[miningmx.com] — VILLAGE Main Reef (Village) CEO Bernard Swanepoel expected the Village share price to weaken after the acquisition of Simmer and Jack Mines (Simmers) but nowhere near the extent that it did.
Village shares plunged nearly 40% to 126c within weeks of the deal being finalized in mid-June from where they have recovered to current levels around 169c. That compares with a 12-month high of 290c.
The shares rose 6% in trading on Wednesday morning following the release by Village of its quarterly report for the three months to end-June which reported a profit before tax from continuing operations of R98.4m (March quarter – R245m loss).
Overall, Village reported a loss before tax of R698m ( March quarter R1.4bn loss) after taking into account the impact of fair value adjustments to Village’s investments in First Uranium and Mine Waste Services (MWS) which are now described as “discontinuing operations.’
Village sold just under 20% of its 25.5% equity stake in First Uranium to AngloGold Ashanti for R205m in cash and Swanepoel indicated the balance of the shares as well as the MWS notes which had a face value of R393m were also earmarked for disposal.
Swanepoel commented, “there was obviously going to be a large overhang of Village shares in the market following our acquisition of the Simmers assets.
“Those are the risks involved when you do an all-paper deal. Many of those shares were in the hands of unhappy former Simmers’ shareholders who would look to get out.
“But what happened to our share price was a disappointment. I thought it might drop from 220c to around 200c but in the real world at present it seems nobody reacts to positive news.’
The positive news Swanepoel is referring to concerns the move in the rand gold price to levels well above R400,000/kg.
If those kind of gold revenues are sustained then, according to Swanepoel, “we are going to generate the kind of cash that will make a mockery of our current share price.’
Reason is the impact of the higher revenues on profits generated by the marginal Tau Lekoa and Buffelsfontein gold mines which Village acquired from Simmers.
In the June quarter the two mines reported a realized gold price of R326,817/kg. Cash operating costs were R316,576/kg which gave a cash operating profit of R10,242/kg of gold produced.
But, as Gold Fields has been stressing for years, cash costs do not give the full picture because you also need to take into account capital expenditure costs to get to a mine’s real bottom-line.
That is calculated through a measure known as notional cash expenditure (NCE) and, for Village, the NCE in the June quarter was R339,048/kg meaning it actually lost R12,231 for every kg of gold produced.
For the current September quarter Village is forecasting that the received gold price will amount to R385,000/kg while cash costs will drop to R285,000/kg following the restructuring at Buffels and “corrective action’ taken at both Buffels and Tau Lekoa.
Village does not provide an NCE estimate for the September quarter but Swanepoel said assuming a similar capex number as for the June quarter would be “in the ballpark’.
Reason is both mines are in the final stages of their lives and capex will remain low compared to mines with longer remaining economic lives.
So, adding R22,473/kg for capex gives an estimated NCE cost of R307,473/kg which would equate to a profit of R77,527 on every kg of gold produced representing an overall profit margin of 20% versus a negative 4% in the June quarter.
Two assumptions must hold up for this prediction to become reality. The gold price has to stay above R400,000/kg for the rest of September and Village must deliver on its cash cost forecast.
The former looks the safer assumption with gold currently sitting around R430,000/kg and given the history of non-delivery at Buffels and Tau Lekoa.
Swanepoel said Buffels had now been downsized and restructured “to more realistic production levels’ while the “corrective action’ taken had involved a “brutally honest assessment’ of the costs of the operation some of which had previously been transferred to Tau Lekoa.
He added that he was “not too worried’ about the gold price and commented, “I like the balance of the dollar gold price sitting at such terrific levels along with a rand that has weakened to around R7.30 to the US dollar instead of sitting at around R6.50 to the dollar.’
