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@Mostyn: what do you think you are missing? Having been through the accounts and announcements in detail, along with follow up Q&A to the company, I actually feel disclosure is fine. There’s some areas I would improve, but nothing fundamental or misleading. If you have questions I may have answers from the research I have undertaken and happy to share.
Apparently tipping based on “buying up to 50p”. So they’ve taken the analysis from this page as fundamental value on Yanfolila of that value, with a ride up to 70p / £1 as the profit to be earned. Fair play.
Value starting to our? OdL’s 70p short-term price target still a long way off! If it’s a takeover a leak announcement will be out imminently, so we’ll know soon. Feels to me more like a decent sized institutional buyer / fund sees the enormous inherent value and is starting to buy in.
15%... that’s a bit of price action!
Majority of way through Q3 2020.
Average price of gold likely to be c.$1,850
ASIC including COVID-19 effect might be as high as c.$1,000
Margin of c.$850
Production likely to be in order of c.30,000 oz (32,000 last year).
That’s $25.5m of cash. Knock off some drilling, a bit of additional inventory and central cost, then c.$20m of net cashflow. Tax fully covered by deferred tax asset.
Then just wait for the higher grades in Q4 to start coming through...
Sainsbury’s reported to be undertaking a strategic review of their JV with Aviva and the SUPR JV with BA:
“Separately, Sainsbury’s is carrying out a review of whether to sell a £1bn portfolio of 26 of its stores, owned jointly by the supermarket giant alongside Aviva Investors, Supermarket Income REIT and British Airways Pension Trustees.”
Suggests great positioning from SUPR for asset value increase on share of JV, upward reset of rents and direct asset purchases with BA in due course.
My short-term price target for HUM of 70 pence a share (current value).
This puts only current share price value on HUM’s 12.25% stake in CORA Gold Plc. However, what is not factored in is the value of Cora deciding to ship high grade ore from its flagship gold project for processing at Yanfolila. As reported in Cora’s interims today, the metallurgical tests have gone well to give the company that option to reduce capex and fast track cashflow. Clearly were that option to be followed there would be additional margin in it for HUM for providing that processing. Another element of potential upside not captured in my price target, nor the medium-term target of 100 pence, as the value of Kouroussa and Dugbe are delivered.
Sorry - didn’t mean for that to sound disrespectful. I appreciate the work you have done on this BB. Hopefully helpful if means we get a more incisive interview from Crux.
DJRyan: some of those questions are quite easy to answer up front.
1) there’s no way the banks will fund a project that is not fully financed with sufficient equity behind it, otherwise implicitly their LTV will have gone up. The budget is the budget with contingency as appropriate. Remember it’s likely to have increased with inflation and there’s COVID which has the potential for delays. The worst place for HZM to find itself in would be trying to raise more finance if the project has gone wrong / equity market is close / costs have gone up / other delays have happened;
2) I do not expect the Brazilian banks to increase the amount of debt / LTV available, rather they will slip into the syndicate for the existing $325m. What I think will be interesting is whether the Brazilian Development Bank type lenders get involved given potential for interest cost reduction or other similar support. Perhaps a question on how the Brazilian lenders are likely to interact with the syndicate and whether that may confer any cost / underwriting benefits?
3) agree with the offtake question - you would think some upfront offtake and offtake underwrite with a price floor would be helpful to provide additional comfort for the debt and reduce the equity cheque.
4) How do they propose to reduce dilution on Vermehlo as a result of the Araguia financing? Does JM expect equity to be purely project level? Any chance of open offer / rights issue?
@Brucey6onus: thanks for sharing. Completely in line with my thoughts on value and progress. My 70p sum-of-the-parts valuation is very conservative on Kouroussa (eg 20% discount rate) but no reason why over next 12 months, something more akin to 20-30p could not be added (vs 10p today). That, along with progress on Dugbe, will get HUM to 100p a share in my view. So much value.
https://www.youtube.com/watch?v=ReBXZUAnTN4&feature=emb_rel_pause
Just re-watching this again. Jeremy has so far delivered everything he promised. Really very impressive! Worth a watch particularly from 16 mins onwards re financing.
