Vatukoula Gold Mines is one of those companies which has changed its spots considerably over the years. It was formerly known as River Diamonds, but transformed itself into a gold miner when it acquired the Vatukoula mine in Fiji from Viso Gero International. The mine was abandoned and waterlogged, and took a year to refurbish before VGM could reopen it. Now, Vatukoula is the company's main interest and the driver behind the share price.
Vatukoula contains 5.15m ounces of gold resources and 830,000 oz of gold reserves (ie, resources economic extraction of which is known to be economically feasible). It's an underground gold mine within the Tavua basin, and has been mined since 1933; at 800 metres deep, it's a relatively shallow underground resource. Estimates of the total resource show there's enough gold in the ground to keep the mine producing for 40 years. A 5m ounce-plus JORC compliant resource is fairly chunky in global terms - certainly more than you'd expect from the average penny stock (which Vatukoula is).
The mine is already producing, but it's going to ramp up production massively in the next couple of years from the current level of around 40,000 ounces a year to somewhere closer to 100,000 ounces. That should have a massive impact on profitability - the company has so far made losses, but the increased sales together with lower unit costs should transform the profit and loss account.
However, there's one big fly in the ointment, and that is the fact that Vatakoula's a high cost resource. Last quarter, the gold cost USD 1090 an ounce to produce - a crazy figure, given that the gold price has only recently hit this figure after years of trading around USD 600-700 an ounce! Fortunately, that is a one off result of temporarily depressed production, as the company accelerated its underground development programme. While most quarters have seen around 10,000 ounces being produced, this quarter saw only 6,722 ounces - above management guidance of 6,000 to 6,500 ounces, but low enough to bring costs in way above average.
Even so, with a yearly average cash cost of USD 837 an ounce, Vatukoula is a high cost producer. The development programme should give the mine more flexibility, and reduce the cash cost to USD 600 an ounce by 2011; management plans to increase production to 100,000 ounces a year by then, giving it economies…
