Trying times for ‘hunkering down’ VMR

[miningmx.com] – THESE are trying times for Village Main Reef (VMR), the investment mining house established by Bernard Swanepoel, known for building Harmony Gold in the Nineties.

The company has closed two of its gold mines – Buffelsfontein (Buffels) and Blyvooruitzicht (Blyvoor) – and will be anxious nothing goes awry at its two surviving assets, Tau Lekoa, a gold mine near Orkney in the North West province, and Consolidated Murchison (Cons Murch), which produces antimony and gold.

Added to that there has been a major management turnover. Swanepoel has handed overall executive power in VMR to long-standing colleague, and former Great Basin Gold CEO, Ferdi Dippenaar. For his part, Swanepoel will be non-executive chairman, which returns him to focus on To The Point, his consultancy.

There have also been resignations in other key executive positions, most notably the CFO in such a way that it doesn’t looked planned.

The future CFO has important decisions to make especially as cash preservation and generation will be the priority. VMR was in danger of going bankrupt had it not shuttered Blyvoor, a gold mine on the west Rand.

The evidence from VMR’s third quarter report, published last week, is that it now only has access to R49m of cash (R105m is locked up in mine rehabilitation obligations) whilst Blyvoor cost it R88m between March and June.

So the company will be keen to avoid a repeat of the labour disruption at Cons Murch which saw production taken out for two weeks at a revenue cost of R10.5m. It will also be hoping Tau Lekoa starts to pump cash after a reassessment of how it should be mined. But it’s hard to know what the future holds for shareholders, especially with flexibility cramped as it now has been for VMR.

Asked prior to his resignation if he thought there may be opportunity to pick up gold assets on the cheap should the big players – AngloGold Ashanti or Harmony Gold restructure following the $500m decline in the gold price – Swanepoel said: “We’re not going to be a bottom feeder’. He wants to look at further investments in platinum and coal.

To be honest, buying Blyvoor and Buffels were the activities of a “bottom feeder’. Swanepoel styles the acquisitions as that of an opportunistic investment house, seeking to harvest the last vestiges of gold the assets could provide.

It’s uncertain shareholders will look kindly on the former strategy, nor a decision to buy back shares for an average price of R1.20/share. At about 37c per share, VMR’s price at the time of writing, that’s equal to an R80m loss on investment. “Why didn’t they pay a dividend instead?’ one shareholder commented in a Miningmx article in July.

Ultimately, it’s the gold price that has made life difficult for VMR. Its decline caught nearly everyone offside and the fallout from the slide is making waves across the investment globe with $20bn in impairments already booked by gold companies, (and that’s before the South Africans have reported third quarter figures).

The key for VMR now is survival. “If we do nothing but hunker down for the year that will be good,’ Swanepoel told Miningmx. “We need to come out of an unexpected negative performance,’ he added.

Tau Lekoa is the key, one suspects. Swanepoel estimates it has a cash operating margin of R100,000 per kilogram.

“That’s more than enough to replenish the balance sheet,’ Swanepoel said. In rands and cents that’s about R8m in cash based on last quarter’s production at Tau Lekoa – or 10 months of uninterrupted performance to remove the blemish of the Blyvoor investment.