Hummingbird Resources PLC (LON: HUM) – Rapidly deleveraging the capital structure to strengthen the balance sheet.

Founded in 2005, Hummingbird Resources PLC (LON: HUM) is a FTSE AIM All-Share quoted multi-jurisdiction, multi-asset, gold production, development, and exploration entity. It is also a member of the World Gold Council. Its mission is to grow asset base by producing highly profitable ounces, while adhering to the Environmental, Social & Governance policies and practices. The Company has two core gold projects, the Yanfolila Gold Mine in Mali, and the recently acquired Kouroussa Gold Project in Guinea. Further, it also has a controlling interest in the Dugbe Gold Project in Liberia.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

HUM is well-positioned among intermediate gold producers to generate substantial returns for shareholders. During Q3 FY20, it reported environmental incidents, while the TRIFR was 0.91 against a benchmark of 2.5. The Company has also brought down the net debt to ~US$10 million by the end of Q3 FY20 and has strengthened its financial position to pursue the upcoming opportunities in the short-term. Moreover, it has a clear strategy of targeting +200koz by FY22-23 from Yanfolila & Kouroussa operations. Hummingbird Resources’ main goal is to upgrade the resource potential and expand the Yanfolila project. After the completion of the drilling and exploration activity at the Yanfolila gold project, the Company would perform the mineral resource update. The 2020 exploration programme of Hummingbird Resources is focused on finding high-grade resources at the Komana East Underground deposit, identifying open-pit oxide resources and reserves at Sanioumale West and Sanioumale East and testing Greenfield targets near the license area of Diaban.

Overall, the Company has strong cash flows, and sound capital management which supports multi-asset and multi-jurisdiction production and has potential to produce over 350 – 500koz of gold at an AISC of lower than US$1000/oz by FY25.

(Source: Presentation, Company Website)

However, the Company is also exposed to various risk and uncertainties. It is exposed to financial risk with fluctuations in Gold price and exchange rates. Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.

Industry Outlook Dynamics

The Gold prices lingered below US$1,900 per oz since lack of additional US fiscal stimulus kept the US dollar firm. The world mines are expected to produce 3,368 tonnes of gold in 2020, which is 4.6% lesser than 2019 and the lowest in the past five years. However, the Covid-19 pandemic has led to unparalleled money printing and low-interest rates globally, which shall put gold on track for registering its best year in a decade as it appeals investors as a hedge against currency debasement and inflation.

In Q3 FY20, global Gold demand dipped by 19% year-on-year to 892 tonnes, as consumer sentiments remained depressed. This represented the lowest quarterly demand since Q3 2009. The YTD demand was 2,972 tonnes, which was 10% lower against the same period in 2019

The chart below shows the performance of LBMA Gold Price over the past 3 years, which was trading at US$ 1,834.10/oz on 7 December 2020, down by 0.32% from the previous day closing price.

 (Source: Refinitiv, chart created by Kalkine Group)

Growth Catalysts

• Uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil.
• Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources.
• Record inflows into Gold-back ETFs should continue to offset the demand weakness in other sectors.
• Central banks have been adding to the gold reserves since the financial crisis. Presently, the official reserves are more than 5,000 tonnes higher than they were in 2009. The central banks own nearly 35,000 tonnes of Gold, equivalent to ~17% of worldwide above-ground stocks.

Key Risks

• The scale and continually evolving nature of coronavirus pandemic are causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations during H1 2020.
• With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars.
• Supply from gold producers can decline as only US$4.4 billion was spent on exploration in 2019 against US$11.8 billion in 2012. Consequently, there were only three gold discoveries in 2019 as compared to 42 major gold discoveries in 2000. In short, there would be less gold, if a lesser amount is invested on exploration.
• The allocation to gold could go down if real interest rates rise dramatically.
• The gradual resumption of economic activities and receding apprehensions of Eurozone disintegration could dent demand for gold to hedge related risks.

Gold Outlook

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment. However, as the gold prices and uncertainty have the inverse correlation, there is a risk that lower uncertainty with lockdown easing might cause gold prices to consolidate around US$1,800 to US$2,000/oz.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Hummingbird Resources Plc.

 

Recent Developments

11 November 2020: The Company exercised its option to acquire the "Central License" located and encompassed centrally within the Project. It represents a significant project enhancement with exceptional prospectively.

