Vast Resources (LSE:VAST) has enjoyed something of a fresh start this year under new CEO Andrew Prelea, with investors beginning to take notice of its two attractive, producing mines against a backdrop of robust metal prices. Fresh from a year of volatility stemming from historical under-investment at one of Vast’s mines and concerns over who would foot the bill for its $10m work programme, Prelea became boss at the beginning of January. Could this change of leadership be a catalyst for positive developments with the firm?
Having previously been president of Vast’s Romanian subsidiary, Prelea had a good working knowledge of the firm and used his opening speech to commit to a scheme of cost-cutting and measured expansion. Things seem to be moving in the right direction so far, with Vast’s shares steadily increasing under Prelea and the business securing an attractive $9.5m off-take agreement last month to fund its work programme for the near future. With Vast set to deliver plenty of news flow this year around plans to expand – and re-open – existing mines and explore new licences, shares could be set to rally even further. Broker Brandon Hill values Vast’s mines at a large premium to its current £28.9m market cap. With that in mind, the current 0.6p value of Vast’s shares could soon look particularly attractive if investors continue to flock to the stock.
Copper opportunity in Romania
A major source of news flow for Vast over the last few months has been the Manaila mine in Romania, where it is the 100pc owner. The mine has been in production since Vast assumed operating control back in 2015, cementing its plans to transition into a producer from an explorer. As it stands, the mine’s open pit has an indicated and an inferred resource of 2.6MT at a grade of 1pc copper and 0.6pc Zinc and an exploration target of between 4.45Mt and 11.9Mt at grades of up to 2.3pc copper and 1.1pc zinc. Beneath the open pit, Manaila has an indicated and an inferred resource of 310,000t at a grade of 1.7pc copper and 0.5pc zinc alongside exploration targets containing between 5.9Mt and 15.8Mt with grades up to 2.6pc copper and 2.6pc zinc.
Since taking over, Vast’s focus has been on improving Manaila’s efficiency. This seems to have been something of a success, with copper concentrate quality increasing from 15pc to 18pc and mining and processing costs falling by 20pc. Vast has also made considered efforts to properly diversify its revenue streams at the site since operation, initiating separate production of zinc concentrate and pyrite concentrate with gold credits. These efforts, alongside the cash Vast has spent on increasing Manailia’s open pit resource and total exploration licence area, have cost around $8m. This may sound a lot for a firm which currently has a market cap of just £28.9m, but with broker Brandon Hill calculating in October that Manaila has a net present value of $15.2m, the mine could still provide a considerable return. Its value may have increased since this valuation, too. Throughout December and January, Vast shut Manila to focus on reducing a bottleneck, which had resulted from years of under-investment and was negatively affecting Manaila’s production throughout 2017.
Shutting the mine to focus on stripping Manaila led to a 48pc drop in the copper concentrate produced in Q4 to 562 dry tonnes and a 19pc drop in the zinc concentrate produced to 96 dry tonnes. When these figures were released to the market, Vast’s shares fell by 12.9pc. But the bigger picture speaks measures. By increasing access to high-grade ore at Manaila through stripping, Vast has traded a quarter of poor production for a future of maximised value at the mine. It can now take its resource forward properly.
Moving on up at Manaila
In a bid to extend Manaila’s mine life and tonnage, Vast is also planning to establish a second open pit in an adjacent area called Carlibaba. Once this second pit has been established, Vast plans to turn the Manaila mine into an enlarged mining complex that will utilise a centralised metallurgical processing facility.
The project is well advanced, with Vast already completing two phases of drilling to test the extension of the Carlibaba orebody at depth. Encouragingly, the drills confirmed the presence of defined mineralised zones and geological structures at Carlibara, as expected. Vast is now working on publishing a JORC compliant mineral resource for the area in due course.
Chief executive Andrew Prelea said the extension forms part of Vast’s efforts to optimise each of its mines in a bid to maximise profits for shareholders. He told us:
‘We are looking at a continual programme of expansion. We said that we would issue the JORC on the extension within the Carlibaba area by the end of the first quarter, and we are working hard on that at the moment.’
Patience is a virtue – Baita Plai licence
Vast’s other large interest in Romania can be found in its 80pc working interest in the Baita Plai polymetallic mine. Baita Plai is a skarn deposit featuring a 1.8Mt copper-silver-zinc-lead-gold-tungsten-molybdenum ore body at 6pc copper equivalent. Vast was selected by the holder of the head licence at Baita Plai to be granted the right to mine the area. It is currently waiting to get its final licence to mine the area. Vast expected to be granted this licence before the end of 2017, but the process is yet to be completed due to the red tape which so often holds this sort of due diligence back. There is little doubt that the licence will ultimately be granted, however. Last year, Vast said Romania’s Ministry of Economy had already been told to grant the firm approval, prompting an 85pc rise in its share price.
With Brandon Hill ascribing a $49.7m net present value to the 80% of Baita Plai, investors’ excitement around the prospect of it coming closer to production is understandable. Especially when one considers that the business has so far had to invest just $4m at the site. This small figure has covered the mine’s acquisition, care and maintenance, legal fees, improvements, and allocation of overheads.
‘We are geared towards going on stream at Baita Plai sometime this year. We have been in constant dialogue with the relevant authorities to move forward and we are geared to get going as soon as this happens; it has been a long time coming. We know that within six months of the association on the licence being granted we will be in production and can begin the ramp up from 5000 tonnes of ore a month to its capacity of 10,000 tonnes a month,’ said Prelea.
