Good calls. Shanta would make an excellent fit but I do think it needs to get the resource up a bit and bring Singida online before that is likely to happen. If they had any sense they would go for it now but the fact is that major corporates rarely have much sense and tend to invest at the top of markets.
Daisan - thanks for comments and share your long-term view
Long-term Shanta could indeed be a target in a buoyant gold market. Both Acacia and AngloGold Ashanti are in Tanzania producing circa 730K Oz and 470K Oz respectively and of course their could be new entrants as well.
Acacia has 3 working mines and of course having issues at the moment with concentrate export ban (could impact roughly 30% of revenue if ban not overturned). On top of that if I remember correctly, one of their 3 mines will come to end of their life within next 3yrs or so. De-risking from concentrate and to maintain production levels, Shanta could be good fit
Acacia - 732koz pa (2015)—3 mines in Northern Tanzania AngloGold Ashanti - 477koz pa (2014)—Geita mine
They have indicated that, at year end, there were stockpiles of 90k tonnes with a grade of 4.6g/t for contained gold of about 13.3k oz.That grade would give 80k oz per year production at full mill capacity and 90% recovery which confirms that it is decent ore. If we work on 12k oz recovered gold from this that is probably about right.
The stockpile amounts to about 30% of the mill capacity over the course of the first 6 months of the year so the key point is what is the input grade of the surface mining and development ore that is being recovered during movement to underground mining and how much high grade underground ore will be recovered in Q2 (it has been indicated that this is when ore will be delivered in this time scale)? As is always the case, devil is in the detail and 'Q2' is quite broad when you are trying to work out quarterly production figures in H1. April vs June would create an entirely different story for Q2 production.
If we spread the processing of the stockpiled ore evenly across the months of H1 then this contributes 6k oz production to Q1 and Q2. Leaving 105k tonnes per quarter to be processed. To deliver 16k oz production on average across both quarters would require a grade of about 3.3g/t with 90% recovery. That seems a little high so you may be right Banksman that we could produce somewhat less than 16k oz, at least in Q1. Looking at the mine plan the grade for the mined ore may be more like 2.4g/t. At that rate we would produce closer to 13k oz in Q1 which I suspect would cause a drop in the share price. If it does then I will be looking to add here as the impact is likely to be short term.
Thanks for taking the time and effort to do this. It is good to confirm how cash generative Shanta will be once underground development is complete but I also agree that the net debt position will increase (in the form of falling cash position). I concur that Shanta will relatively quickly become a 100k oz per annum operation.
I believe that gold has the potential to go MUCH higher than current prices over the next few years and this will lift all gold miners and explorers greatly. Add this to Shanta's development at Singida (which will incur more capital expenditure) to lift them to 150-200k oz production and they become a takeover target. This is my ultimate view here and the reason why I would like Shanta to invest heavily over the next 2-3 years developing Singida and significantly increasing resources. I have a target of at least 4-5m oz across New Luika and Singida. At that level of resources and production they will attract the attentions of more mature mid-tier producers or even majors and a buy out price could be ten times plus the current market cap. I know that sounds ambitious but a little research into gold bull markets will confirm how possible this is.
When we had our exchange about AISC, I thought some more about whether this should be considered as part of sustaining costs and my conclusion is that it should not. My reasoning is that underground mining was envisaged from day one so the development of the mine at the time was a total capex of £x being composed of £y for open pit development and £z for underground development. Now, if these costs were incurred at the beginning of mining there would be no argument. It is just that they have been phased as open pit mines are exhausted that the debate occurs.
Looking around other miners that have done similar (it is not that uncommon to open pit and then underground), I believe that typically these costs are non-sustaining.
(N.B. I have used 'x, y and z' as it isn't material what the actual costs are - I haven't just forgotten to substitute the real numbers!)
Another note to temper short-term expectations - the Capex not included as part of AISC is also weighted to 1H 2017. So short-term my expectation of the net debt position currently at USD 42.9m would be to increase.
