In a weak market. Shanta doesn't normally follow the gold price at all really since it's a miner rather than the actual commodity. Actually, being cynical, when gold goes down SHG goes down and when gold goes up SHG goes down.
Seriously, though this is one seriously cheap undervalued share. It's cheap on New Luika production prospects alone with all their other assets, GBG, additional exploration upside in for free.
To me this is the archetypal 'no brainer'. ;-)
Lastly, the most recent interesting snippet of news is the entry of Red Kite as a substantial shareholder @ 5.2% of the company (inc. warrants) This to me is curious as they are a major global player and SHG is very small for them to get involved with so what is going on there I wonder?
It makes no fundamental difference to the inherent value of a company who is, or is not, on the shareholder list. Companies huff and puff about “establishing a solid institutional following” but with few fund managers delivering exceptional returns , it should not normally concern you who is in or out. But just occasionally a buyer of note emerges. And followers of Shanta Gold (SHG) should note the latest addition to the Shanta list with some interest. It is good news.
Not that this is reflected in the share price. With gold having suffered a mini-sell off in recent weeks, few of the mid cap stocks have seen their shares move the right way. Shanta today trades at 20.75p to buy – that is marginally up on the 18.75p at which I recommended it here but off recent highs of 23p plus.
The shareholding news is no game changer but is fascinating none the less. It transpires that one of Michael Farmer’s Red Kite funds has snapped up 5.2% of the issued equity ( plus a stack of warrants at 35p). Farmer’s Red Kite Management is one of the biggest industrial metals hedge funds in the world and is responsible for shipping as much as20% of China’s copper supplies – hence Farmer’s nickname of “Mr Copper.”
If the name Red Kite rings a bell for AIM followers that is because it announced in the autumn that it was making a major investment in AIM listed EMED (EMED) which one assumes was principally to secure copper supply once EMED’s Rio Tinto mine starts producing. You can read details of that here
What attracts Farmer to Shanta? God only knows. It seems small beer for him and outside his area of focus. And that makes the investment all the more interesting. But farmer is no fool and perhaps it is simply that Shanta is very cheap. We all know that it had operational and funding issues in 2012 but as it enters 2013 the situation is rather different.
The company has a number of assets but its core value is in New Luika in Tanzania which the company has stated will produce 70,000 oz this year and has an 8-10 year life of mine. With a cash cost of $560-610 we might humour the gold bears and assume an average 2013 gold price of just $1600 and this mine will still throw off almost £40 million of free cashflow. It should do the same again in 2015 and 2016 and £25 million a year thereafter. I suspect that drilling around the core pit will result in production guidance from 2017 actually being lifted and also the LOM being extended.
Shanta has other less developed assets which add to the upside and you can add £4 million a year to free cashflow for every $100 on the gold price above $1600. Trading on less than three times free cashflows and with all Non New Luika assets valued at nothing Shanta remain s a very cheap stock. My target price remains 39p – follow Red Kite and buy.
As an analyst wrote this morning “the recent fall in the gold price has come on the back of an increasingly positive view of the stock market, resulting in investors favouring so-called ‘riskier’ assets. In turn this, and concerns that central banks may ease QE, has led to profit taking in commodities, including gold.”
The fall in Shanta’s share price is of course frustrating but the management remain focused on meeting its operational targets and delivering value for its shareholders over the longer term.
I would be happy to discuss this more and can be reached on 020-7267-7183
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