Diottica
11 Aug 2016
Re: High risk - reward? What joy - trying to construct a reasonable cashflow projection has made me realise how much I've forgotten (I'm an ex-banker that used to do cashflows with my eyes closed!) and how much more I have to learn about miners. With that in mind I've just bought Don Durrett's 'How to Invest in Gold & silver - a complete guide with a focus on mining stocks'. However, haven't had time to read it yet so here goes my amateur back-of-the-envelope technique (patent pending, lol).In principle, cashflows are easy - its' sales less total costs = cash generated, after adjustments for non-cash items like depreciation, amortisation, working cap etc. However, Shanta doesn't seem to like revealing all it's numbers (no updated cashflow, P&L etc with Quarterly results) so I've come up with a 'back-of-the-envelope' method, as follows.The accounts reveal that all sales are to one client (doesn't say who but I assume a bullion dealer/refinery) and they pay promptly. So, it's fairly safe to assume that sales=cash (rather than debtors). Costs - clues are those incurred in 2015 i.e. $94.1m in total, but that included an 'extraordinary' $21m amortisation charge - $9.6m relating to waste stripping costs and $11.4m for 'future development expenditure post 2015 for underground mining'. Now, some may say that's management being prudent. Others, may make the observation that there's a new CEO aboard that wants to clean house, make 2015 look as bad as possible so that 2016 onwards is better. The cynic may even point out that taking a $21m amortisation hit in 2015 means that amortisation from 2016 onwards will be lower, flattering the AISC. Oh, look, they're forecasting lower AISC, guiding $730-$780 for 2016 versus $845 in 2015. Still, to be fair there's more to that than accounting tricks e.g. poor ore availability in H1 2015=lower sales, grades etc.If we strip out that $21m then 2015 total costs were $73,141k, equivalent to $907/oz of gold sold (80,622 in 2015). This figure is slightly above the AISC quoted of $845. A quick diversion on AISC. Do look it up if you're not familiar with its definition but, in short, it was suggested by the World Gold Council (industry trade body) in 2013 as a 'truer' measure of costs to sustain a mine i.e. excludes costs of new development. But, it has no accounting rules that apply, definitions are open to intrepretation (by miners and analysts), blah, blah.....So, having loosely suggested that quoted AISC are a reasonable estimate of true total costs and given that sales=cash, then sales revenue less AISC should yield a reasonable approximation of cashflow. Some numbers:From published results for Q1 and Q2 2016 we know that revenues are:Q1 - 21,486oz sold at ave. $1,132 = $24,322,152Q2 - 26,134oz sold at ave. $1,246 = $32,562, 964and the CEO stated in the quarterly results podcasts that he expects the upper end of the 82-87,000oz to be achieved. This seems realistic, given that they've already produced/sold 48,237oz in H1 2016. So we can expect H2 sales of 87,000 less 48,237 = 38,763. We know they've hedged 39,000ozs at $1,222, so H2 sales will be:H2 - 38,763oz to be sold at $1,222 = $47,368,386Add that all together we get 87,000oz sold for $104,253,502 (an ave. of $1,198/oz).I'll address costs and sum-up in the next post but as another aside I (and many others) dislike hedging in the current environment. After all, we're buying gold miners because we believe the gold price will appreciate - why negate that by hedging? The company's Investor relations did not respond to my email query about its hedging but documents reveal that Investec require Shanta to hedge a minimum of 30% of sales. The CEO has stated (podcasts) that it typically hedges 30-50% of sales, upto 6-9 months forward. That's disingenuous - all sales in 2016 will have been hedged (sold forward). I also note that the average gold spot price for Q2 2016 was said to be $1,222 which suggests the actual hed
Taddish
10 Aug 2016
Re: High risk - reward? Useful summaries Diottica, thanks for sharing ...In my (limited) experience investing in PM miners, asssessing resources for underground mines is more of a challenge as the PM is highly concentrated in narrow veins. The seams and grades that SHG have found are relatively shallow (cheaper to access and to bring to surface) and indicate pretty high grades (g/tonne). However, once PM-rich seams have been reached, it's really just a question of following the seams. The high grades should help manage the milling constraint too. So although the company is heavily in debt, the job of establishing a low cost U/G mine is probably not too difficult. Nevertheless, they have to prove they can do it within the time and resources they have