Shanta Gold #SHG – Multiple catalysts, multiple risks, low valuation

Opened a very small, c1.2% portfolio weight position in Shanta Gold.

Shanta is a London-listed Tanzanian small cap production company. It has a 33m GBP market cap and is trading at a forward PE of around 2.6 / historic of 3.2 or EV/EBITDA of c2. (source).

The company is a standard, small, gold producer.  It has a good cost base – cash cost c $505/oz / all in cost of c$750/oz. There appears to be lots of opportunity in its holdings to expand production. They have just released an RNS valuing their Singida project at c $31m USD at a (highly optimistic) 8% discount rate. They say they will develop it at no cost to existing shareholders – as the company is worth c$44m Equity and c$35m  net debt this is potentially significant – even if we say it’s only worth c $20m.

They are also owed a $17.9 VAT receivable from the Tanzanian government which has been withholding it from many companies.  Their last refund was $3.4m in November 2017. Very significant in light of the market cap. There is no guarantee whatsoever that this will happen any time soon, or will happen at all.

They have also said they will evaluate a dividend policy in January 2019. So we have Singida/ Vat resolution / Dividend as potential catalysts for a rerating.

There are potential risks here. As a small gold miner I am not sure the resources are good, though I think they are. There is always risk here, there is also risk / opportunity associated with the possibility of a lower / higher gold price, though government will no doubt want a greater share should the price of gold rise.

Tanzania’s president may be going the way of Zimbabwe / Venezuela.  A ridiculous, confiscatory claim was made against Acacia, due to supposed corruption. Tax rises and the ability for the government to claim ownership in mines / raising local input/ raising tax has also been introduced (link). Investor confidence is on the floor.

Most of Shanta’s mine/infrastructure seems to be built.  At current production rates / prices net debt is falling very rapidly c $10m the last 9 months /$3m a quarter. There don’t seem to be issues getting capital / gold out of the country.

Shareholder register looks good institutional holders.  Management are not paid too much and will only make real money if the share price goes up. I saw management at Mello in London, it seemed a decent enough idea at a valuation that is very attractive. Bit concerned they were talking to investors to raise the share price prior to a placing – as it does go on at these sort of events, and to me debt is a bit high, no way to tell definitively though, and the share price hasn’t really risen

Gold miners are new to me but seems a good enough opportunity. It isn’t perfect, very, very high risk but there is decent upside chance here and with a bit of luck even if nothing happens debt can slowly be paid down and a dividend paid. This is a tiny, tiny weight for me so it won’t really hit if it falls.  I need to gain expertise outside my usual stomping grounds of liquidating companies / trusts and the only way to do it is to explore things like this.  Not sure I would follow me in here, but it seems to me there are a few opportunities for good news / rerating. Criticism / comment of my ideas is welcomed – I am very new to investing in miners so any primers on what to look for is appreciated.

I would like to do what a number of other investors do on stuff like this and build a basket maybe of 2/3 more stocks on an undervalued, producing miner theme, any ideas ?

 

7 thoughts on “Shanta Gold #SHG – Multiple catalysts, multiple risks, low valuation”

  1. Interesting idea. Worth a deeper look.

    I own a lot of Gran Colombia Gold, very cheap and management keeps overachieving guidance.
    On my watch list are Roxgold and Teranga Gold, both not expensive and Teranga has a lot of potential for more production in the near to medium term.
    Wesdome Gold is interesting because they are executing so well and and constantly surprise to the upside.
    Equinox Gold is a bet on the gold price and especially on founder Ross Beaty, a serially successful mining entrepreneur and company builder.

  2. Regarding the Singida project, I don’t like that
    – it has not been independently verified
    – permitting isn’t done
    – need for re-housing of families
    – they use a gold forward curve

    Of course you already mention $20m NPV, which is much more realistic at 10 %(still low!!) and 1250$/oz gold.
    Pre production capex at $16m seems doable although large compared to say $20m NPV. IRR around 50% is still not bad.

    Obviously it is very cheap, so there is margin of safety and historic production was very consistent, which is good.

  3. As I said I am not entirely convinced myself in Singida.

    If they can get funding in from non-shareholders, in effect it is free money to me and material in context of market cap.

    RNS says they have already resettled people from the site.

    IRRs / NPVs to me seem a bit misleading as there is a very high probability of more gold in the ground but they can’t entirely be sure how much – so real NPVs may well be higher. Resources in other mine seem to expand as they produce / explore surrounding areas.

    Looked at your ideas quickly. Interesting but not quite what I am looking for – they are more explorers / a bit growthy. I am looking for:
    Really cheap, PE under 5 (10 max).
    Producing – decent revenue/profit. Not spending money on exploration more than the minimum to sustain the existing mine.
    No to low debt / debt being rapidly paid down. (OK debt is a bit high on Shanta)
    Management incentives aligned with me.
    Ideally paying dividend/ about to return cash / get bought out (v. unlikely in current market).

    1. Well, NPV numbers are always estimates because it is never clear, quite hoch much gold can be produced (grades, issues) and it is not uncommon that there is more gold than estimated towards the end of a mine life. It’s not like the pounds in the ground are counted, they are delineated from a geological model (grades) and the extent of the deposit. This process is inherently imprecise and to be honest even independent studies (PFS, bankable FS) have a very bad track record.

      I assume they will come up with the needed capex via bank credit lines or another form of debt.

      Why are you looking for small PE? Earnings are totally meaningless in my opinion for miners. A suitable quick metric is EV/EBITDA, ideally you come up with normalized free cash flow.

      Gran Colombia is very cheap on that basis, quickly delevering.

      You sound like looking for a cigar but, I am not sure if that’s generally found in miners.
      Regarding M&A, I have encountered several industry insiders that this is heating up. The majors have spent almost nothing on exploration in the bad years and need to keep/grow production, therefore are hunting for good projects.

      1. No financing at company level for capex so I assume this covers debt.

        Low PE / EV/EBITDA – as I am looking for operations with little debt numbers would tend to be very similar.

        I’m not the world’s biggest fan of EV / EBITDA as somewhat inherent to it is an implicit assumption that capital structure doesnt matter. That if your project is viable you can always get debt funding / roll funding. That isnt the case. I also dislike debt in a company’s capital structure. I am aware of tax / leverage advantages to debt but I would much rather invest on a company with a lower ROE and very little debt than one with a higher ROE and more debt. In a down-turn the one with lower ROE and little debt is far more likely to survive and to be less volatile.

        Also tax is very important. I would look at this – but for my filter I use PE – I might switch it.

        I am not looking particularly for a cigar – just something that isn’t going to spend operating profits on further exploration. Think of it this way – if your equity is valued at a 3/4x PE / 1x or less than 1x book – why reinvest earnings beyond maintenance capex? You are not getting any return for the risk you take on even if an investment project is successful.

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