Despite mining a ‘haven’ asset, gold companies have not escaped the recent coronavirus sell-off following the yellow metal’s drop from a seven-year high in the biggest one-day fall since 2013. Saxo Bank commodity guru Ole Hansen put the plunge down to investors selling gold to cover other losses, and believes the metal’s longer-term price drivers all remain in place. And following this week’s Fed cut, the price has indeed bounced sharply higher.
Gold producer
Cost base
Takeover potential
Debt rapidly falling
Past production problems
Single operating asset
The run-up to this sell-off has seen major merger activity in the gold space, although in London this has been limited to Endeavour Mining’s (Can:EDV) failed takeover of Centamin (CEY) over the Christmas and New Year period. While not putting up Hummingbird Resources (HUM) as a certain takeover target – the shares doubled in the six months to mid-February, so the company is not overly cheap – it is a gold pure play with an improving balance sheet and an ability to find new reserves on its existing licence areas.
Hummingbird got its Yanfolila mine in Mali into production in 2018, four years after buying the project. Reaching that first gold pour is a major achievement, as any shareholder of a development-stage mining company can attest. But reaching production was not the end of the company’s challenges.
In 2018, Malian soldiers on the mine site shot dead three people, who were protesting for the right to mine on a small scale on the company’s licence area. The company said at the time that it was working with community leaders and has not had any fatal incidents since.
The company has also found stable production again, and this month released a mine plan for the next five years. This will see between 100,000 ounces (oz) and 125,000 oz of gold mined a year, peaking in 2020. This timing is fortunate, with gold still over $1,600 an oz despite the recent drop. This production is coming at a reasonable all-in cost as well of between $800 and $900 an oz, and the company has given itself a selling price floor of $1,350 an oz through a put option in case the gold price drops further.
While a plan spanning only five years might not seem long enough to back a company, this timeline is based only on current reserves at the Yanfolila mine. Prospects for adding new reserves look good judging by December's updated estimate, which saw 165,000 oz move from the less certain ‘resources’ category. This included ounces from two new areas at the mine. There could be plenty more to come. Hummingbird will spend $5m this year on exploration.
While a difficult 18 months has left its mark on the balance sheet, cash should now start to flow in, helped by current gold prices, and the company expects to have net cash by the end of 2020.
| Hummingbird Resources (HUM) | |||||
| ORD PRICE: | 22.7p | MARKET VALUE: | £80m | ||
| TOUCH: | 22.6-22.8p | 12-MONTH HIGH: | 30.0p | LOW: | 12.5p |
| FORWARD DIVIDEND YIELD: | NIL | FORWARD PE RATIO: | 7 | ||
| NET ASSET VALUE: | 35.2ȼ* | NET DEBT: | 65%** | ||
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ)** | Dividend per share (ȼ) | |
| 2017 | 0 | -5 | -2.0 | nil | |
| 2018 | 117 | -12 | -3.0 | nil | |
| 2019*** | 156 | 4 | -1.0 | nil | |
| 2020*** | 188 | 37 | 5.0 | nil | |
| % change | +21 | +89 | - | - | |
| NMS: | 20,000 | ||||
| BETA: | 0.39 | ||||
| *Includes intangible assets of $73m, or 20.6ȼ a share | |||||
| **Includes lease liabilities of $19.1m | |||||
| ***Berenberg forecasts, adjusted EPS figures | |||||
| £1 = $1.29 | |||||
