that too little development work had been done by the previous owners, understandably, as they ran the mine down to a halt in the low gold price era of 2004 to 2006.

Again from the AR "We have instigated a number of measures to assist mining, and in particular grade control. We have returned our stope mining to traditional longwall stopes, with the addition that we are designing new stopes to produce over a much longer time horizon. This involves longer setting up – but we believe it will provide smoother production when commissioned."

So, IMHO, putting all the above indications together does suggest to me that they have done a lot to overcome their historic inability to deliver on their forecasts.

How are they getting on so far?

So far they have reported Q1 (Sept – Nov) and finish Q2 in the next few days (Dec – Feb), and I would expect them to report an operational update during week commencing 19th March 2012.

The Company has given no breakdown of their forecasts into quarters or half years, which is a pity. The best I could get at the AGM was that the amount of gold produced each half year should steadily ramp up to the 100,000 ounces in 2014.

We can perhaps therefore deduce an approximate profile from what we do know.

We know that H2 last year production was 22k ounces, and we were told in the December update that the gold grade in Q1 this year was 32% up on the previous year. So as a rough guide we might deduce that H1 this year will be about 38% up on H2 last year. H2 would therefore be a further 13% up on that.

The profile of a steady build-up, to serve as an approximate half yearly guide might therefore be as follows:-

H2 2011.....22k (actual)
H1 2012.....30.5k.....38% up on previous half.
H2 2012.....34.5k.....13% ditto.....................equals 65,000 ounces for full year
H1 2013.....36.5k......6% ditto
H2 2013.....38.5k......5% ditto......................equals 75,000 ounces for full year
H1 2014.....46.0k.....19% ditto
H2 2014.....54.0k.....17% ditto......................equals 100,000 ounces for full year


The Actual production in Q1 was 15.68k ounces, and this was a quarter where they said the grades encountered were particularly good.

Therefore to meet the above profile, Q2 will need to be 14.82k. More than that would be a bonus and make the achievement of the year end forecast a little safer.

We shall find out in week commencing 19th March.

Gold Price? Has been trading in the $1,700 to $1,790 range in the last month (February) – but as I write it is dropping from $1,785 at 3pm today to be below $1,700 tonight after Ben Bernanke said there would be no more QE....therefore it could be seen as being good for the US Dollar....and therefore bad for gold. If it were to stay down it would be negative for VGM's profit margin. Personally, I think there is still enough uncertainty / sovereign debt etc. in the world, with inflation being a sovereign exit aid, that gold will remain a store of value.

Cost of production ?

VGM is seen as a high cost producer because last year the 53,461 ounces they shipped cost them $1,349 an ounce.

This was high because of the huge amount of waste rock being extracted while they do the accelerated development work underground. Their aim is to get the cost down to $800 an ounce when they are producing 100,000 ounces a year (2014).

On the face of it this is a massive reduction....But it is not really......All they have to do is finish the development work, mine 17% more ore and get the grade back to historic levels......That's All !!..... I know it is not that simple!

Briefly, starting from their total cash costs in the last quarter of $20,150,000, add the cost of mining an additional 21,000 tons of ore brings this to $21,262,000. If the grade was back up to the historic level of 6.5 grams per tonne they would be producing at 26,400 ounces a quarter which would be close on $800 per ounce. (theoretical because it is at October 2011 price levels and excludes inflation of costs up to whenever they achieve 25,000 ounces a quarter) So not too difficult to reduce the cost per ounce if the number of ounces goes up as planned.

Even at $800 per ounce they are a relatively high cash cost operator producing 100,000 oz per year compared to, say Medusa. But, if they could achieve it, at $1,600 gold they should be throwing off £48million a year in cash which would justify a market cap rather higher than their present £72.5million

Initiatives for the longer term?

Cost reductions –
There are two initiatives that will help this year......the improved systems of working underground – more efficient working, safer working, more discipline and training all as set up by the new mine manager, Dave Whittle and his team. This will make the labour force more productive.

Secondly, at the AGM, we were reminded that the previous owners of the mine had become pretty poor at paying their bills before closing it down. At first the suppliers to VGM had been cautious and demanded early (sometimes pre-) payment terms. Now that VGM have demonstrated a good track record with their settlement of invoices, suppliers are keener. So they are re-negotiating terms and setting up longer term supply chain agreements at better prices.

In the longer term there are two initiatives that we have heard about before – the biomass power station in conjunction with Fiji Sugar Corporation (at present expected to complete feasibility, financing and procurement this year. Then, 18 months to two years to build, so operational late 2014) and expected to save about $100 an ounce off the cost per ounce.

Also the possibility of adding a bacterial leach recovery plant ( better recovery rate 90 to 95% as opposed to 83 to 85%) – that is about 10 or 12% more gold from the same mined ore.

Extensions to the existing gold resources –

They found new extensions to the existing underground ore bodies and one significant new orebody all as set out in their RNS on 12 October. It is here

This is part of an on-going exploration programme which should extend the life of the mine well past my lifetime!

The Directors have aspirations to be producing at 200,000 ounces a year, and with a resource of 4.2million ounces at present, before the latest exploration finds, this is not outside the bounds of possibility – but of no real benefit in this NFSC year !!


Drivers for the share price in the rest of this year?

