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Why surging gold prices make Shanta Gold a solid buy

Publication Date: 08 Aug 2019 - By Samuel Smith By Samuel Smith
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Equity Fundamental Equity Commodity Other UK Metals and Mining

Shanta Gold (LON:SHG) is a small scale miner that owns the New Luika gold mine, the Singida project, over 1,560 square kilometers of under explored ex-colonial mining areas in the Lupa Goldfield surrounding New Luika, and 12 square kilometers of prospecting licences, all in Southwestern Tanzania.

The miner has built up strong operational capabilities which it is seeking to leverage while exploring these large and potentially lucrative areas. If successful, the exploration program will extend the life of the New Luika mine as well as enhance returns at the Singida project.

In its most recent quarter, the company reported zero time lost due to injuries and zero recordable injuries, reflecting well on their operational safety and efficiency practices. Additionally, first half gold production showed 11% growth year-over-year.

Furthermore, underground exploration drilling results at New Luika were the best they have been since production began there. At the same time, the company’s balance sheet is growing stronger, with gross debt down 22% sequentially from Q1 and net debt at its lowest point in the New Luika gold mine’s history. The share price is also very opportunistic at an Enterprise Value to EBITDA ratio of just 2.4.

One of the main drivers behind this result was the company’s exceptional drilling performance at the Bauhinia Creek underground mine. Thus far, Shanta Gold has converted 126,787 ounces of Inferred Resources grading 3.15 g/t into 83,543 ounces of Indicated Resources grading 7.85 g/t at a conversion cost of just $2 per ounce. 

The company also has an additional 58,553 ounces of new Inferred Resources grading 4.79 g/t. Management expects to extend the current life of the mine to at least 2025 once these resources get blended at 4.3 g/t as they execute their strategy to maintain the mine for 5-8 years. Over the next 12 months, management plans to execute their next phase, which targets 220 koz Inferred.

Management has also devoted a lot of effort to repairing the balance sheet; reducing net debt by 41% since the third quarter of 2017 to just $26.9 million today. Furthermore, its gross debt of $30.1 million is at its lowest level in over 6 years. Meanwhile, Shanta Gold has total liquidity of $8.9 million, giving it plenty of resources to fund capital expenditures at its various exploration and mining sites.

A positive outcome of this rapid deleveraging is that Shanta Gold’s market cap has gone from just 42% of enterprise value two years ago to 75% today. During that time span, shares have appreciated by 156% as well, reflecting growing equity alongside declining debt.

Conclusion: Looking ahead, the company plans to continue driving shareholder returns by improving safe operational delivery, executing on their exploration projects by implementing effecting resource conversion and mine life extension at New Luika, continuing their aggressive balance sheet deleveraging, and unlocking value through their value added tax receivable (currently equal to 30% of their market cap) and placing good asset level financing on the Singida project. All things considered and with gold prices surging, Shanta Gold remains an attractive buy.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Samuel Smith

 

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