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Shanta Gold unshackled for 2021

As the gold bull run goes on, the East African gold miner has been able to buy a major new asset, move into a net cash position and start work on the Singida mine. All that's left is a payout for shareholders
February 4, 2021

The mining world has made itself comfortable with gold at over $1,800 (£1,317) an ounce (oz). The precious metal has now been above $1,500 per ounce (oz) for over one-and-a-half years. Barring any major crash in the coming months, gold is on track to beat the previous bull market’s record of two years over $1,500/oz. 

Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points

Strong gold price

Company now in net cash position 

New projects offer growth at low price

Dividend possibly on the way

Bear points

Risk from Tanzania jurisdiction

West Kenya project at an early stage

Shanta Gold (SHG), the East-Africa focused miner, even used a $1,700/oz price assumption for a recent study into its new West Kenya mine. One reason cash flows are so strong in the gold sector is because operations are more usually built around long-term assumption of prices of about $1,300/oz. Barrick Gold (US:ABX) boss Mark Bristow famously insisted  on a 15 per cent internal rate of return (IRR) at $1,200/oz for mines. 

At the other end of the project scale from Shanta’s 100k/oz a year West Kenya prospect, Polyus Gold (PLZL) has used $1,200/oz for its 2m/oz a year Sukhoi Log project in Russia, although this is expected to run for more than 20 years compared with Shanta’s nine-year West Kenya project. The banks fall in the middle in terms of optimism. Macquarie Bank has a long-term forecast of $1,400 an oz.  

It’s not just miners getting used to the high prices. BMO Capital Markets says gold jewellery buyers will have adjusted to spending more this year. Sales statistics for last year showed people in China and India spent the usual amount on gold last year – not bad in a pandemic – but this got them much less. 

Investment demand is actually small-fry compared with the jewellery market in volume terms. In 2020, a record year for gold exchange traded funds inflows at 877 tonnes (t), or $48bn, jewellery demand – down a third on 2019 – was 1,411t, or $81bn. These numbers are to make the point that the gold market is more than investors diving into it as a safe-haven asset. The combination of very strong equities markets and a gold bull market also shows the traditional thinking of gold as balancing out equities in a portfolio as not applying at the moment. 

Well-established gold miners offer dividends as well as potential valuation gains (or losses), which offers an advantage over both gold and cash at the moment. There are only a handful to choose from in London, including the major Russian miners, Polyus and Polymetal (POLY), Centamin (CEY) and Hochschild Mining (HOC). Fresnillo (FRES) has more silver production, which at the moment is a positive thanks to the huge market interest. 

Among the smaller gold miners, such as Shanta, dividends are less certain. Caledonia Mining (CMCL) offers a stable payout despite its sometimes-difficult operating environment in Zimbabwe. Pan African Resources (PAF) has brought in a dividend, while Shanta is not there yet.

 

Happy new year

This year is effectively a clean slate for Shanta, according to management’s long-term goals. 

Eric Zurrin and his team's efforts to clear the company’s debt are now complete. Gold that had been forward sold at low prices has been a yoke on Shanta’s earnings, but this problem is also now gone. The forward sales were a condition of a loan, although that didn’t make the impact much easier to stomach for shareholders. In 2020, the miner sold 40,000oz – half its production – at a measly $1,240/oz. This made its average sales price for the year $1,495/oz. 

This year also sees work ramping up at the new Singida gold mine in Tanzania. A relatively cheap project, it will take Shanta above the 100,000oz a year mark when production starts in late 2022. The company had floated a plan to list the project separately on the Tanzanian stock exchange to raise funds, but has been able to commit to funding the $26m mine with internal cash flows. A separate $42m placing of new shares at 16.5p in London will go to the West Kenya project. This is a major turnaround for Shanta, which bought West Kenya from Barrick Gold (Can:ABX) last August for $7m, a 2 per cent royalty and $7.5m in shares. 
 
Before this acquisition the company was aiming to reach 100,000oz a year with Singida. If West Kenya gets off the ground, the miner could reach double this within a few years. New mines take a long time to build, but the capital raised last year will be thrown at getting this done as quickly as possible. A resource and scoping study have already been done, which are important steps. 

Shanta's current operational mine, New Luika, is running well. Exploration at the site last year found enough new gold to replace all of the precious metal that came out of the ground, adding to its life. 

Despite the stable production, costs and margins have bounced around in recent years. Shanta’s cash profit margin hit 50 per cent in 2016, before falling to 30 per cent 2017, then climbing again. Broker Liberum’s 2021 forecasts have cash profits hitting $99m, from $64m in 2020.

 

 

Not so golden 

Tanzania is not an easy jurisdiction. The long-running, bitter and costly row between the country's government and its largest gold miner, Acacia Mining, shows this. Shanta avoided the shutdown orders that hit Acacia, but has its own challenges with the government. The Tanzanian revenue authority is holding around $28m in owed VAT refunds from the company, and has only paid out small amounts in recent years. Mr Zurrin said on an analyst call last month discussions with the government over tax were ongoing. 

Investors are also ramping up the pressure on companies on environmental, social and governance (ESG) issues. Shanta has some easy wins here: no deaths or lost-time injuries at New Luika in three years, a shift from heavily-polluting generators to on-grid power (0 per cent to a forecast 37 per cent later this year), while a small solar plant has been running at New Luika for two years .

Shanta also does slightly better than other Africa-focused miners on its management composition, because the chairman of its local holding company is a Tanzanian national, as is its technical director. Its main board, however, is all-male and has zero Tanzanian nationals on it. Last month, the Church of England’s investment arm said it would start targeting companies that did not reflect the communities in which they exist. 

While the Church Commissioners will likely look first at FTSE 100 companies, this approach will surely trickle down. Miners focused on Africa rarely have directors representing the countries they operate in on the boards. There is just one black chief executive  among the London-listed miners, despite the tens of companies operating in Africa, while those with assets in the Americas, Australia or Russia all have board or management representation from those countries. 

Shanta is clearly aware of representation as an issue, boasting of its 99.5 per cent non-expat workforce. But it needs to do better at the very top of the company. 

Overall, this is a gold miner that has set itself up for growth by slowly getting the basics right, and is reaping the benefit of having been able to buy a sizeable new asset as a result. The solid foundations means it can also start building another new mine and has reached net cash in a pandemic-stricken year. We think it’s worth getting on board to be part of that growth, even if $1,700/oz is an optimistic long-term gold price. Buy. 

 

Shanta Gold (SHG)    
ORD PRICE:15.9pMARKET VALUE:£167m  
TOUCH:15.4-16.4p12-MONTH HIGH:20.5pLOW:6.0p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:4  
NET ASSET VALUE:12.3ȼNET DEBT:4.6%  
Year to 31 DecTurnover ($m)Pre-tax profit ($m)*Earnings per share (ȼ)*Dividend per share (ȼ) 
20171023.60.60nil 
201810413.11.03nil 
2019113-1.0-1.20nil 
2020*14728.04.90nil 
2021*15870.05.00nil 
% change+7+150+2- 
NMS: 
Beta:
*Liberum forecasts, adjusted EPS and PTP figures
£1=$1.37