May 2012 – Half year accounts
June 2012 – Q3 Operational Update
September 2012 – Q4 and year end Operational Update
December 2012 – Annual Results
December 2012 – Q1 2013 Operational Update

Mid year – Update on arrangements for bagasse fired power station with Fiji Sugar Corporation
Second half of calendar year – Listing on TSX, perhaps.



Useful links for Further Research

Website:-

Q1 Operational Report:-

Exploration Update :-
Annual Report dated December 2011:-

[yanzui] 16/3/2012 09:29

Should be out Monday,

Can't see 16k ozs TBH.

I'd say 14.5/15k, fingers crossed it's nearer 15k ozs.

[nielsc] 16/3/2012 09:07

chipperfrd:

Good to see Rex Harbour is also a holder. Did well with MML so hopefully a sign that VGM can do equally well. VGM much more highly geared to the gold price, but hopefully they can lessen that in a couple of years with the much talked about sugar cane power plant.

stodgy88:

I think it is an educated guess that Q2 update is out on Monday. I am hoping it will be out next week and show production around 16k oz, perhaps higher if things have gone well.

Cheers,
Niels

[stodgy88] 16/3/2012 08:45

is the last post fact or fiction.

[statement2] 15/3/2012 13:42

Results out Monday, still on track for this year, quarter gone was in line, with improvements costs marginly down, we may wait till Monday for the numbers.

[chipperfrd] 15/3/2012 12:59

Niels

Encouraging to see a report that recognises the real challenges of narrow vein mining and that also uses MML as a comparison - particularly the use of air-leg mining.

Note that Rex Harbour (an early large investor in MML) is also a holder of VGM!!
Chip

[ajviews] 15/3/2012 12:15

Have been following VGM for a while and think that having worked through its recent period of redevelopment and underperformance is currently at attractive risk/reward levels for investors.

Being able to control/reduce the costs at VGM will be a significant boost to underlying profitability longer term. However, as a high cost/lower margin producer currently VGM's shorter term performance may be tied more to the performance of gold (double edged though that can be) so could well see the share price perform well later this year and beyond given a favourable outlook towards the PoG. Longer term the potential for development of the large Gold resource and steps that have been taken to increase production and grow the business should lead to increased profits.

Making an initial investment here. Early days yet and consider this a LT investment so will be looking to add as operational performance improves. - AJ

[nielsc] 15/3/2012 11:51

78k oz in 2014 and 95k oz in 2015 forecast.

They do state
"In our financial forecast, we have taken a conservative approach to production and grade, given that the previous two operators were "remiss" both in their geological investment (i.e. drilling) and capital-development."

I am hoping things go smoothly and we are up at 100k oz a little earlier than those forecasts. Even with the conservative numbers I am still comfortable being invested in VGM currently.

Cheers,
Niels

[zpellar2] 15/3/2012 11:19

well have just taken 10000, i must be mad.. remember this share when it had volume!!

[georgesorrow] 15/3/2012 10:23

Perhaps they read as far as page 21; see forecasts for costs and production and the conclusion that the legendary 100k ozs will be reached in, wait for it... 2016



Also has cash costs still rising next year...

[zpellar2] 15/3/2012 08:12

well note doesnt seem to have drummed up any trade,

[nielsc] 15/3/2012 08:10

Well having been in Medusa since the early days 40-20p I certainly hope VGM performs as well. Much higher costs though so perhaps that will dampen the possible rise, but still plenty of upside.

Next week then for Q2 results I am guessing.

Cheers,
Niels

[stodgy88] 15/3/2012 07:57

yes i mean that.

[ifthecapfits] 15/3/2012 07:55

PAge 9 - reference to MML. Funny - I did think a while ago when there was talk of a TO that MML might be a good fit.

[ifthecapfits] 15/3/2012 07:52

You mean this.

[stodgy88] 15/3/2012 07:29

We cannot emphasise enough what an incredibly promising prospect we believe Vatukoula
to be, especially for orebody extensions regional.
quote from research note -see iii,s board for details.

[tonco2] 14/3/2012 18:50

Fiji Sugar Corp & VGM mentioned in Fiji Times

[hazl] 09/3/2012 13:21

and the stock market is about the future after all! imo
good luck

[nielsc] 09/3/2012 12:58

P3dr036,

We just have to hope that if diesel prices rise the gold price rises in step.

Cheers,
Niels

[p3dr036] 09/3/2012 11:38

For the record and in case folk take the power problem as near to being "solved", it is some way away.

VGM's largest fixed costs is 31.1% for power generation [slide 13 of Jan 2012 presentation.] This is mostly the cost of diesel fuel for on-site power generation from VGM's own generators. There is little or no electrical power delivered to the site from the local grid.

The tie up with the Fiji Sugar Corporation [FSC] is 18-24 months away and they are only in the Joint Venture with the FSC stage at present [slide 15 same source].

So, unless the cost of diesel fuel comes down [unlikely] then VGM will be stuck with similar power costs until 2014 at least.

[I hold VGM shares for the long term]

p3

[paulo92] 09/3/2012 10:54

Stodgy, DP hitting a production target would be a 'major breakthrough', unfortunately the biomass project is but a side issue, all be it a very nice one, until the mine starts functioning predictably