VATUKOULA Gold Mines

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Vatukoula Gold Mines investment in new equipment starts to feed through to bottom line

It’s never straight forward returning an old mine to its former glory, particularly so if it is an underground mine, but that is exactly what Vatukoula Gold Mines (AIM:VGM) is in process of doing at the Vatukoula mine on Viti Levu, Fiji.

During 2009, Vatukoula Gold raised a fair old chunk of cash to invest in new mining equipment and for working capital. This morning, the junior gold company, headed up by former mining analyst Dave Paxton, with Canadian Zinc (TSX:CZN) and Sprott Asset Management (TSX:SII) amongst its major shareholders, reported a marked improved in tonnes of ore processed at its flagship mine.

Underground gold mines can be exceptionally profitable operations, due to the high grade nature of the ore being extracted, but they can also burn cash at an alarming rate due to their higher fixed costs. In layman’s terms, the trick it so ensure the mine operates at its designed output to ensure cash costs per ounce to not race ahead of the gold price. Paxton’s key ambition since taking the helm at Vatukoula Gold is to ramp up production to a level where operating costs per ounce fall to target level of US$550-600 per ounce.

Results for the second quarter (December-February) showed hints of this ambition beginning to take hold. Tonnes of ore processed in the second quarter rose 18% to 62,606 tonnes compared to the first quarter (September-November) while development meters rose by 20% over Q1. Cash costs did increase in the second quarter, but this was due to lower grades being mined (6.93 grams per tonne versus 8.34 grams per tonne) than the previous quarter plus higher fuel costs.

Nonetheless, the results were encouraging as Vatukoula cannot dictate the grade of ore being mined and can only mitigate the influence of diesel fuel to a certain extent, and therefore it must logically focus on delivering the best operational efficiency it can. This was reiterated by the junior gold producer this morning, which stated that it still expected cash costs to fall over the long term.

"We continue to focus on ramping up production and are now clearly seeing the benefits of our investment in new equipment last year. We have a long-term plan in place for the mine and it is pleasing to see its continued development going to plan. We continue to believe that our forecast production target of 60,000 ounces gold production for the financial year ending August 2010 remains on course,” Paxton stated this morning.

“The step increases in gold sales and earnings achieved during the quarter demonstrate the fruits of our labour. As previously stated, the planned continued increase in production is expected to result in a reduction of our cash costs per ounce. Additionally, as we grow our exploration programme, the Company's prospects are expected to become even more compelling. As such, we look forward to updating the market with further developments in the coming months.”

Gold shipped in the second quarter jumped from 8,826 ounces to 15, 267 ounces, allowing the company to report a near fourfold increase in mine net earnings to £4.6 million.

While a strong emphasis is being placed on increasing throughput to the mill, Vatukoula also confirmed that it had acquired four additional drill rigs, lifting the total number to nine, to boost in its mine planning. Dewatering of the low levels has also been completed, giving the company access to the 18 level where operations are expected to start in the next financial year.

Vatukoula is forecasting production of 60,000 ounces for the current fiscal year and has a longer term ambition of increasing production to 110,000 ounces annually.

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