Show me the money
Obviously, all these developments do not come for free. Building the new metallurgical complex at Manaila ($4m), re-opening and drilling an underground resource at Baita Plai ($1.8m) and a host of additional expenditure will cost Vast a total of $10m. So where has it got this money from?
Initially, the business floated the idea of raising cash through a strategic investment from a third party. Indeed, it was at one point considering issuing a 29.9pc stake in its issued share capital for the money, but eventually decided against it. Ultimately, in order to avoid diluting value for shareholders, Vast decided to go the way of an off-take agreement. In January, it confirmed that it had agreed a $9.5m pre-payment off-take with Mercuria Energy Group for up to 100pc of the copper and zinc concentrate produced at Manaila and Baita Plai until December 2021.
Vast’s decision to eschew equity fundraising for debt fundraising was a win-win-win for investors. Firstly, and most obviously, it ensures that Vast has the money to complete its work programme and pay off its debts, as outlined in the image below. It also allows it to complete stripping at Manaila, which will enable it to supply the required tonnage and grade to satisfy the off-take agreement going forward. Secondly, aside from a £1m placing in November to cover ongoing costs while the agreement was being finalised, the deal completely bypasses any dilution of shareholder value. This is especially commendable when one considers that cash was so vital to progression. Most importantly, however, it means Vast can maintain control of its Romanian assets. With these assets offering a good chance of meaningful future expansion as metal prices look set to keep increasing, the company’s shareholders could find themselves extremely grateful for this point when the agreement ends in 2021. As Prelea puts it:
’We do not have to go back to shareholders for any future funding for the current projects which is fantastic. We stopped the dilution, which is very important and a promise I made when I took on the role. It also allows us to look at some other opportunities in Romania, so 2018 is looking extremely promising. Especially with commodity prices going where they are.’
Go for gold
Vast’s third big project is the Pickstone-Peerless gold mine in Zimbabwe, in which it owns a 25pc stake. The mine has historically produced more than 400,000oz of gold and currently has a JORC resource of 62Mt containing an impressive 3.6Moz gold. In its October calculation, Brandon Hill gave Vast’s stake in the mine a net present value of $37.5m, making it the firm’s largest currently producing asset, given that Baita Plai is yet to re-open.
In Q4 2017, Vast produced a record 6,057oz of gold from Pickstone-Peerless, but this is likely to rise further. So far, Vast has been producing from the mine’s oxide cap, but it is currently working on the construction of a sulphide plant to treat Pickstone-Peerless’s open cast sulphides. It recently commissioned the crushing, milling, and leaching components of the plant and once it is built, Vast anticipates an increase of around 75pc in mill throughput and a 40pc increase in grades recovered. First sulphide production is scheduled in 2018, so watch this space.
Aside from Pickstone Peerless, Vast sees significant opportunity in Zimbabwe, where it has been active since 2005. Indeed, Prelea said the firm is just now adjusting its focus back to the country after years of focusing on Romania.
‘Zimbabwe is basically the top ticket area for African investment. We have seen the country’s government trying to get investment back into the country and financiers who are looking to enter. It is a prime opportunity for Vast to extend its footprint in Zimbabwe given its previous history there.
‘Due to expected future cash flows at our mines, we have a lot of scope to take more debt if the projects are right and there is a need for the cash. We are re-visiting some of our old claims in Zimbabwe. This year could see us extend our footprint in the country, acquiring and joint venturing on several projects across various commodities.’
Finding your stride
Last year, a number of challenges led to a particularly volatile 12 months for Vast. Under the leadership of Prelea, the company looks like it is beginning to settle into its stride in 2018. The NPVs calculated by Brandon Hill in October for Vast’s three producing mines give the company a total notional value of $102.3m. Despite its shares climbing from 0.26p in August to 0.586p at present, Vast’s market cap still sits at just £28.9m. Even after factoring some discount for the risk of operating in Romania and Zimbabwe, this seems particularly cheap given the potential resource base the firm is sat on. This company-wide NPV does not even include the future potential on offer at Vast’s three main mines. Indeed, the business plans open up a new pit at Manaila and create a sulphide plant at Pickstone. Both of these activities could generate significant value by upgrading existing resources. Furthermore, this piece has not covered Vast’s Piciorul Zimbrului and Magura Neagra prospects in Romania. In October, a healthy update at these licences led to a 63pc surge in Vast’s share price. The firm also has a 25pc stake in Zimbabwe’s Giant Gold Mine, which has an inferred resource of 500,000oz of gold.
On the corporate side, things also look secure. In his CEO statement in January, Prelea promised to cut costs in order to improve Vast’s financial model and give its board a more technical focus. He also pledged to only expand into new opportunities if they do not risk impacting Vast’s existing operations. These points, combined with Vast’s aforementioned efforts to avoid diluting shareholder value, suggest the firm’s interests are falling in line with investors. Prelea takes over Vast in an exciting year, which could see it, deliver swathes of value-accretive news flow. He believes the company should be valued at around 2p a share, and says its focus is now on providing the market with plenty of information as it continues to move towards its ultimate goal of becoming a mid-tier producer. With metal prices also heading in a healthy direction, the business could represent a good value punt at just 0.58p a share.
Author: Daniel Flynn
The author does not own shares in the company mentioned in this article