Back in August I wrote about Shanta Gold (SHG) as being worth a look at around the 16p level, and with a chance of a good profit over the coming months. Subsequently, the share price rose to more than 20p as the gold price remained strong against a background of worldwide economic and political uncertainty, but news has just come of a placing, so does that change my opinion at all?
The placing, which was completed on Friday, raised a total of £32.2 million at 16.5p via a combination of shares being issued to institutions and via a subscription, plus participation from directors, and a portion of it was also available to private investors via PrimaryBid. The placing represented a discount of 6.8% to the prevailing share price prior to the news of a fundraise, and in the current market conditions I see that as being positive, and even more so that the placing was oversubscribed – I know of people who didn’t get the full amount that they had applied for via PrimaryBid. I wasn’t necessarily expecting the company to raise money at this stage I must admit, but can certainly see the rationale of doing so at a time when the gold market is strong, and given that the money will be spent on infill and expansion drilling, plus technical studies, at its recently acquired West Kenya project.
When I last wrote about the company I pointed out that one of my concerns was the relatively short remaining life of its existing producing assets in Tanzania, and that New Luika only had a mining life of around six years based on current reserves there (although there was potential to convert resources to reserves via further work). This, in my opinion, was why the company appeared to be relatively cheap at a market cap of around £140 million, as compared to its free cash flow generation (I estimated that this would be in the region of $20-22 million for Q3). Often this is the case with these smaller miners that do appear very cheap compared to the profit they are making and if you were to apply a typical PE ratio – the issue often is that the lifespan of the operations is limited, and therefore such a PE ratio doesn’t work, as the reserves are exhausted too soon for that to play out. Shanta already had potential further upside from its Singida licence, and that alone would boost production by 32,000oz per annum over a nine year period, and with an AISC of $869/oz. Construction is already underway, at a cost of $26 million over a two year period, and is expected to be funded from existing operating cash flows.
Additionally, the company recently completed the acquisition of the West Kenya project from Acacia Exploration, a subsidiary of Barrick Gold, for $7 million in cash plus $7.5 million in shares and 2% smelter royalty. A lot of work has previously been done on this asset, with over $55 million having been spent on further exploration there to ascertain the economics, given that historically it has already produced around 260,000oz of gold, from the Rosterman mine. The inferred resource for the project is nearly 1.2 million ounces and with grades of up to 12.6g/t, so the potential is clear, and if it were to be a success and reach production, then it would certainly solve the mining life issue that the company currently has at its existing producing asset. There is of course risk associated with that and no guarantee that it will ever reach production, but the indications that it could do look promising to me based on the recently published scoping study. This study estimated that the operation would produce circa 950,000 ounces of gold, averaging 105,000oz per annum for a nine year period, and with average grades of 9.3g/t. To get it to the production stage, which would initially involve open pit mining for the first two years, it would need Capex of $161 million, and over its life, all-in sustaining costs (including that initial Capex) would be in the region of $850/oz, which certainly makes it look very attractive given where gold prices are currently, and it would seem to make sense to fast track that, assuming of course that funding could be obtained. The estimated economics also look encouraging, as it would be expected to generate EBITDA of $118 million per annum on average and total free cash flows averaging almost $60 million per annum over the nine years, so the internal rate of return would be high as well.
The company also released its latest production and operational update for Q3 2020 last week, which showed that gold production was lower than the previous quarter, at just under 20,000 ounces, but still inline with guidance of 80,000-85,000 ounces for the full year. It still also showed that it currently still had $15.4 million in the bank, post completion of the acquisition, and overall net debt of just $5.1 million. Shanta also continues to reduce its hedging position and is on track to be completely unhedged by the start of next year, as a result of scrapping its forward sale commitments in order to be able to take full advantage of the prevailing spot price at the time the gold is delivered. Reserves stood at 653,000 ounces from its two projects in Tanzania, and with a further 3.2 million ounces from those plus the new West Kenya licence. So overall, I continue to see this as a good buy, even allowing for the increase in market cap to around £170 million post placing, and given a current share price of around 16.5p. If you didn’t get the chance to buy any as part of the PrimaryBid offering, then I can still see value in doing so in the open market.
Filed under: Shanta Gold, Keras Resources, Revolution Bars, St James House, Whitbread, QUIZ plc, Ariana
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