Vatukoula Gold Mines Marches On Towards Profitability In Fiji, With One Eye On Working Capital
By Alastair Ford
minesite.com
Why did Dave Paxton leave a perfectly good job at Hichens Harrison to join a company that’s currently rehabiliating an ageing Fijian gold mine? One reason among many might be the 50 million options at 2p per share that he was granted upon his arrival. That’s not an outrageous amount, but it’s nice to have, although he’s going to have to more than double Vatukoula’s share price from the current 0.97p if he wants to get his options into the black. But he’s got until 2013 to do it, and given some of the metrics that he points out to Minesite in the wake of maiden operating profits from the company’s newly re-opened Vatukoula mine, there’s every chance he may succeed.
One of the jobs Dave was tasked with by the powers-that-be at Vatukoula (otherwise known as Dave Lenigas and Colin Orr-Ewing) when he took on the job as chief executive of Vatukoula Mines, itself not long re-incarnated from its old identity as River Diamonds, was to raise the company’s profile. Why, he was asked, does a company with five million ounces of gold in the ground and a 70 year operating history on its principal asset trade at such a discount? The answer, partly, was that following a long history of meandering around in the mining industry the exact focus and purpose of the old River Diamonds had become obscure. The answer was a clear communication to market that in its new guise as Vatukoula Gold Mines the company had regained focus as a specialized underground gold miner, with its key operating asset at Vatukoula, also known as Emperor, in Fiji.
Dave’s the idea man for this job in many ways. A qualified mining engineer with 35 years in the business behind him, he was also, at Hichens, the company’s broker, so he knows a thing or two about how to dig the metal out of the ground in Fiji, and a thing or two about marketing the company’s shares in London. Or further afield, even. Old clients from Hichens days, like Colin Andrew of Cambridge Minerals, speak well of him, and he’s certainly a face well-enough known in London that if he sets off out on a serious promote he’ll find plenty of hearers.
Of course it’s helpful that, almost as a lone voice in a wilderness of asset classes, gold has been performing well. As an ageing underground mine, Vatakoula isn’t exactly low cost. At the moment production costs are running at around US$660 an ounce on the basis of output of around 1,200 ounces per week. Dave is hopeful that output can increase to around 2,000 ounces and that costs will in the process fall to between US$500 and US$550 an ounce. “At the moment”, he says, “we’re just at breakeven”. And breakeven is all well and good, and allows the company to talk in terms of operating profits, but Dave is careful to caution against any over-exuberance on the part of Minesite. The reason? Vatukoula needs around US$5 million in working capital in order to keep the old operations in Fiji ticking over. Specifically there are eight ageing generators to be maintained, and Dave would dearly like to take out a lot of the ageing plant and replace it with up-to-date and more efficient machinery instead. Where the requisite money will come from isn’t exactly clear yet, but Dave doesn’t seem too stressed about whether he’ll get it or not. Rather, what’s up in the air is the form the new money will come in – he talks of a “potential loan or royalty”. In London, talk of royalties generally means a phone call to Brian Wides and the boys at Anglo Pacific.
But looking ahead Dave Paxton isn’t setting his sights purely on London. Fiji, he points out, is nearer to Vancouver, than it is to London. He’s optimistic that he can take Vatukoula on the road in Canada and the US and drum up some serious interest. As a former analyst the grounds for his optimism rest in that old analyst favourite, the peer group comparison. Peer group comparisons don’t always work out - comparing apples with apples can almost be as fruitless as comparing apples with oranges when savage sentiment, illiquidity, specific redemptions and political risk are thrown onto the conflagration. Anyone who can really build those factors into a working spreadsheet deserves some sort of Nobel prize. But in the case of Vatukoula the exercise is instructive simply because of the huge value differential that can be demonstrated straight away, a differential larger than any discount can allow for. To be precise, on the current market capitalization the company is valued at around US$5.50 per ounce of gold in the ground. In North America, where we can include the likes of Kirkland Lake, Agnico Eagle, Hochschild and Richemont, the average valuation runs to around US$70 per ounce. Fair enough you might rather be in North America than in Fiji. But to the tune of a US$64.50 per ounce valuation difference, where the gold has been mined for 70 years and there are no metallurgical issues? Dave is confident he can close that gap. Indeed, eventually, he says, “I believe this company will be sold to a North American mining company”.
What price any mooted North American buyer might come in at is open to speculation, but Dave argues that even if a buyer came in at ten times the current price, said buyer could still be satisfied that a decent and fair price had been paid. It’s at this theoretical stage that Dave’s options begin to make a lot of sense too. But a take out isn’t required. As long as gold stays strong, Vatukoula has 30 or 40 years worth of life in it. And there’s no reason why Dave and his team can’t run it themselves to the benefit of locals and shareholders alike. |
