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Shanta Gold – Private Investors Screwed Again But It is still a buy

By Tom Winnifrith | Wednesday 17 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 Gold (SHG) has announced that it will today raise a minimum $30 million (£18.6 million) via an institutional placing. An accelerated book build will take place today so we do not know the price but I reckon that it will be in the range of17-18p. Yes private investors are being screwed and the share price movement in the days leading up to today stinks like a mackerel’s rectum but the shares, at 17.125p valuing Shanta at £54 million) are still very attractive for the long term investor. Here is why

Well let’s start with that share price movement ahead of the RNS. Coincidence? Methinks not. This is the sort of thing regulators are meant to be dealing with. Will anything happen? Of course not. Don’t you just wish that once in a while something would happen when a share price slumps ahead of a placing in such a mysterious manner?

This is an institutional placing. We poor mug PIs cannot participate. The costs of doing a rights offering and the time involved mean that PIs always get screwed in this way. Get over it. I would have thought in an electronic age things could be done in a fairer manner but what do I know?

Having recommended the shares at 24.875p on October 6th (and indeed been a fan for a while, originally recommending the shares at 21.5p in July 2011) I cannot say that this company has covered me in glory and I apologise for any paper losses so far. I feel legged over but sentiment aside what does the investment case look like now.

Not massively different to what it looked like on October 6th bar the obvious dilution. My thesis then can be found HERE

What will the cash be used for? The company says that it has $3 million in the kitty and that cashflows from gold sales this quarter of at least $9 million will (together with the placing funds) be used for $14m in payments due, $12m of Q4 2012 operating costs, $5m of project finalisation capex, $7m of debt repayment and $4m of general working capital and transactional expenses. That indeed works out at $42 million.  With the placing done Shanta goes on to say “ The Placing provides the Company with the flexibility to consider the suitability and attractiveness of additional alternative sources of non-dilutive financing which are currently under consideration as well as providing the flexibility to consider value enhancing corporate transactions.”

Well damn the corporate transactions, how about just getting the New Luika mine to a stage where it is generating pots of cash? That surely should be the priority. I cannot say that I am wildly impressed by Shanta’s inability to bring New Luika onstream in a way that would have avoided this dilutive equity issue. The management has let us down. But should the shares be dumped? I think not. I will not be sending the managers a Christmas card but 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 the second property 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 million 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. Assume that £18.6 million is raised at 17p – that is another 109 million shares in issue which leave the company with a proforma market cap of £73 million. Put another way, on a proforma basis Shanta is valued at two times 2013 cashflow from New Luika alone. That is clearly wrong.

The dilution is not welcome. The pre-placing price move is a disgrace. But the shares are cheap. My target price is reduced to reflect the dilution from 48p to 39p but at 17.125p that still leaves material upside. With some anger inside me, through gritted teeth my stance remains buy.

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 – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith

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