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Vatukoula Gold Mines – Down but far from out

By Tom Winnifrith | Wednesday 26 September 2012

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

AIM listed Vatukoula Gold Mines (VGM) is not a tip that has covered me in glory. Yet. I tipped it at 46.5p in November 2008 and although it zoomed ahead thereafter, the shares now trade at 41p valuing it at £40 million.  All gold juniors have taken a hammering in the past 18 months but Vatukoula has also failed to hit production targets and so has taken a stock specific hammering as well. But it has cash, is profitable and the current valuation is just crazy.  This is a stock that could well double within a year and still be cheap. And this is why.

The underground Vatukoula mine in Fiji has been producing for years and it has an enormous resource which means that it can carry on producing for years. Its two problems are that the grade can be very variable and so monthly gold production numbers can swing wildly on the same tonnage and that it is high cost. At 70,000 oz per annum the all in cost of running this mine (including exploration drilling) is c$1200. At 90,000 oz that falls to $1000 oz. If it can build a dedicated sugar waste to power plant as it plans to do that could knock $200 oz off its costs. Chatting to CEO Dave Paxton today (before my signal was cut off by tunnel after tunnel) I understand that this plan is now almost ready to go and that the power station will be built by a Special Purpose Vehicle (SPV) and so will not require Vatukoula’s shareholders to pony up anything.

Following a number of placings, most recently with a Chinese group Vatukoula has net cash of c£6 million.

The year end is August 31st and having targeted 65,000 oz at the start of the year Vatukoula has again missed and will deliver 50,000 oz for 2012. But this year, higher recovery rates, new higher grade ore bodies being tackled and the opening up of new shafts will push output to 70,000 oz. Next year the company is targeting 90,000 oz and that is easily sustainable – indeed if it has a run of higher grade months it can top that easily.

So what cashflow will Vatukoula throw off? I outline a number of scenarios below (the numbers are in million US Dollars)

70,000 Output Gold Price $1200 Gold Price $1500 Gold Price
Gold Price
Gold Price $2000 Gold Price
Cost $1200 $0 $21 $35 $45.5 $56 $91
Cost $1000 $14 $35 $49 $59.5 $70 $133



90,000 Output Gold Price $1200 Gold Price $1500 Gold Price
Gold Price
Gold Price $2000 Gold Price
Cost $1000 $18 $45 $63 $76.5 $90 $135
Cost $800 $36 $63 $81 $94.5 $108 $153


It is not possible that in the current year the new power plant will be built so the free cashflow generated in the year to August 31st 2013 will be based on a cost base of  $1200 oz and the cashflow generated is purely a function of the gold price. Right now gold is at $1748 oz. I cannot see it collapsing, indeed the risks have to be on the upside.  But even at $1500 gold the mine chucks of $21 million (call it £13 million) of cash. At $1700 that becomes $35 million (call it £22 million).

Going forward – take your pick. At some stage you must hope that cash costs come down to $800 but I accept that this alternative power scheme has been talked about for ages. Even at $1000 an oz for a company currently capitalised at £40 million ($66 million) the cashflow multiples are derisory. I’d expect Vatukoula to be trading on a cashflow multiple of at least 3. Even at $1700 gold that implies that the share price should – at least – treble within a year. If Vatukoula delivers on its targets this stock is very cheap indeed.

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