available.So ... cash flow. On the face of it, despite conservative hedging, the rising gold price should comfortably provide the financial cushion following a slightly disappointing rights issue after the institutional placing.A fair few variables then upon which ongoing profitability depends.I'm very optimistic on PM prices, and when we look back this time next year, hopefully the company will show that cash flow has been well more than adequate.There's no doubt tough that the risks are significant, which is clearly a major reason for the low market cap. the same token, a successfull execution of plan would eliminate the risks and move the SP far more than say and existing steady producer. So I look forward to your assessment of the next 12 months' cash flow - that being the most critical period for us PI's.Tad
Diottica
10 Aug 2016
Re: High risk - reward? On to resources.Shanta's web site has a link to a 'Reserves & Resources' statement dated October 2014. It details 9 pits within the 'New Luika Gold Mine' complex, only 2 of which contain meaningful resources - Bauhinia Creek (BC) and Luika. At 1.0g/t cut-off these are BC 607k oz and Luika 354k oz, a total of 961koz or 70% of the overall total.Since then the company has been mining these resources and undertaking drilling etc. An updated Reserves & Resources statement is due by the end of Q3 2016, so I'll limit my comments atm. However, in brief:- BC is an open pit, c.160m deep. Luika is also an open pit c.120m deep.- Both of the above 'open' pits are near depletion, and are being replaced by underground resouces, hence the company's transitional nature (see Toby Bradbury's comments in the Q2 release dated 19/7/16). Also note that the release states that the dam has been "completed" (meaning finished being built) but on page 4 the Luika open pit and BC open pit are also described as "completed" or "will complete". Tosh. A better verb would have been 'depleted' - as in mined-out, kaput etc.- The remaining resources at these two pits are deemed underground (at between 315 to 330m below surface) and consist of: BC 424koz (327koz indicated and 97koz inferred) and Luika 163koz (148koz indicated and 15koz inferred).If you are not familiar with resource definitions, please do look 'em up (e.g. search for Mining 101 by Don Durrett or the JORC code). My working interpretation is Measured, Indicated and Inferred are, in descending order of certainty, educated guesses that the resources exist. If a feasibility study is undertaken then part of these resources can be classified as Proven and/or Probable meaning that they can also be economically mined.The Base Case Mine Plan dated 29/9/15 is also worth a read. It postulates production of an average 84koz of gold p.a. for 5 years (total 420koz) from mining 2.79Mt of ore (ave. 558Kt p.a.) from the residual ore at the open pits and, mainly, the new underground pits at BC and Luika.The Mill throughput capacity is stated as 600k tonnes p.a. so this is sufficient for the ave.558,000 tonnes planned. However, that's inefficient as it underutilises capacity so they plan on doing some open pit mining at the Elizabeth Hill open pit (see 25/1/16 report) to top-up.As an aside, note from the Q2 update (19/7/16) on page 3 that the Tonnes of ore milled from Q3 2015 to Q2 2016 totals 606,664 i.e. the max capacity of 600kt p.a. . Alongside comments by the management (can't find it but made in connection with the Silver streaming deal I think) about possible new milling equipment I surmise that milling capcity has been a bottleneck, so further capex, funds permitting, could be required/desirable.So, if for the time being (pending updated resources due by end September 2016) we ignore extra resources and if we assume that the declared resources in the plan are economical* to mine, then Shanta will produce 84,000oz of gold p.a. over the next 5 years.* generally underground mines are more expensive than open pits but the depths (300+ metres) aren't great and so I'm willing to take management's word about costs.In summary, we know Shanta has USD75m of gross debt, is mortgaged upto the hilt but is planning on transitioning from open pit mining to a mix of open/underground mining at BC, Luika, and Elizabeth Hill with some add ons (e.g. Ilunga pit with 74koz) as a prelude to starting mining at a new pit - Singida, all to be financed from cashflow and all within the next 6-12 months.Singida consists of 9 ore bodies, containing resources of:Measured 432,000ozIndicated 118,000ozInferred 309,000ozTotal 859,000oz Shanta is planning a pilot-project to start mining in Q1 2017 at Singida. Normally dangerous to start mining without a full feasibility study but they say it'll be surface mining (down to 100m) and small scale.
