SHG - Shanta Gold

I said I'd do a little writeup on Shanta ... and here it is.

Quick run-down on Shanta:

SHG is a gold explorer in Tanzania. Production is expected in 2012.

2011 saw its share price drop by 22%. This was due to a combination of factors:

• an unexpected share placing at 18p, which drove the share price down
• general negative sentiment against the resource sector. Large-cap miner BLT (BHP Billiton) dropped 25% for the year, for example.
• mining at New Luika did not commence in December 2011, as originally planned, due to delays in the construction of the mine’s process plant. Management has pushed pushed back the commissioning to the end of 2012Q1. Shares dropped 6% as a result.

SHG currently has stockpiled gold. The delay in processing it, particularly about the timing and the possibility of further delays, has raised concerns about SHG’s cash position. However, on 21-Dec-2011, SHG announced that it had secured a first bridging loan of 5m USD, with a second one for 15-20m USD in an advanced stage of negotiations.

Short-term backup finance therefore looks in place, despite market fears, and I believe that the completion of the construction of the processing plant will act as a near-term catalyst for the re-rating of the shares. I expect the share price to arise in anticipation of the happy day, although of course there could be further delays that will negatively affect sentiment.

I estimated  a fair value of 100p:

Looking at New Luika, production over first 3 years is estimated at 175-190,000 oz. Call is 60,000 oz pa. Let's say costs are 610 USD/oz, towards the high end, and hopefully absorbing all the other costs. If gold is say 1610 USD/oz, that's a profit of about 1000 USD/oz. Assuming tax at 30%, and a ROX of 1 USD = 0.654 GBP, that works out at a profit of £27.5m (= 60000 * 1000 * 0.7 * 0.654), or close to 10pps. Digital Look show analyst estimates of 12.26pps. So at least I'm in the right ballpark. Based on a PER of 12.26p, that puts Shanta on a PE of less than 3. I can’t imagine that situation lasting much longer.

You can see a more detailed writeup by me as a Google Doc. I also point to a more detailed, and hence more accurate, gauge on expected profits in the doc.

Enjoy!


22.75p