@Turnkey - I like to make my own assumptions for discount rate, gold price, costs and timings and I don’t believe that the market puts full weight on NPV. Plus the NPV is pre tax. My approach is arguably conservative (20% post tax WACC means there’s a lot more value if everything is delivered as anticipated), but if that’s the case and it still gives a near doubling in value, then I know my downside is very protected. As things progress, my discount rate will drop and I will value it higher.
@Patientvulture: thank you for sharing. Helpful analysis, demonstrating that my assumptions on Dugbe in the SOTP are very conservative. A lot of value to be unlocked, none of which is in the HUM price today, despite a new clear path to progressing and unlocking.
Upsides:
- Unwind of discount rate should mean delivery of 15-20% ungeared return p.a. on Yanfolila and Kouroussa
- Gearing on Kouroussa, should mean enhancement of value (5p a share assuming $50m of debt)
- Dugbe upside is potentially enormous - delivery of NPV of say $250m ($125m for 50% share) in 2 years would add another 10p+ a share on top of what I have assumed.
- Short / medium term PoG may remain stronger than I have forecast
- CORA looks set to deliver, with HUM enjoying 12.25% of the return which feels like it should be with more than £2.3m today.
- Platform value - if HUM can deliver Yanfolila, learn from some of the operational issues, then find Kouroussa, they can do it again. Assuming Kouroussa delivered within a reasonable timeframe, then the market has to put more platform value on HUM. That’s when a P/E multiple starts to make sense and when the value should be considerably enhanced. I’m not there today and I stick with my SOTP approach (70 PENCE PER SHARE TODAY) but the above shows the pathway to £1+.
Happy to debate any of the points or assumptions I have made. Thanks, Otho.
Dugbe:
- Valuation above has only $2m in for Dugbe being the value of the non-fundable deposit paid by ARX to HUM which was received in July.
- That is clearly deeply (and incorrectly) conservative, given the enormous resource that exists in Liberia, with a potential that has clearly attracted international capital. As per my early posts this is a great deal for HUM (I have dealt with my reasoning elsewhere)
Valuation benchmarks for Dugbe:
- NPV10 @ $1,500 = $337m
- Value @ $22 oz on 4.2m oz resource = $92.4m
- Investment to date = $70m
However, if we work with what the market gives us, we can also infer a price for Dugbe given acquisition of ARX (49% farm in partner) by Pasofino Gold (VEIN). VEIN is trading at CAD$0.3 on 306.5m shares (post issuance to ARX and 33.4m for CAD$10m capital raise) that’s a market cap of CAD$92m or £52.6m.
Taking £52.6m as 49% of Dugbe, then HUM’s 51% is 13p a share.
I am not sure whether the other assets in VEIN have any value, so it could be that not all of that is Dugbe but the VEIN share price was CAD$0.04 in April, so I’m assuming Dugbe is the lion’s share but call it 10p a share. There is then enormous upside to HUM for securing even 50% of the NPV of $337m through additional exploration and delivery of the DFS for which HUM does not contribute a further penny.
DUGBE PRICE TARGET VALUE COMPONENT:
- 10p
- Added to Yanfolila and Kouroussa: 70p (midpoint); 90% upside to current share price.
Kouroussa:
- We have not got huge amounts of detail on Kouroussa, so difficult to build a very detailed model in the way I have for Yanfolila. However, assumptions are set out below:
- 2 years to production feels a bit ambitious so I have allowed for 2.5 years
- I have used a POG of $1,600 and AISC of $825 (I have added in a bit of fat on cost and reduced POG from today’s level)
- Assumed GoG take 20% interest (they are allowed 15% free-carry, plus a further 20% for cash, so I assume a full free 20%) and 35% corporation tax
- issuing 35.2m shares to Cassidy shareholders, means 9% dilution on Yanfolila value (basically 4-5p a share on my NPV per above)
- WACC of 20% (that’s hefty and very prudent but delays, issues or the usual development hiccups will cost money)
OUTPUT
- NPV: 10p a share @ 20% WACC
- NPV: 14p @ 15% WACC
- each year of additional mine life beyond the first five years adds c.1-2p a share of value, but I won’t factor in at this stage until more detail available.
