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Debt financing would give Vast Resources a boost - speculative buy

By Gary Newman | Saturday 7 October 2017

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.

The hardest thing for many of the smaller miners is actually making it to the production stage, and there are many that never get that far.

Even amongst those which do manage to actually get something out of the ground and sell it, it still needs to be able to be done on a scale and at a cost which means that the company is able to make a profit overall. There is little point in continuing longer term if the operating profit isn’t even enough to cover the overheads of running the company, and looks like it will remain that way indefinitely.

One small company which seems to be heading in the right direction, and has been making progess operationally as well, is Vast Resources (VAST), although there is still risk as the company has been making a loss and burning through cash. But to some extent that is to be expected at this stage and is something that I can accept – it is when it continues to do so indefinitely that it becomes a problem.

Vast has already made the transition from an explorer to a producer, and for a company of this size has fairly well diversified operations, including polymetallic (copper, lead and zinc) mines in Romania and gold operations in Zimbabwe.

The recently released final results up to the end of March 2017 showed a significant 230% increase in revenue to $23.8 million, as compared to $7.2 million the previous year. That still resulted in a net loss $2.4 million, which was significantly less than in 2016, although that was largely as a result of write-downs relating to discontinued operations.

There were some changes at the Manaila polymetallic mine in Romania where the company acquired the remaining 49.9% of the mine to give it 100% ownership, and the company has since invested money there. That resulted in 828 tonnes of copper and 157 tonnes of zinc being produced in the quarter up until the end of June this year. During that period the Pickstone Peerless mine in Zimbabwe produced just over 4,000 ounces of gold, and having seen a bit of a drop, it is now operating back at expected levels.

Operationally in 2016/17 the company managed to make a gross profit of over $6.3 million (compared to just $1.6 million the previous year), but high levels of overheads have always weighed heavily, and this is something which the company is actively looking to address – it certainly needs to if it is to start turning a net profit any time soon.

The big concern for investors hear had been the levels of cash that the company was left with, as it had just $425,000 in the bank at the end of August, but this week we have had news on possible finance for future work at Manaila to extend the mine life – based upon the recent positive drilling results, along with the offtake arrangements that are already in place for next year – and that could now come in the form of debt or some form of reserves/production based agreement, which wouldn’t dilute existing holders.

Prior to this latest news the company had been considering a possible $10 million investment, which at one stage would have potentially seen 29.9% of the company changing hands through a subscription at 0.4p, although that was later altered to avoid that level of dilution, with talks about direct investment into the projects rather than the shares of the company.

If the company is now able to secure the Manaila finance through other means, that should cut the other funding requirements in half, to around $5 million.

In the meantime the company managed to secure a bridging loan of $1.68 million from Sub-Saharia Goldia Investments, at an interest rate of 1% per month, and this is in addition to the existing $4 million loan that is already in place from the same source.

In the background to all of this, the commodities which the company produces – particularly copper, zinc and gold – have been performing well, and this should certainly help the company in terms of profit margins.

Currently the company is valued at over £16 million, at a share price of around 0.35p, so there is still a fair amount of risk if financing can’t be secured via debt or similar, and if it had to come through an equity issue in some form. Especially as the company is now in a phase of its development which could be quite capital intensive.

But when investing in small mining companies like this you do expect that to a certain extent and have to consider if the potential upside is worth that risk. Given the way in which production has expanded and revenue has increased, I can see decent upside here for the shares if the company is able to continue making progress so I would class it as a speculative buy following the recent pullback in share price from around the 0.45p level.

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