Over the wkend I worked out a very rough "back of the fag" packet calculation of "all-in costs" per ounce for 2017. That is Shanta's AISC + Capex not included in AISC. I took a worse case scenario that none of the 33m Capex is included in AISC other than the "Stay in Business" (SIB) costs (which clearly are in AISC). Based on the stated 80,593oz production for 2017 in the Mine Plan, I produced an "all-in cost" of $1,238 oz for 2017. Therefore if Gold avg. $1,250, by end of 2017, I'm not expecting net debt position to change that much overall.
I've done same for 2018 onwards and due to steep fall in Capex, the AISC can be relied on far more for investors to work out a rough "free cashflow" and Shanta will be paying down debt at a very rapid pace indeed. The AISC for 2018 of $751 clearly includes more Capex costs than just the SIB. The only costs that do not appear to be included are Underground Capex (as Daisan alluded to last week). Based on production of 86,718 for 2018 from Mine Plan, a very rough "all-in cost" I worked out is $869oz. Even with Gold at avg. $1,250, Shanta's positive cashflow for 2018 would be USD 33m.
Thereafter "all-in costs" continue to go down per year aligning closer to AISC. Production in 2019 is estimated at 91,973 Oz and with future revisions to the mine plan incorporating 683,000oz resources not currently included, additional exploration and resources (such as recent Nkuluwisi Lupa), if executed correctly I'm sure Shanta could get to 100K Oz per year and 10+ yrs mine life, Ultimately it would then be correct that the Capex was classed as "non sustaining".
I have read with great interest the latest presentations from Shanta. I like what I see, and have added to my holdings in the company. I wonder if is just sentiment holding the share price down. My 35 years of experience with shares has taught me that some companies are just undervalued by the market, and hopefully with Shanta that will change. Be patient.
I like Google maps for getting an overall idea of a mine. https://tinyurl.com/l2sjyog I've used tinyurl, as LSE can play havoc with links.
I agree with your comments Daison. I would add that the concentration of gold in the ore stockpile is another factor. If high, then gold production may not be greatly effected in early part 2017. If low, then it could be significantly lower than your 40:60 H1:H2 split which could result in a retrace of SP & a buying opportunity.
Whilst we are on moving underground, I thought that it was worthwhile just making it obvious about the production profile for 2017 so that quarterly production figures don't come as a surprise to anyone on these boards. The BoDs has clearly stated that the production profile for this year will be weighted towards the second half, despite the fact that ore has been stockpiled.
On that basis we should assume the worst case scenario that conforms to plan. So, taking 80k oz as the total production, it would not seem unreasonable to suggest that there could be as much as a 40:60 H1:H2 split. This would mean that Q1 and Q2 could average out at 16k oz per quarter. I would not be surprised at such a result and the reduced amount of hedging is indicative of a reduction in the production profile.
I believe that there is some reason for optimism. They recently reduced their cash position to retire some debt. Whilst more debt is still available, it is a sign of confidence for them to do this and they appear to be saying that the cash position is sufficient to see them through to cash generation in Q3. Of course, things can go off plan but Shanta have shown themselves to be reasonably cautious over the last couple of years (for example, they have tended to beat production targets; they have maintained a strong cash position even to the extent of raising as a precaution) so I would be surprised if their current position was not also cautious.
To conclude, whilst H1 production is likely to be weak as they move underground, I expect Shanta to navigate this period in reasonable financial health before moving back to cash flow positive in H2. If there are choppy waters, they have access to debt facilities to ensure that there is a safety net. Let's hope they don't have to utilise them.
Shanta is not the only gold miner that hasn't responded to gold's increase. It seems to be relatively common. If you look at the GDX, the reaction has been muted and we are far from the exuberance of last year.
Whilst Shanta look like they are doing well in their underground development efforts, anyone who follows miners will know that moving underground is a risky process so I think caution is a reasonable response. That said, if gold started going mental then I would expect goldies to respond. Equally, if Q3 this year sees a significant uplift from Q2 as underground ore starts to be delivered consistently, then this should respond as the execution risk decreases.
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