Miners

SHG (Shanta Gold) up 7.3% today. Apparently it was tipped in Daily Mail on Saturday. SHG is attracting attention now. Interactive Investor also produced a video on it on 12-Jan-2012. I have a Google Doc on it, in which I guesstimated a fair value of about 100p. Current price is 25p, so there's plenty of upside left on this badboy.

AFF (Afferro Mining) up 2% today. Its rise continues unabated - hopefully they'll be a pullback soon. At 77.5p, it's now at least made it to its net cash position. Plenty of value still left.

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

SHG - Shanta Gold

Some sketch notes of the Interactive Investor iBall video on Shanta Gold released on Thu 12-Jan-2012.

SHG soon to go into production. 2012Q1 estimated - there were delays due to equipment delivery. SHG's ventual goal is 200k oz pa. Singida is expected to prodcue 45k oz pa when it goes live in 2013. Most eyes are on New Luika, where production is expected Real Soon Now. It already has a stockpile that needs processing. New Luika is expected to produce 190k oz in the first three years. It should pay for itself in the first 12 months, and then bankroll Singida.

Bridging loans are in place, and the company does not expect to have to go to the Market for additional funding.

Posters have speculated that institutional investors therefore have no incentive to sit on the sidelines and hope to pick up stock cheap in a placing. they'll have to invest directly, if they want it.

Brokers have pencilled in 12.26p for both y/e 31-Dec-2012 and y/e 31-Dec-2013. I presume these estimates were done prior to a knowledge of the delays. Still, on a forward PER of 1.9, there's plenty of room for a huge margin of error.

I have a holding in SHG.

22.75p