September 05, 2012

Chinese-Backed Vatukoula Gold Mines Prepares For Higher Grades And Lower Costs

By Robert Tyerman

David Paxton, chief executive officer of Vatukoula Gold Mines, reckons the company is now six months away from reaching the high-grade and potentially more profitable sections at its Vatukoula gold mine on Fiji in the South Pacific.

Underground at Vatukoula

Thanks to a new £10.3 million cash injection from China’s Xintai International Mining Industrial Group, Vatukoula has enough money to achieve this, and other goals.

These include increasing annual gold production over the next two years from the 53,461 ounces shipped in the year to August 2011 to 100,000 ounces.

At the same time, the plan is to cut overall costs from the uneconomic US$2,000 an ounce incurred in the nine months to May, to around US$1,000 an ounce.

That latter cost looks much more sustainable in the context of the current market price of around US$1,650 an ounce.

A key objective is to increase grades from the below-estimate 4.3 grammes of gold per tonne of ore recently achieved to an eventual target of between 6.5 and 7.5 grammes a tonne.

Chaired by small-company sector veteran Colin Orr-Ewing, Aim-traded Vatukoula gained control of the 75-year-old Vatukoula mine in the north of Fiji’s main island six years ago.

It’s not been plain sailing since then, but the company now hopes the arrival of Xintai will provide real support.

Recent quarterlies showed a nine-month loss of £4.3 million, and that did little to reverse a two-thirds share price fall over the past year. But the Chinese interest did bring some bounce.

Xintai was introduced to Vatukoula by existing shareholder Canadian Zinc, is taking a 17 per cent stake through a £7.1 million placing at a premium-priced 51.65p. It will also take a £3.2 million five per cent loan note convertible into shares at the same price.

Xintai will have two members on Vatukoula’s six-strong board, which no longer includes entrepreneurial Lonrho boss David Lenigas.

What’s more Xintai has indicated it intends to take its holding in the company to 29.9 per cent by buying more shares from existing investors, which would make it the biggest shareholder, ahead of Canadian investment group Sprott and Canadian Zinc.

One boon which Paxton and colleagues believe could come from Xintai is technical help in cutting costs. In this regard, Xintai could bring its partnership with China Gold Technical Company to bear.

Lately though it’s not just been difficulty with the ore and the mining that’s hindered progress. Torrential rains in the third quarter to May caused gold production to slip marginally to 41,389 ounces, while recoveries slid from 82.2% to 79.07% and costs rose by £500,000.

Paxton blames the recent grade disappointment partly on “dilutive” development work, and says recovery rates fell because the mine was processing more surface oxide material than it was a year previously.

Having said all that, there’s a reason the Chinese are so interested: the 4.3 million ounce resource, including reserves of between 700,000 and 800,000 ounces.

The company now hopes to produce between 60,000 and 70,000 ounces next year on its way to the 100,000 ounces a year target.

Along the way it will use its US$10 million resource definition budget to switch more ounces into reserves and extend the projected life of the mine.

“The life of mine is seven years on present reserves,” says Paxton. But he adds that for 75 years Vatukoula has been renewing its life expectancy. To this end, Vatukoula is probing ore bodies around the existing Vatukoula operation.

The present exploration lease covers more than twice the area of its four by two-km mining lease. “There is lots of land to explore,” says Paxton. “Xintai is interested in boosting exploration,” he adds.

The company is keen to probe several deposits in the vicinity, notably Nielsen, where directors cite exceptional grades of between 50 and 60 grammes a tonne.

Other points of interest include targets known as Cayzer, with recent intersections of 7.42 grammes a tonne, and Prince William, lately showing 7.82 grammes a tonne.

Paxton and colleagues reckon accelerated capital spending, perhaps in the order of US$20 million or more, could yield eventual cash flow of between US$40 to US$50 million.

That compares with Vatukoula’s present Aim value of £36.1 million, with the shares at 37p, down from a 12-momnth high of 112p but nearly 12p above their 25.25p year’s low.

“The light at the end of the tunnel is getting brighter,” claims Paxton. And certainly Xintai’s backing offers some potential encouragement.