Vatukoula Gold Mines : Interim Results to 28 February 2014

20 May 2014

Vatukoula Gold Mines plc

("Vatukoula" or "the Company")

Interim Results to 28 February 2014

Vatukoula Gold Mines plc, the AIM listed (AIM: VGM) gold producer focused on Fiji, is pleased to announce its Interim Results for the half-year ended 28 February 2014.

·      Completed the US$ 20 million equity portion of the US$ 40 million investment agreement with Zhongrun International Mining Co. Ltd ("Zhongrun") in November 2013. A total of S20m in loan stock investment to be received by 30 June 2014

·      To date US$4.6 million of the outstanding US$20 million debt financing received

·      H1 production of 19.1 koz - on track to achieve full year production target of 40 koz

·      Order of 4 dump trucks and 2 loader completed and scheduled for commissioning in early July 2014

·      34% reduction in cost of sales from the six months ended 29 February 2012 to the six months ended 28 February 2014.

Y.B. Ian He, Non-Executive Chairman of Vatukoula, commented:

"During the half year we completed the US$ 20 million equity portion of the US$40 million investment agreement with our majority shareholder Zhongrun. This has allowed us to continue with our capital development programme and has delivered a 10% improvement in ore grade and a 9% increase in the gold recovery rate. At the same time we have continued to manage our cash costs per ounce which has been reduced by 11% compared to the same period last year.

In March this year the regulatory approval of the US$ 20 million loan portion of the US$40 million was granted, and to date US$ 4.6 million has been advanced. With the current difficult gold and capital market conditions, this funding will provide us with the means to continue or capital investment programme in this fiscal year and we look forward to working alongside Zhongrun as we deliver growth in production to a sustainable and profitable level.

Given the historical delays in financing and the change in the delivery dates of the US$ 20 million loan notes, it has meant we will been unable to progress as quickly as we would have liked to. This is turn has meant that production guidance for the financial year ending August 2014 will be approximately 40,000 ounces as previously announced.

Operating and Financial Performance

Vatukoula Sold 19,116 ounces of gold during the first half of this year at an average cash cost of US$1,463 per ounce. This represents an 11% reduction in cost per ounce, a large portion of the decrease in costs has been driven by the increase in grade which rose 10% from 3.80 grams of gold per tonne in the six months ended 28 February 2013 to 4.19 of gold per tonne in the six months ended 28 February 2014. The increase in grade delivered to the mill also drove a 9% increase in recovery which stood at 79.95% for the six months ended 28 February 2014 (73.24%, for the same period last year).

We have continued to focus on cost reduction with cost of sales reducing by 15% to £16.9 million compared to the same period last year. Our continued cost control over the two years has yielded some excellent results with costs of sales dropping 34% from £25.5 million for the six months ended 29 February 2012 to £16.9 million for the period under review.

Nonetheless, and despite the reduction in costs, we have been effected by the lower gold price environment. Our average realised gold price per ounce decreased from US$1,681 for the six months ending 28 February 2014 to US$1,264 for the period under review. This 25% drop in price has meant that we have lost approximately £5.4 million from revenues and as result we had a gross loss of £1.9 million during the period compared to a gross profit of £0.9 million during the same period last year. After administrative expenses, foreign exchange losses and depreciation and amortisation expenses the operating loss was £9.1 million compared to a loss of £2.5 million during the same period last year.

As highlighted in January 2014, at the beginning of this financial year the main objectives for this period were to continue with our development schedules to allow access to high grade mining sections. We have continued to invest heavily in our development programme with some £5.6 million invested during the period under review, compared to £5.2 million during the same period last year.

Underground Production and Development

Gold production from underground mining was limited, as we continued to advance the capital investment programme. We continue to implement footwall drive development (below the ore body) as we believe that this approach will deliver significant benefits and allow for a reduced mining machinery fleet and increased extraction ratio in the long-term. In the short-term however, it will slow initial access to the ore and not produce any gold from development. We do however, remain convinced that this programme is required for the long-term sustainability at Vatukoula.

During the first half of the year we mined a total of 211,242 tonnes of ore and waste, a 2% increase on 206,501 tonnes mined in the same period last year.  The increase was driven by higher capital development metres.

Ore delivered from underground was 116,100 tonnes at a grade of 5.18 grams of gold per tonne. Although the tonnage was 8% lower compared to last year, there was 6% increase in underground grade from 4.86 grams per tonne to 5.18 grams per tonne, which resulted in a net marginal decrease in the underground gold delivered to the mill. The lower tonnage was a result of lower strike drive development, reduced stoping tonnes due to reduced face availability during development, and narrower stope mining widths.