Diottica
09 Aug 2016
High risk - reward? Over the past week or so I've been revisiting Shanta and thought I'd share my findings/thoughts. Not sure these will be coherent, so bear with me!First, my disclosure. First bought SHG as a non-core holding, in July 2011 at 18p, because (from memory) it was a near producer that was planning to self-finance it's expansion into a 2nd mine (Singida) and the Gold price was soaring. Saw the sp near double in the following 6 months, then the Gold price started its 5 year decline and I neglected it (my holding was modest). Recently, I added substantially in the open offer and the market, taking my holding to 2% (of portfolio - vast majority in cash), then sold half at the end of July, post Q2 results, as I was disappointed by the forward sales (hedging). This brought my stake to a more bearable 1% at a break-even of 10p.Rather than recount the past 5 years of declining gold prices and innumerous refinancings, generous management remuneration, disappointing production etc I thought i'd start at where we are now and where this might go, particularly as we have elatively new management i.e. Toby Bradbury (CEO) and Mark Rosslee (CFO).The elephant in the room is debt. Indeed, in the May 2016 USD10m placing the company said it has "reached peak debt" and capex will peak this year. At Q1 gross debt was $74.7m and at Q2 $75m. this breaks down as:$40m - Investec Loan taken out April 2015. Fully drawn and secured over the company assets (see note 19.3 on p42 of the 2015 annual report). Repayble $2.5m pq starting June 2016 (or half can be deferred another 12 months - so $1.25m pq initially). Interest at LIBOR + 4.9%$15m - Convertible Loan Notes, maturing April 2019, with interest at 13.5%. Unsecured.$ 5m - Sandvik mining. Vendor financing for underground mobile equipment. Int. 7%, repayable quarterly over 3 years from June 2016.$ 9.1m - Bank M Tanzania Letter of credit converting to loan for new 7.5MW power station. Int. 8% fixed, then 12m LIBOR + 9%. Repayable monthly over 5 years.$ 3.1m - Promissory Note. Int at 2.6%, repayable April 2017.$ 2m - Sandvik. Vendor financing for crusher/screening plant. Int at 6%. Repayable by 20 quarterly payments from August 2014.$ 0.5m - Oryx Oil. Finance lease for Heavy Fuel Oil storage tanks. Repayable over 5 years from August 2014.$74.7m - TotalUnclear how the debt increased by $300k to $75m in Q2 as all facilities are fully drawn but as the amount is relatively modest I don't think we need worry too much.Arguably the debt will increase further when the $5.2m Silver streaming deal is signed (imminent - per Q2 update on 19/7/16). In effect the company is selling forward its silver by-product (7-10 years worth) to receive $5.2m cash. I'm unqualified to judge if this is a fair price but I'l just note that Silverback Ltd seems to be linked to Investec and one wonders if this was an arm's length deal or other streamers were approached to quote?Finally, I note that the Private Placement raised $10.5m, all of which went to repay the associated costs and the $10m Covertible Note holder(s) who declined to extend repayment from April 2017 to 2019. The open offer was intended to raise upto £2.5m but only raised £176k (as sp was below the 6.5p offer price most of the time).In short, my assessment is that the company has tapped out all it's capital and financing options and is now entirely dependent upon cash flow - to finance capex, repayments and get Singida up and running.I aim to address the resources and cashflow in future posts but please feel free to post away if you spot any errors or unfair analysis.
Taddish
21 Jul 2016
Proactive Investors coverage [link]
Taddish
20 Jul 2016
Re: Q2 H1 Operations Update And to add to your comments smilingmickey, the new management still need to prove themselves over more than a couple of years.Nevertheless, I'm still surprised that SHG hasn't had a good run up over the last 2 months. There are several other <100k oz/yr miners with net debt, limited mine life and in the case of AAZ for example, low grades, that have risen with the recent tide of enthusiasm for gold. Enthusiasm that is now taking a breather with greater confidence post Brexit and the opportunity for equity profits through more QE.SHG will hopefully benefit from the next phase of gold price appreciation. The market is after all, forward looking.Holding but not adding.Tad
smilingmickey1
20 Jul 2016
Re: Q2 H1 Operations Update Hi Taddish,I listened to the H1 conference call after having done some of my own dd into Shanta.I have the impression that the strong cash flow currently being generated is required to fund the various ongoing capital projects which Shanta have ongoing (ie tailings plant, underground mine and new electricity generation.) Once these are all in place by the middle of next year the capital requirements should reduce and the debt can be brought down but in the meantime management want to keep some headroom.The production costs are going to be higher in H2 than H1 as the operations move from the surface pits to underground, but again once the underground mine is fully established costs will come down again. Given that the current mine life is relatively short, Shanta need to find some more resources to continue with the operation beyond 2022. There is the prospect of more resources in the underground, but declared resource life for underground mines is often limited by the need to establish them from "underground", rather than by drilling from the surface.The management seem very confident of good resources being found at (i think) Illunga and a resource update is due in the not too distant future. The grades seem quite promising for this deposit but not as high as those established for the underground resources at the current deposit.I've bought a few but I can understand why the share price has not moved as much as other goldminers. The basecase keeps the operation alive but additional resources need to be established to grow for the value of the business.AIHMOSM
