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Vatukoula Gold Mines (LSE:VGM) has today announced that it has completed its botched replacement placing to raise £6.6 million gross from Chinese investor Zhongrun International Mining Co. Ltd at 33p a pop. The shares are now 32.5p. I can understand why folks are giving up on this one. Numerous placings – including this rather botched one ( Zhongrun came into replace another Chinese outfit which did not stump up its promised shekels in a 51p placing) – and numerous project delays. But I would not give up. I’d buy more and here is why.
Firstly the Chinese now own 24% of Vatukoula. That means that a) they will almost certainly fund the SPV which will build a sugar cane to power plant on site so cutting output costs by $200 oz. That will help. And b) if Vatukoula screws up again I reckon they will bid for the whole company.
Secondly Vatukoula is a high cost gold producer. As the gold price rises it gets real operational gearing and shares in this sort of company thus move the fastest. The re-election of Obama is good for gold as a) his pal Bernanke will now head off for QE ad infinitum and b) the budget deficit and National debt issue will get far worse.
And finally, even on the current cost base and the current gold price the shares are dirt cheap. I attach a table below giving some idea of the cash Vatukoula can throw off at various gold prices and on a current fuel cost/lower fuel cost basis at 70,000 oz pa ( this year’s forecast) and at 90,000 oz the forecast from next year onwards.
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 $1700 |
Gold Price $1850 |
Gold Price $2000 | Gold Price $2500 |
| 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 $1700 |
Gold Price $1850 |
Gold Price $2000 | Gold Price $2500 |
| Cost $1000 | $18 | $45 | $63 | $76.5 | $90 | $135 |
| Cost $800 | $36 | $63 | $81 | $94.5 | $108 | $153 |
At 32.5p the company is capitalised at £36.7 million ( $59 million). Do your maths.
For a detailed analysis of why the shares are cheap and what they are worth click here
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that free material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
Tom’s premium share website The Nifty Fifty was launched on October 28th 2012. Having created and run the t1ps website for 12 year his average gain per tip there was 42.7% (over 241 tips) with an average holding period of 36 months. His new website promises more of the same – for immediate access click here
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