Total development decreased to 9,388 metres, a 7% reduction compared to the same period last year. The primary drivers for this were as follows:

·      Operating development includes all mining to access stopes within an ore body (e.g. rises, cross-cuts and gullies). This type of development is expensed as it is normally within the ore body and once the mining has ceased the development has no further use. Operating development decreased by 16% to 5,698 metres compared to the same period last year. This reduction is a result of increased resources being assigned to the capital development programme.  Once new development has exposed new mining areas, we expect an increase in operating development.

·      Capital development metres are primarily comprised of inclines, declines and footwall drives. This type of development is carried outside the orebodies and provides long term access to the ore bodies, and is capitalised. Capital development increased by 20% to 2,861 metres compared to the same period last year. This is the result of incline and decline access development and footwall drive development as part of our change in mining methodology. Capital Development is a major item of our new regime in underground mining at Vatukoula.

Surface Production

During the six months, production from the surface oxides delivered 58,586 tonnes at an average grade of 2.06 grams per tonne. Surface mining produces both oxide material from open pit mining and sulphide material from old waste dumps.  During the six months we terminated the surface oxide mining, to focus on the higher grade sulphide waste dumps available in the mine area. The termination of the oxide mining led to drop of 36% in ore delivered from surface mining compared to the same period last year. The surface oxide material is a supplemental source of gold production and will be phased out once we have sufficient production from underground sources.

Vatukoula Treatment Plant ("VTP")

Ore processed for the half year was174,010tonnes, a 20% decrease compared to the half year ending 28 February 2013 (216,860 tonnes). The decrease was primarily driven by the decreased surface mining activities, which decreased ore delivered to the mill by 36%.

The average grade processed increased from 3.80 grams of gold per tonne in the half year ending February 2013, to 4.19 grams of gold per tonne in the half year ending February 2014. This was driven by higher grades delivered from underground mining operations and a decrease in lower grade surface tonnes delivered to the mill. Recoveries ran at 79.95% for the period compared to 73.24% in the same period last year. The increase in recovery rates can be attributed to the increase in grade delivered to the mill

The mine shipped and sold19,116ounces of gold during for the six months ended 28 February 2014 compared to 19,595 ounces in the same period last year.

Financial Review

Gold shipped for the period was 2% lower than the six months ended February 2013, and the average gold price was significantly lower by 25%.  Even though the Company benefited from a reduction in cost of sales, the impact of lower revenue reduced the gross profit for the period into a loss of £1.9 million (HY 2013: profit £0.9 million). The lower gross profit affected underlying operating loss, and combined with a £2.6 million foreign exchange loss (HY 2013: gain 1.5 million) resulted in a £9.1 million loss compared to £2.3 million loss during the same period last year. Net loss for the period was £9.2 million (HY 2013: £2.5 million) as a result of the lower gross profits and foreign exchange losses.

Reconciliation between net profit for the period and EBITDA is presented below:

Revenue

Revenue for the half year was £15.0 million which is 28% lower than the prior year period (£20.8 million). The Group's year on year sales volume decreased slightly by 479 ounces. The average realised gold price was US$1,264 per ounce in the half year ended February 2014 compared to US$1,681 per ounce in the same period in 2013, which adversely affected revenue.

Cost of Sales and Operating Expenses

Excluding the impact of foreign exchange, cost of sales and operating expenses showed a decrease of 12% compared the same period in 2013.  This was in line with a general decrease in total tonnes mined during 2014.  

The negative impact from the foreign exchange loss meant the overall Cost of Sales and Operating Expenses increased to £24.2 million in the half year ended February 2014 from £23.1 million during the same period last year.

Depreciation and amortisation was £3.7 million for the half year ended 28 February 2014, similar to the same period last year (£3.5 million).

Cash Costs

Cash costs per ounce sold for the half year ending 28 February 2014 were US$1,463 per ounce sold (2013: US$1,634 per ounce). This is mainly driven by the 10% increase in grade delivered to the mill which decreased the cash cost per ounce by approximately US$131 per ounce of gold shipped. 

Administrative Expenses

Administrative expenses totalled £0.9 million for the half year ended 28 February 2014, which was a 21% decrease in costs from the same period in the prior year of £1.2 million. The administrative expenses are those costs associated with maintaining the London office and the administrative expenses in Fiji. Costs include salaries, office rent, regulatory, audit, legal fees and investor related expenses.

Exploration and Resource Definition Costs

As highlighted in the operations review we have curtailed our capital expenditure and incurred £63,000 exploration and resource definition costs compared to the £1.0 million in the same period last year. All the exploration and resource definition costs were capitalised as an Intangible Asset in accordance with the requirements of IFRS 6 Exploration for and Evaluation of Mineral Assets.