Taddish
19 Jul 2016
Re: Q2 H1 Operations Update Results are out and even better than I had hoped. Market should start to wake up to the value of SHGTad
Taddish
18 Jul 2016
Re: Valuation and Price I mean test support at $1300, not resistance
Taddish
18 Jul 2016
Re: Valuation and Price Yeah, financing the U/G mine and sustaining sufficient cashflow following the disappointing offer @6.5p - this is where the risk lies. Interesting the price action suggests we might still be on the next leg up towards 9.5p - fair few trades today, mostly small fry though. The company need to keep the (hopefully positive) news updates coming through. As to forward sales. the Q1 16 Ops update presentation quotes 32k oz forward sold (Q2/3) @ $1172, so assuming 20k/quarter, we shouldn't expect much more than $1200/oz until start of Q4. Conservative hedging is working against SHG at pres. I'm expecting gold to test resistance at $1300, before continuing up and breaking $1380. There are few safe investments around now that aren't in bubble territory, so I'm well overweight PM miners and gold/silver metal.Tad
Diottica
14 Jul 2016
Re: Valuation and Price Agreed, it's off radar, but that partially is why I like it.SHGs finances aren't great at present (heavy debt load) but the recent fundraising has been double edged. It allowed a USD10m reduction in the convertible, the maturity of which was pushed back. That's positive. However, this was the private placement. The fundraising for shareholders sought £2.5m but yielded only £176k. Bad, but not surprising since the sp (c.5.8p) was below the offer price (6.5p) for much of the time. I've also noticed, over the past few days, large blocks being sold. I suspect that this is the new investors offloading for a quick profit of 0.75-1.5p/share. Is there still an overhang?So, SHG is unlikely to launch another fundraising in the near term, so it is reliant on positive cashflow to pay down debt. As you identify, if it can sell say 20k ozs per quarter at a gross margin of USD500 ($1,200 less costs of $700) then the situation can/will improve quickly. But it's not clear to me if the margin will be that - remember it had 20k ozs sold forward at $1,148, unless that was utilised in Q1 - the results announcement was unclear. Whatever the prices achieved in Q2 (announcement due around 21 July), thereafter its margins should improve further - with gold at over $1,300, assuming costs remain under control, no exceptional costs etc.My current intention is to await the Q2 results and assuming these are favourable, then consider adding to my position. If Gold has/does dip a bit, resulting in the offer sp falling to 6.5-7.0p then I'll be a happy bunny - I can accumulate more at a great price!In 12 months time this company's B/S could be much improved and that will start to get recognition. Cashflow will be key - so current/higher gold price + execution of the mining plan at low AISC are required. Add in expanded resources from the drilling.........Finally, I'm not a great fan of charts with PM miners but since September we've had higher lows and higher highs but need to go through 8.5p to maintain this trend - see chart.
Taddish
14 Jul 2016
Valuation and Price At 7.25p SHG is valued at a paultry £42m. Selling 80,000 oz a year @ say $1200/oz with an all-in-cost of $700/oz leaves $40m or around £30m. The underground mine has a pay-back of 3 years and there is clearly a lot more gold in there than the initial resource estimate identifies.SHG is clearly and amazingly to me, completely off-radar. Small sales are allowing the price to fall at a time when the gold price is consolidating above $1300. Even basic charting knowledge, coupled with the fundamentals under-pinning continued rise in the gold price (even the US wants a weaker $) suggest strong support around $1310, at which point the more experienced investors will start buying. Thechnically, SHG should then test 10p.Tad
Taddish
09 Jul 2016
Re: PM miners Good post Diottica, Looks like we both anticipate that precious metals are a solid long term investment, but along the way there are going to be periods of consolidation and weakness (compounded by price manipulation). So we should expect and hope to take advantage of volatility. And obviously investing in PM miners is a leveraged play on PM prices.You have certainly done more research than I have, so hopefully over time we can share some ideas. Rising PM prices should lift the SP of all PM miners, so which companies (not just PM miners) will attract the most investor interest. One thing Ive learned since the 2008 crisis, is that printed currency (QE) has benefitted the larger cap, dividend paying stocks the most. And the safest way to have made money since PM prices bottomed has been to go with the large caps, especially those that are tipped.The other thing is the Gold/Silver price