UK investors will soon have another gold miner to choose from. This month sees the planned flotation of VI Mining (VIM), a Peru-focused resources group, which from a standing start plans to leapfrog the output of FTSE 250 stalwart Hochschild Mining (HOC) in under a decade. That’s the same Hochschild that should produce the equivalent of 500,000 ounces of gold this year.
So far, so normal – at least within the mining industry, where projects invariably start with grand plans, and even grander aspirations.
However, a few features of the listing immediately stick out. First, VI is joining the London-based NEX Exchange, rather than Aim. Ostensibly, this is due to chief executive David Sumner’s positive experience of the market when he floated nursing recruiter Healthperm Resourcing (HPR) in 2016. VI’s choice of public market – billed as a “soft launch” – is also apparently better suited to a company that needs a bit of time to build a disciplined board, but could do without the paperwork demands of more prominent bourses.
If on first glance this looks like a snub to the London Stock Exchange, Mr Sumner tells us that a main market IPO is planned in the second half of 2018. That should put VI on the radar of institutional investors within a year, particularly if the miner achieves its initial market capitalisation target of £420m. That figure will also make it the largest stock on NEX after Arsenal Holdings (AFC), the tightly controlled holding company of the football club, in which shares trade for £20,050 apiece.
The second quirk is the company’s business plan. VI wants to be a big miner, but will get there by first building two gold processing plants for small-scale miners in Peru. According to the national government, which since 2012 has made efforts to ‘formalise’ this semi-legal, $2.6bn (£2bn)-a-year industry, artisanal mining provides work for hundreds of thousands of Peruvians. What they often lack is access to a nearby market; many miners are forced to travel hundreds of kilometres to their nearest smelter, sleeping beside their rock for days until their wares are sold.
VI is bringing processing capacity to two particularly underserved, but highly active mining regions. The first, Casma, is located in the Ancash region, immediately north of the capital Lima. For an outlay of $5m, VI has built a plant capable of processing 350 tonnes of rock a day: assuming a head grade of 10g a tonne – a realistic expectation given the highly targeted nature of artisanal mining – and a processing recovery rate of 80 per cent, Daniel Stewart analyst Austin McKelvie believes Casma should be producing around 30,000 ounces of gold doré by 2019. The expected gross profit margin on processing is 35 per cent. A second operation, in the sparsely populated southern department of Arequipa, is designed to process a similar volume, at lower unit costs.
As its supply comes directly from artisanal miners, VI argues its model presents “zero mining risk”. And with 7,502 authorised miners in the Arequipa region alone, the company can afford to be picky. Cash generation from the plants will provide funding to develop the Rosario de Belen project, a fully-permitted, thoroughly explored silver-gold deposit in northern Peru. VI will commit $40m in capital expenditure and working capital to get the mine up and running in 2019. By 2020, Daniel Stewart thinks Rosario could be generating 330,000 ounces a year, or $125m in free cash flow assuming a gold price of $1,250 and an operating profit margin of 29 per cent.
That also explains the broker’s large carrying value for the asset which, once a 15 per cent discount rate is applied (and assuming 30,000 tonnes of ore can be treated a day), equates to a net present value of $482m – roughly three-quarters of VI’s proposed market capitalisation.
The self-funding model also means VI will not ask for capital on listing. Together with the shares’ illiquidity – just 13.4 per cent of the company will be free floated, with most “locked up” in board ownership – this begs the question why the company is floating at all. The answer, we are told, is the advantage publicly traded paper will provide in VI’s myriad upcoming business negotiations.
VI’s third peculiarity, given its size, relates to the calibre of its board. Its geologists count Barrick Gold, BHP Billiton and Hochschild on their CVs. Chief operating officer Lucianno Giorffino advises the government. Mr Sumner has also landed Jide Zeitlin, a former Goldman Sachs (US:GS) executive and current chairman of fashion giant Coach (US:COH), as his non-executive chairman.