Taxation and Other Expenses

During the period the Company had a tax credit of £0.2 million (HY 2013: £0.2 million). This tax credit arises as a result of the release of the deferred tax liability. Other expenses amounted to £40,000 in the half year ended 28 February 2014 (HY2013: £231,000), mostly due to a significant doubtful debt provision in 2013.

Cash Flow

Net cash used in operating activities was £4.5 million for the half year ended 28 February 2014, an increase of £4.8 million compared to the same period last year (cash generated of £0.3 million). Prior to working capital movements the net operating loss was £2.3 million compared to £0.004 million in the same period last year. The net operating loss before changes in working capital was increased by the changes in working capital which used £2.2 million (HY 2013: generated £0.3 million). These changes in working capital were a result of an increase in inventories of £0.8 million, an increase in receivables of £0.3 million and a decrease in accounts payable of £1.1 million.

Cash flow used in investing activities equated to £6.1 million for the year which represents a 16% decrease from the same period last year of £7.3 million. Of the £6.1 million used in investing activities £0.4 million (HY 2013: £1.1 million) was used in the purchase of plant and equipment and £5.7 million (HY 2013: £6.2 million) was used in underground development and resource / exploration drilling.

Cash provided by financing activities was £13.0 million (HY 2013: £6.7 million), mostly through the issuance of shares. As of 28 February 2014 the Group had cash and cash equivalents of £2.9 million (HY 2013: £2.2 million).

Change in Year End

In order to make further savings in both administrative and regulatory costs, the Company has resolved to align its year end with its majority shareholder, Zhongrun. Therefore, the financial year end of the Company will be changing from 31 August to 31 December. The Company will release a further set of interims for the six months from January 2014 to June 2014 which will be published by 30 September 2014. In addition, the Company will report for the 16 months from September 2013 to December 2014 as a transitional financial period, and thereafter for the 12 month period ending 31 December each year.

Post period events

As announced in March 2014 Zhongrun informed the Company that Chinese regulatory approval had been granted for the advance of the second tranche of US$20 million of secured loan notes ("Loan Notes"). The Company and Zhongrun have agreed to vary the terms of the US$20 million loan notes, to match the cashflow requirements of the operations at the Vatukoula Gold Mine. In this regard the schedule of payments from Zhongrun will occur in three tranches, with the first received by no later than the end of April and the last in June. Each tranche will be no less than US$ 4 million and will total US$20 million.

As of 30 April 2014 and the publication of this document the Company has received a  total of $4.6m with US$2 million in cash, a further US$1 in underwriting guarantees for the purchase of an additional four underground haulage trucks and two underground loaders and US$1.6 million deposit paid on its behalf for additional resource development drilling.

Outlook

The long term future of profitable mining operations at Vatukoula requires access to new sections of existing ore bodies. Accessing these ore bodies is the key part of our capital investment programme.  In addition, to this we will need to carry out an extensive drilling programme to better define the ore bodies, an upgrade and expansion of our heavy vehicle fleet, the construction of an additional tailings dam and other ancillary capital projects. 

However, the historical delays in financing and the change in the delivery dates of the US$ 20 million loan notes, have meant that we have been unable to progress as quickly as we would like with the expenditure on plant property and equipment. This is turn has meant that production guidance for the financial year ending August 2014 will be approximately 40,000 ounces as previously advised.

Y.B. Ian He

20 May 2014

All activities relate to continuing operations.

NOTES TO THE FINANCIAL INFORMATION

FOR THE SIX MONTHS ENDED 28 FEBRUARY 2014

1.   General information

Vatukoula Gold Mines Plc. is registered in England and Wales under number 5059077. The Company is governed by its articles of association and the principal statute governing the Company is the Companies Act 2006. The Company's registered office is at 2 More London Riverside, London, SE1 2AP. The company is listed on the AIM market of the London Stock Exchange. The principal activity of the Group is the mining of gold ore and the refining of the ore into gold Dore bars which are sold to be smelted into gold.

2.   Basis of preparation

The interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting.

These interim condensed consolidated financial statements are unaudited and does not constitute statutory financial statements.  The interim condensed consolidated financial statements incorporate the results of the Group for the period from 1 September 2013 to 28 February 2014.  The results for the year ended 31 August 2013 have been extracted from the statutory financial statements for Vatukoula Gold Mines plc. for the year ended 31 August 2013 which are prepared under International Financial Reporting Standards ("IFRS") as adopted by the European Union. The interim financial information should be read in conjunction with the annual financial statements for the year ended 31 August 2013.

The same accounting policies, presentations and methods of computation have been followed in these condensed financial statements as were applied in the preparation of the Group's financial statements for the year ended August 2013.