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Shanta: as good as gold

The East African gold miner looks in better shape than for some time, while global uncertainty can only help its share price
April 8, 2020

It's an understatement that investors must be extra picky in the current environment. Any company worth looking at needs to have low debt, variable spending commitments and, ideally, a product that is likely to maintain its price.

IC TIP: Buy at 9.5p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

High gold price

Stable production 

Can vary capital spending 

Debt falling

Bear points

Covid-19 production risk 

Forward sales of gold 

Gold ticks that last box easily. While its price fell in February and the first two weeks of March as sellers looked to cover other losses, the yellow metal has since rebounded to over $1,650 an ounce. Broker BMO Capital Markets forecasts that the gold price will average $1,654 this year, almost 20 per cent higher than last year, and gold-friendly interest rates do not look like going away anytime soon. 

Tanzania-focused miner Shanta Gold (SHG) fits those other two criteria as well. It cut net debt by over half during 2019 to $14.3m (£11.6m), and its expansionary spending is largely on exploration. This can be cut fairly easily. The gold reserves in its licence areas are not going anywhere if exploration is delayed. 

True, production is riskier for Shanta as more countries shut down industrial operations to limit the spread of Covid-19, although Tanzania itself has limited cases so far. Shanta guided to production of 80,000-85,000 ounces (oz) of gold this year, at an all-in sustaining cost of $830-$880 an ounce. In 2019 the company produced 84,506 oz and had net operating cash flow of $37.6m.

One constraint on earnings this year is the amount of gold sold forward at $1,244 an oz. As of 31 January, this was 37,000 oz. While this can be pushed forward, Shanta had to hand over 5,000 oz at that price last year, and sold 3,000 oz forward in January. 

On top of the New Luika mine, which is its sole source of revenue, the company has the Singida project and a newly acquired West Kenya project. Singida could be a 20,000-oz-a-year operation, but Shanta has been hampered by financing, while the Tanzanian government has gone after fellow gold miner Barrick Gold (Can:ABX) in its former guise of Acacia Mining. The government of John Magufuli, up for re-election later in the year, also changed the mining rules in 2017 to increase the state's royalty take. Shanta’s workaround for investors’ mistrust of Tanzania is a plan to list a separate company locally, raising $15m.  

Meanwhile, West Kenya may add more to Shanta’s share price when the deal – worth $7m in cash and $7.5m-worth of shares – is completed mid year. House broker Numis Securities values it at 4ȼ a share, and Singida at 2ȼ a share. The project has reserves of 1.2m ounces spread across two deposits and, while field work could be slowed by Covid-19, Shanta has said it can work on a scoping study once it has vendor Barrick’s data. The scoping study will give an idea both of the project’s underlying value and potential paths to production. Being outside Tanzania, financing should come more easily. 

Shanta Gold (SHG)    
ORD PRICE:9.5pMARKET VALUE:£74.8m  
TOUCH:9-9.5p12-MONTH HIGH:13.3pLOW:6.0p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:6  
NET ASSET VALUE:9.9pNET DEBT:27%  
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ) 
20171034.01.0nil 
201810413.11.0nil 
2019113-1.2-1.2nil 
2020*13224.0

2.0

nil 
2021*12129.02.0nil 
% change-8+21 - 
Normal market size:20,000    
Beta:1.1    
*Numis forecasts
£1=$1.23