Hummingbird Resources - a speculative buy? Gary Newman reviews...

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Mining companies often operate in parts of the world that you definitely wouldn’t consider to be safe or politically stable, but despite that many of them operate fairly smoothly and rarely have major issues when it comes to their mines. Of course, investors in such companies need to be aware of all that is going on, and decide whether or not they are prepared to take on this type of risk, but the flipside of that is that often the rewards can be significant if the company is successful and continues to be over a period of time, despite the instability in its chosen country of operation. That would seem to be the case with Hummingbird Resources (HUM) currently, which not only has suffered set backs to its production via Covid and adverse weather conditions, but also has the added problem of a military coup and fighting in Mali, where its producing Yanfolila mine is located. On top of that we also saw a sharp pullback in gold prices at the end of last week, so you might be thinking that all of this combined is a very good reason to completely avoid this company. But I would argue completely the opposite for those who have more tolerance for risk and are prepared to take speculative positions with potentially high rewards if they are proven correct, and would view the current level of around 32p as a buying opportunity, with a view to the share price being significantly higher at some point this year...

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So far this company hasn’t really lived up to its potential and has had its fair share of problems, plus concerns about the remaining life of operations at Yanfolila, based on current reserves. A lot also depends on whether or not you view this drop in gold price as a temporary blip or the start of a more significant retrace in the commodity price. Personally I see it as a temporary drop as I see enough macro-economic factors to ensure that gold remains strong in at least the near term, plus I suspect that we will see nations such as China continuing to increase their reserves of the metal. The company is also actively drilling to move some of its existing resources into reserves, as well as expanding that resource base – prior to 2020 it had 676,000 ounces of reserves remaining, with most of that having been exhausted by 2024 via annual production in the 100,000 to 120,000 range. The issues it has faced this year - including having to mine softer ore to preserve its milling equipment at a time when getting parts for the machines has been difficult due to Covid restrictions and border closures, plus extreme bad weather - has meant that it won’t hit its guidance range of 110,000 to 125,000 ounces, and by the end of November it had produced around 93,000oz. That obviously isn’t ideal, but that gold will still be produced over the next few years so the loss of production was temporary rather than permanent. The company has also had some recent exploration and appraisal drilling success at Yanfolila, including discovering a new zone of mineralisation not included within the current resources. Drilling is ongoing and the company expects to release an updated resources model by the end of this quarter. Aside from the new discovery, the drilling at Yanfolila is designed to bring as much as possible of the current 1 million ounces of resources into the reserves category.

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The company has decent levels of cash for this drilling, with $9 million in the bank as at the end of September, as well as having significantly reduced its bank debt the previous quarter $7 million to $19 million. That net debt of $10 million also doesn’t take into account the 4,600oz of inventory it had at the time which was valued at circa $9 million. So I see no cause for concern on that front – even more so when you consider that the production issue, particularly the weather, had increased AISC costs to $1,238/oz for the quarter, and well above annual guidance of $995/oz for the year, and with an average gold sale price of $1,919/oz. So as long as gold prices remain strong and AISC can be reduced back down to predicted levels, the cash generation potential increases dramatically – during that quarter, if AISC had been in line with annual expectations the company would have generated an additional $6 million odd in operating profits for the three month period. The company also diversified its operations via the addition of the Kouroussa gold project in the Republic of Guinea, via the payment of £10 million in shares (once the licence has been reassigned to Hummingbird) priced at 28.4p. Further drilling will be carried out at Kouroussa and a development plan will be made to fast-track the building of a mine targeting annual production of 100,000oz at an AISC of around $800/oz over an initial five year period, with potential to expand and tap into the full 1.18Moz of high grade (over 3g/t) resources already identified at the project. At an earlier stage but still with potential, Hummingbird also has the option to earn up to a 49% stake in the Dugbe gold project in Liberia, where 4.2Moz of resources have been identified, and over the next couple of years the company will earn its share via exploration drilling plus completion of a definitive feasibility study.

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Overall, I certainly see enough potential here to make things interesting if gold prices remain high, and which offer enough potential upside from a market cap of around £116 million to make things interesting. You do of course have to consider the risk in Mali and the impact that would have on the company if there was any sort of significant disruption to its operations, but it is also worth bearing in mind that gold mining makes a significant contribution to the economy of Mali. On that basis, I view Hummingbird as a speculative leveraged play on future gold price strength. There is also enough news flow to come that it is also worth considering the shares as a shorter term trade as well over the coming months and they could easily go back up above the 40p level again.

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