Time for Shanta Gold to Shine?
“…Potential investors in Shanta Gold should tread cautiously, but we think the strong fundamentals make it a gold miner to look out for this year…”
Like that of other gold producers the share price of Shanta Gold (AIM:SHG) has fallen back this year as the value of the precious metal has been pared back, investors turning to equities in expectation of a year of stellar economic growth.
But after a highly successful 2020, during which the East Africa-focused miner made it to net cash, acquired promising new exploration rights from Barrick Gold (Can:ABX), and announced payment of its first dividend, Shanta remains one to watch this year.
Flush with cash after increasing its turnover by 30.7pc from $112.8m (2019) to $147.4m after spot gold prices surged last year, and moving from a net debt of $14.3m to net cash of $37.3m, the company, which holds producing and prospective licences in Tanzania and Kenya, is strengthening operations at its flagship New Luika Gold Mine, building a mine at the prospective Singida Project, and pursuing exploratory drilling at its new West Kenya project.
Shanta sold 83,228 oz of gold from New Luika last year, up from 80,926 oz in 2019, and added 173,000 oz to the project’s reserves. Upgrades to the mine’s processing plant increased its capacity by 14pc. The company continued to explore the project’s cluster of exploration licences, allowing it to declare a new open pit resource of 64,000 oz at 2.08 g/t.
Shanta also increased its reserves and grade at the Singida Project, to 243,000 oz at 3.00 g/t, and started mine construction. Once in production Singida is forecast to produce an average of 32,000 oz of gold annually over an initial seven-year mine life at an All-In Sustaining Cost (AISC) of $869 per oz. The reserve announced so far, which the company says is within 120 metres of the surface, represents just under a third of the existing total contained resources.
Shanta acquired the West Kenya Project from Barrick Gold last August for $7.8m cash, 54.6 million shares, and the offer of a 2pc stake in the Project’s future royalties. Potentially one of the highest-grade gold projects in Africa, with an inferred resource of 1,182,000 oz grading 12.6 g/t, West Kenya comprises 1,121 km2 wholly owned exploration licences and 40 km2 partially owned licences. An independent scoping study undertaken after the acquisition estimated a nine-year mine life averaging 105,000 oz per year, and a post-tax NPV of $340m at a base case gold price of $1,700 per oz. Drilling is now underway to progress the project to a construction decision, expected within the next three years.
Shanta increased its JORC compliant reserves last year across all of its projects by 82pc to 625,000 oz at a grade of 3.00 g/t, and – courtesy of the West Kenya acquisition – its resources by 75pc, to 3.2 million oz at a grade of 3.53 g/t.
The company secured a record net profit of $17.2m and increased its underlying EBITDA by 34pc on 2019 to $63.9m, financial progress that has allowed it to approve an $8m exploration budget for 2021, and declare its first ever dividend: a premium of 0.10p per share will be paid on 30 April: the ex-dividend date is 8 April.
Shanta published an update on its 2021 exploration programme last month. 5,750 meters of drilling were conducted in January and February, with 22 core holes drilled across New Luika, West Kenya and Singida. The company says exploration discovered ‘one of the best holes drilled at the Luika deposit over 162 holes drilled in its history’, intersecting 9.29 metres grading 11.27 g/t Au from 441 metres. Discoveries at the West Kenya Project included 2.00 metres grading 15.9 g/t Au from 233 metres, and 22.9 metres grading 4.81 g/t Au from 124 metres. Greenstone deposit drilling at the Singida Project also indicated new prospects.
Gold’s ebb and flow
Despite the positive progress Shanta seems to be making on the ground, its prospects this year will inevitably sway with the ebb and flow of the price of gold. The yellow metal’s price has fallen to its lowest level for nine months, as the anticipated world economic rebound and rising bond yields reduce its value as a haven asset: gold holdings do not pay interest so the metal tends to perform poorly as yields rise on other assets such as bonds. At the time of writing gold is down to $1,686.23 a troy ounce, nearly 20pc shy of its $2,072 August high. Holdings in gold-backed ETFs, popular for allowing indirect exposure to the metal, have seen particularly significant outflows.
There is a possible upside. Weaker prices could stimulate demand for gold, which according to the World Gold Council fell to an 11 year low in 2020, slowing jewellery sales in big markets, notably India and China, the largest consuming countries. Investor anxiety about inflation would also reignite gold’s appeal as a store of value.
Another potential cloud is ongoing economic and political uncertainty in Tanzania. The government’s handling of the pandemic has been at best erratic, with controversial President John Magufuli denying the virus posed any threat and mocking testing and social distancing. It seems that Magufuli may have died in tragicomic circumstances last month, from a so far ‘undisclosed’ illness.
Magufuli, nicknamed ‘the bulldozer’ for his forceful governing style, was behind 2017 laws legislating for increased government shareholding in mining projects. The provisions entitle the Tanzanian state to a minimum of 16pc interest in all mining projects, with the right to increase it to up to 50pc. Indeed Barrick Gold already has a bilateral agreement with the government to share benefits from its Tanzanian mines on a 50/50 basis.
So far the legislation has had no material impact on Shanta beyond a requirement to increase its royalty payments from 4pc to 6pc, but the company’s full year results stated the ‘management’s view that a similar arrangement between Shanta and the Government of Tanzania could be required.’
The company appears to have maintained cordial relations with the state over the past decade. Nearly all of its employees are Tanzanian or Kenyan nationals, with 40pc coming from communities neighbouring New Luika. The prospective Singida Gold Mine would employ more than 220 Tanzanians. And Shanta continues to mark itself as one of the safest gold mining operations worldwide, achieving a Total Recordable Injury Frequency Rate (per one million hours worked) of 0.97 last year, a 3pc reduction from 2019 (1.00) and significantly below the global industry average of 3.20, as measured by the International Council of Mining and Metals.
The political and economic winds swirling around Shanta come with the territory for gold miners operating in a developing nation. Prospective investors should follow these developments closely. But the company seems to be doing a good job of controlling those factors that it can influence: its production and exploration programmes, and its cashflow.
After reaching heights of 20p last autumn Shanta’s share price has fallen back to just under 12p, taking its market cap to £123m. Potential investors should tread cautiously, but we think Shanta’s strong fundamentals make it a gold miner to look out for this year. And buyers seeking an extra premium should remember that ex-dividend deadline.