KOUROUSSA PRICE TARGET VALUE COMPONENT:
- 5 to 10p (post dilution for acquisition shares issued)
- Added to Yanfolila: 60p (midpoint); 62% upside to current share price.
Yanfolila:
- The currently producing mine in Mali
- Clearly a bit more risk on this given political uncertainty and continued violence to the north of the country
- nonetheless, things seem to have settled down and operations have remained unaffected with reiterated guidance if 110-125k oz
- my DCF valuation breaks down production into a) the current mine plan (2020: 115k oz - of which 58,906oz remaining for the year; 2021: 120k, 2022: 121k, 2023: 100k, 2024: 108k), b) annual LOM extensions of 100k oz p.a. for 2025-2028 and c) additional oz to keep all years of production to 2028 at 120k oz
- I use a WACC of 15%
- Assumes $5.5m of central cost not absorbed by AISC
- Usage of tax shield (c.$150m of tax losses should give c.$45m of tax savings), meaning tax of only $1.6m for rest of 2020 (1.5% of revenue minimum tax payment) and majority of 2021 tax shielded, thereafter full 30% of tax.
- Also assumed that HUM get some benefit from the outstanding $10.8m payment for the extra 10% GoM stake that is outstanding. I have applied as a $1.4m p.a. tax reduction for four years from 2021 (maybe a bit optimistic but ultimately a rounding error)
OUTPUT:
- a) NPV of 5yr existing LOM only: 35p a share
- b) NPV inc 4 yr LOM extension: 50p a share
- c) NPV inc 4 yr + 120k steady: 55p
Each value driven off 30 June 2020 balance sheet (net debt and working capital)
- 12% WACC increases respective values to a) 37p, b) 54p and c) 60p
Given quality of drill results to date (75% of drilling for 2020 is complete), we can be very sure that LOM will be extended. I think that means b) and c) are now the only relevant values (debate is whether 120k can be fully sustained and whether 15% WACC is overly punishing for risk?)
- factors in only $2m for Dugbe, share of market cap for CORA and BH and no net value for Kouroussa. These need to be explored in more detail.
YANFOLILA PRICE TARGET VALUE COMPONENT:
- 50-55p (35% to 49% premium to the current share price)
Morning all! Following on from my posts last week, I have updated my valuation model on HUM. The methodology I use is a sum of the parts focussed on a DCF on Yanfolila, now adding a DCF of Kouroussa following the completion of the deal, plus share price read through for Dugbe, Cora and Bunker Hill. I have set out the components which I will post in turn along with some sensitivity analysis and the key assumptions.
@adamsmithfreethi - hopefully this sets out why I think selling at 40p is too cheap. In short, I see 70p per share of value today, delivering an ungeared return of 15-20%. I can see a pathway to £1 with judicious use of gearing on Kouroussa and depending on view of gold price and Mali political risk. I am bullish on the former two and sanguine on the latter.
PRICE TARGET: 70p (90% upside)
@the_shareminator: I agree that development cost should be funded by debt and I expect HUM will do that. So the question is, how will that interact with the free cashflow coming from Yanfolila? The answer to that (plus the cash buffer the board wants) is the difference between a maiden dividend in 12 months time and 24 months time, assuming the team don’t find another Yanfolila / Kouroussa opportunity. They won’t dividend sooner than that when there’s a ramp up at Kouroussa development, COVID and Coup risk ongoing and it would not be prudent to rely on c.$2,000 oz pricing (although I expect it to be around for a good while yet).
@Punter64: agreed. I certainly don’t rely on analyst notes for my information and view on value - too often badly worded or poorly / lazily thought through, so I won’t defend Cannaccord. I do think HUM’s announcements on Kouroussa have been very clear on the acquisition cost and form of consideration. It’s appears to be a very good deal, notwithstanding HUM’s share price rise.