By Tom Winnifrith | Saturday 6 October 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
AIM Listed gold producer Shanta (SHG) is in production and should be generating cash from its New Luika mine in Tanzania At June 30th it had $21 million in the kitty yet on October 5th it announced that it had secured a new $4 million loan facility from a director and was “in discussions with additional providers of working capital financing facilities to meet its short term working capital requirements during the ramp up phase of the New Luika Gold Mine.” What on earth is going on?
The loan facility is short term and unsecured paying interest at 8% and comes from a company related to Shanta director Ketan Patel. Options equivalent to 3% of the drawn down amount at the price at drawndown point have been granted.
It is clear that New Luika was more costly than I had imagined to get into production. I wrote ( wrongly it turns out) on September 17th that “ cash was not an issue” as Shanta had – I reckoned $10 million left in the kitty. I reckon it still has some net cash but, while New Luika is still forecast to produce 13,000-17,000 oz by Christmas it will take some time to convert that gold into hard cash. So this is a short term issue.
Moreover it is relatively small. 13,000 oz of gold should equate to at least $13 million of free cashflow. It is just a matter of when that cash arrives (Q1 next year). I remind you that at 24.875p Shanta is capitalised at £79.3 million – $4 million is not great in comparison to that. So this loan facility (which may be topped up with another small facility) is not an issue and makes very little difference to the maths in the long run.
New Luika is Shanta’s main asset but it has others. Here is the maths: For NL, a June 2010 feasibility study indicates it will produce 450,000 ounces over ten years with the first three years seeing output of 175,000- 190,000 ounces at an all in cash cost of $560-610 oz. So what is that worth? Using a ludicrously cautious gold price forecast of $1600 oz and an assumed cash cost of $600 oz then this mine should chuck off c$60 million ( call it £37 million) for each of the calendar years 2013, 2014 and 2015. For the following seven years it should chuck off c$38 million, call it £24 million. Clearly Shanta hopes that drilling around the pit can extend the life of mine and/or years 4-10 output. Using these base case numbers the Net Present Value of the cashflows from Luika (using a 10% discount rate) is £174 million
Then there is Singida. There is a minor royalty agreement with a JV partner but essentially this is Shanta’s show. At a 2.84 g/t cut off the resource is 858,485 oz and again this would be developed as a small low cost open pit operation. The ore bodies are open at depth so the resource might be greater but Shanta reckons that it could produce at 60,000- 66,000 oz per annum for three years and then see a similar tail off as at Luika. The company says that it will decide on its project development and financing strategy shortly. It has estimated that the NPV using a $1200 gold price) is $130 million (call it another £80 million) but clearly at more realistic gold prices that number is far greater. Finally there is an exploration portfolio. The company has a Joint Venture agreement with Great Basin Gold which is underway with Great basin chipping in material amounts ($12 milion by Christmas 2014) but with Shanta keeping an 80% interest.
Ignoring the exploration upside one gets a base case valuation for the lead properties of £255 million. That is more than three times the current market capitalisation. Even if you risk weight Singida as it is not yet producing NL is on its own worth more than twice the market cap. The valuation is just daft and the wobbles caused by news of this relatively small loan facility should be seen as an opportunity. I first tipped this stock at 21.5p in July 2011. Most gold mid caps have tanked during the past year but I am showing modest gains on this one. Those gains will get much bigger. At 24.875p buy with a 48p target.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
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