Shanta Gold – Low Risk Very Cheap Gold Play

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I first tipped AIM listed gold explorer and producer Shanta Gold (LSE:SHG) at 21.5p in July 2011. In my most recent performance stats (August 31st) it is in there at 20.5p but the shares are today trading at 29.25p and are still, very cheap. The Tanzanian based company is valued at £93 million, has cash and is now producing gold and material cashflows from its lead asset at Luika. I reckon that the stock is hugely undervalued.

So what does Shanta own and what is it really worth?

Firstly it has net cash. That always helps. As at June 30th it was $21 million. My guess is that with its first gold pour at Luika not happening until 3rd September cash is probably down to c£10 million by now but that is a pretty good cushion. We are told that the open pit mine at Luika will produce 13,000-17,000 ounces by Christmas at a cash cost of c$600 oz and so (even on a $1600 gold price) that should chuck off $13 million or more. So cash is not an issue.

The maths on Luika are simple. A June 2010 feasibility study indicates it will produce 450,000 ounces over ten years with the first three years seeing output of 175,000- 190,000 ounces at an all in cash cost of $560-610 oz. So what is that worth? Using a ludicrously cautious gold price forecast of $1600 oz and an assumed cash cost of $600 oz then this mine should chuck off c$60 million ( call it £37 million) for each of the calendar years 2013, 2014 and 2015. For the following seven years it should chuck off c$38 million, call it £24 million. Clearly Shanta hopes that drilling around the pit can extend the life of mine and/or years 4-10 output.

Using these base case numbers the Net Present Value of the cashflows from Luika (using a 10% discount rate) is £174 million – i.e. roughly twice the current market cap ex cash. Put another way the cashflows generated by the middle of 2015 from Luika would be greater than the current market cap ex cash.

Then there is Singida. There is a minor royalty agreement with a JV partner but essentially this is Shanta’s show. At a 2.84 g/t cut off the resource is 858,485 oz and again this would be developed as a small low cost open pit operation. The ore bodies are open at depth so the resource might be greater but Shanta reckons that it could produce at 60,000- 66,000 oz per annum for three years and then see a similar tail off as at Luika. The company says that it will decide on its project development and financing strategy shortly. It has estimated that the NPV using a $1200 gold price) is $130 million (call it another £80 million) but clearly at more realistic gold prices that number is far greater.

Finally there is an exploration portfolio. The company has a Joint Venture agreement with Great Basin Gold which is underway with Great basin chipping in material amounts ($12 milion by Christmas 2014) but with Shanta keeping an 80% interest.

Assessment? I am a miserly sod so will value the exploration activities at nil. But however you look at it Luika is worth more than the current market cap – let’s call it £175 million. Singida is harder to call until we know how it is to be financed but heavily risk weighing that $130 million NPV (which itself is cautious as it uses a $1200 gold price) we might attribute a value of £40 million. Add in the cash and the sum of the parts is £225 million or 70p a share. Even running Luika with a $1200 gold price still sees it worth £104 million and a company sum of the parts valuation of 48p per share.

I do not see gold being at $1200 in the next three years. $2200 is far more likely. AIM listed gold stocks have had a torrid time over the past year and there are now some real bargains to be had. With cash in the bank and generating cashflow this stock is, at 29.25p, one of those bargains.

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Comments

  1. Charles says:

    Tom what is your view on Anglo Asian Mining?

  2. Pankaj Bansal says:

    Current price 24p market cap. of 77.31 M, the co. should earn that in less than 1.5 yrs.

  3. Pankaj Bansal says:

    What’s going on at Shanta, can someone tell ??

  4. Pankaj Bansal says:

    falling and falling 23.5p now

  5. Sari Kosco says:

    Wow Tony, seems you took our comment pretty personally. Didn’t intend for that at all. We are in contact with industry, and non-industry folks just about everyday and Ohioans are being hired for work in the Utica Shale. While it is upsetting your search has yet to bear fruit it goes without saying the market is competitive. These things take time and patience. With barely 200 wells in the ground, and over 10,000 jobs already there is more reason to be positive than negative.

  6. Bob says:

    Yet another great call at 29.25p Tom. Currently 17.5p to sell after only 4 weeks!

  7. Dan says:

    Bob, have you seen the latest video post from our favourite Tom? He is still in dark, lol. come out!!! It’s time to quote Napolean Hill’s quote, “one at a time”. I mean, either blogging in genera or pizza or share tips or retire!
    Dan

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