ratio. That has historically averaged around 60 +/- 20. Recently it's been just above 80 and so the out-performance of silver v gold in the recent months led me to buy Fresnillo between 800 and 900p which peaked recently at over 2000p.A 9p dividend and a Moneyweek mag tip some months back convinced me to buy back into Pan African Resources (PAF). A relatively small cap stock, with good grades and good financial strength ovbiously attracted others too and the price trippled.So seems like at present, investors arent thinking long term enough to see the likes of SHG as attractive. There's been interest in FRES and PAF and the share price increases had momentum driving them up almost on a daily basis. So confidence in there being the beginnings of a bull market in PMs is another factor.So Ive done very well in 2/3 miners so far this year, and using the logic above, I can imagine the same scenario when gold and silver break confidently above $1380 and $20/oz. Then, if the US Fed's desire for a weaker dollar is reinforced by prolonged low interest rates and the absence of periodic institutional shorting at the quietest periods of the day (usualli 1pm UK time), maybe we'll get the situation where any company with gold or silver in it's name with rise. Hopefully then SHG will be one of the bigest risers!Tad
Diottica
08 Jul 2016
Re: PM miners Whilst I'm bullish on PM and PM miners l/t, I can't help but feel that the recent run-up (from Dec 2015) was 'supercharged' by the Brexit induced uncertainty last month. It may be wishful thinking but I am reluctant to overcommit funds into PM Miners at present - I think we should see a pullback over the next couple of months as the froth clears and/or investors take profits and/or TPTB manipulate PMs downwards (harder, post Deutsche Bank admission?).My current modest holdings in the PM miner arena are SHG, Eldorado, Hecla and Silvercorp Metals. However, over the past few weeks I've been compiling a list of those miners I want to buy - when the time is right!* I have c.20 goldies and c.12 Silver miners on the list - a mix of large producers, potential takeover targets and a couple of explorers/near producers. I aim to pick those that will give me (as a portfolio) exposure to different jurisdictions (guarding against political/environmental risks); have solid balance sheets (especially not too indebted - I recently shed Avocet Mining for that reason); and lower cost structures (AISC measure). I'm also trying to get my head around what currency exposure would be most advantageous e.g. most of the PM miners have their primary quotes on the Toronto or Sydney exchanges. Best to buy them in CAD or AUD or go for USD (many have ADR or similar quotes on USA exchanges)? Whilst a double edged sword (share price could rise 10% but FX translation could wipe that out) I'm thinking that it could enhance returns e.g. best case scenario is a Canadian miner rises 100% and CAD appreciates against GBP by 20% = 120% gain. So many thoughts, so little time!What I haven't done is completed my analysis and I haven't yet got it clear in my head how to value the miners. Yes, there's lots of analysts that come up with fancy Discounted Cash Flow (DCF or NPV) valuations, based on various assumptions but I prefer a simpler metric - a bit like a P/E ratio for mainstream equities. I'm currently looking into EV/EBITDA (for the producers) and am searching for the right sources that calculate this measure (I'm too lazy to do so myself, even though I spent most of my career in finance!) - my broker (TD) and Yahoo finance seem likely candidates.In summary, I'm not quite ready to answer your last question - "Any other ideas for relatively undervalued PM miners???" but will be happy to share when I do. I've added GPM to my 'to be researched' list as I generally prefer Investment Trusts to open ended products and dislike ETFs/ETPs (other than for short term exposure).RegardsDio* I sold my house at the start of the year, spent 2 months homeless (holidays and new home searching) so found myself distracted from the markets, thus missing the run-up from Jan.. Ha... timing......if only the house had sold by end 2015. If, If......
Taddish
07 Jul 2016
PM miners Interesting you exchanged some CEY for SHG ... I did the same with some of my PAF and FRES shares which have also experienced a really good run. SHG have lagged the field so to speak which possibly the last broker note from Peel Hunt (with a target price of 8p reduced from 9p) is responsible for. FinnCap is targeting 12p, down from 13p, and both of these notes were issued in the last 3 weeks.Obviously the financing and risks associated with creating the underground mine are weighing on the SP. Its a big project for a small company. On the other hand the drilling results just out look very promising and surely remove some of the risk.The $ gold price seems to be consolidationg in the $1350-1370 area,and perhaps vulnerable to some manipulation by those US institutions with deep pockets and whose interest is in maintaining confidence in the US$. For UK listed miners though the weakening £ sterling should help offset any $ price weakness in the short term. Longer term, there seems little doubt that gold and silver are going to go a lot higher.I also put some cash into GPM, which is a UK listed Precious Metals investment Trust currently priced at a 7% discount to NAV. Any other ideas for relatively undervalued PM miners???Tad