Key Performance Indicators

 (Source: Annual Report, Company Website)

Operational Update (as on 2 December 2020)

• The review of the initial draft of 2021 budget was conducted and expected to finalise in the coming weeks.
• Hummingbird also aims to update the Yanfolila mineral resource models with Q1 FY21 update once the drilling at SE (Sanioumale East) is finalised.
• In Q3 FY20, the mine endured extreme weather events with the wettest rainy season on record.
• The Company will not meet the lower end of 2020 production guidance of 110,000 - 125,000oz.

FY20 Corporate and Operational Update for the for the third quarter ended 30 September 2020 (as on 26 October 2020)

• Financial Position as of 30 September 2020:
  • cash balance was ~US$9 million.
  • total bank debt was US$19 million, reduced by ~US$7 million during the quarter, bringing net-debt down to ~US$10 million.
• During Q3 FY20, ~US$5 million was spent exploration programmes, expansionary capex, and preliminary pre-development costs at the Kouroussa Gold Project in Guinea.
• The gold inventory stood at 4,600 ounces ("oz"), which valued at US$9 million.
• The joint venture partner Pasofino Gold Limited gained funding during the quarter and have now begun works to carry out and fund a definitive feasibility study.
• The gold production was 24,722 oz in Q3 FY20 (Q2 FY20: 24,054 oz) at an All in Sustaining Cash Cost ("AISC") of US$1,283 per oz (Q2 FY20: US$983 per oz)
• The gold sales were made at an average realised price of US$1,919 per oz.
• The Total Recordable Injury Frequency Rate ("TRIFR") stood at 0.91, meeting the Company's target of having a TRIFR lower than 2.5.
• FY20 production guidance was maintained at 110,000 - 125,000 oz.

(Source: Company Website)

Financial Highlights for the six months ended 30 June 2020 (as on 26 August 2020)

(Source: Interim Report, Company Website)

• During H1 FY20, the Company sold 56,095 ounces of gold at an average price of US$1,621/oz.
• It also signed a share purchase agreement to acquire the Kouroussa Gold Project in Guinea.
• The revenue for the period was US$92 million (H1 FY19: US$67.1 million) with total AISC of US$936/oz.
• The adjusted EBITDA was US$38.9 million for the period, while the pre-tax profit was US$23.7 million.
• FY20 guidance was maintained at 110,000 - 125,000 oz at an ASIC of up to US$995 per oz.
• The Company was on track to fully repay the bank loan by the end of H1 FY21.

Financial Ratios – Strong Liquidity Position versus the Industry Median

Share Price Performance Analysis

On 7 December 2020 (before the market close, at 10:30 AM GMT), Hummingbird Resources PLC shares were trading at GBX 28.25, down by 3.91% against the previous day closing price. Stock 52-week High was GBX 42.74 and Low of GBX 18.08, respectively.

As per the technical indicator, 14-day RSI (40.80) is currently supporting an upside move, which means the stock price could increase in the short term. In the last one year, Hummingbird Resources PLC’s stock return has outperformed the benchmark index and the sector as it has delivered a positive ~38.12% return as compared to ~ 21.79% return of FTSE All Share Mining index and ~ 17.67% return of FTSE AIM All-Share Index.

Business Outlook

Hummingbird Resources is looking forward to having a strong finish to the year in terms of production despite the difficult last quarter due to heaviest rains on record hitting site, difficult logistical challenges imposed upon through a combination of managing COVID-19 issues and the temporary closure of borders due to the military coup in Mali. Moreover, the Company continues to rapidly deleverage the balance sheet with net debt approaching zero, which is a significant achievement for the Company.

The FY20 exploration programme has led to some stellar drill intersections, particularly at the Sanioumale West and East deposits, and therefore, it is excited to model these and see the potential impact on the life of mine at Yanfolila. Furthermore, the Company made solid progress at Kouroussa ahead of commencing construction of second mine. 

 (Source: Presentation, Company Website)

However, as Gold has moved sharply higher in the past few months, the price may experience some consolidation in the near term. Nevertheless, if quantitative easing and other factors encourage investors to treat Gold as money, the potential for Gold price outperformance is extremely high over the next five to ten years. Therefore, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

 (Source: Presentation, Company Website)

Based on the decent growth rate trajectory with sound financial and operational performance, we have given a “Speculative Buy” recommendation on Hummingbird Resources PLC at the current market price of GBX 28.25 (as on 7 December 2020, before the market close at 10.30 AM GMT) with lower double-digit upside potential based on 5.32x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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