Shanta Gold Limited (LON: SHG) – Upgraded Gold Reserves at West Kenya Project

Shanta Gold Limited (LON: SHG) is an FTSE AIM All-Share listed Company, engaged in the production and exploration of Gold in Tanzania. The Company was incorporated in 2001, currently focussed on the New Luika Gold Mine, located in southwest Tanzania. It also owns Singida, which is in Central Tanzania. The Group had exploration licenses encapsulating approximately 1,500 square kilometres in Tanzania. SHG had announced the purchase of the West Kenya Gold Project in February 2020.

On 18 October 2021, SHG plans to release quarterly production results.

Recent trend of dividend payments: SHG will pay an interim dividend of 0.10 pence per share on 29 October 2021, while the ex-dividend date will be 07 October 2021.

Growth Prospects

• Encouraging Results from West Kenya Project: SHG had declared an estimates resource of 117,600 ounces for the West Kenya project during the Phase 1 exploration programme. Moreover, the Phase 2 drilling results would be expected by Q1 2022.
• 5-years Plan for NLGM: The Company had recently declared a new five-year plan for New Luka Gold Mine and forecasted Tanzanian assets of approximately 499,000 ounces for the five-year period starting from H2 FY21 to H1 FY26.
• Lower All-in Sustaining Costs: The Company had maintained AISC of USD 1,338 per ounce during H1 FY21, which remained in line with the FY21 guidance ranging from USD 1,325 to USD 1,375 per ounce.
• Key Tanzania Market: Gold mining in Tanzania has been significant for more than a century, and it is the fourth-largest gold producing country in Africa. Moreover, the Company’s production mine at New Luika and development project at Singida will reap future benefits.

Key Risks

• Volatile Commodity Price: The high volatility in gold price could have an adverse impact on the top-line revenue of the Company.
• Increase in US Dollar & Rising Treasury Yields: The strengthening of the US dollar and rise in the treasury yields may create pressure on the gold price.
• Failure to Discover Substantial Reserves: The failure in discovering substantial reserves could adversely affect the SHG’s future performance as exploration and development are capital-intensive activities.

Gold Industry Dynamics

• The medium to short term outlook for the gold looked bleak as Federal Reserve hinted of tapering to begin sooner than expected by December 2021. Moreover, the tapering is going to take US Dollar out of the market and put pressure on the gold price.
• Nonetheless, the jobless claims numbers released last week had reignited the hopes of delay in tapering.
• The return from gold ETFs was around negative 10% over the last one year.
• Global gold ETFs had shown a net outflow of around 22.4 tonnes during August 2021, equivalent to USD 1.30 billion, after showing a marginal inflow during June 2021 and July 2021.
• The inflow into European and Asian Funds got outweighed by outflows from North American funds.
• The global Asset under Management stood at 3,611 tonnes during August 2021, equivalent to USD 211 billion, around 0.6% lower than the prior month.

 (Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,749.70) is sustaining between the lower Bollinger band and the middle Bollinger band, indicating an upside direction for the commodity. The momentum indicator RSI (14-period) is trading at ~39.70 levels. 

Now, we will analyze the Key Fundamental Statistics & Shareholding Pattern of Shanta Gold Limited.

Odey Asset Management LLP is the most significant shareholder as it holds nearly 138.69 million shares as of 30 June 2021.    

H1 FY21 Financial & Operational Highlights (for the six months ended 30 June 2021, as of 09 August 2021)

(Source: Company result)

• On the profitability front, the profit after taxation witnessed a jump of approximately 200% from USD 1.04 million for H1 FY20 to USD 3.13 million during H1 FY21.
• With regards to the balance sheet, the Company had maintained a net cash balance of USD 24.20 million as of 30 June 2021.
• SHG has reported zero lost-time injuries during the period.
• Meanwhile, the Company was able to pay the maiden final dividend of 0.1 pence per share attributable for FY20 during the period.
  

Financial Ratios (H1 FY21)

Share Price Performance Analysis

 (Source: REFINITIV; Analysis done by Kalkine Group)

On 27 September 2021, at 08:33 AM GMT+1, SHG’s shares were trading at GBX 13.00, same as the previous day closing price. Stock 52-week High and Low were GBX 20.50 and GBX 10.50, respectively.

From a technical perspective, the stock is hovering between the lower Bollinger band and middle Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~39.90 is inching towards the oversold territory, reflecting an upside momentum in the stock price.

Over the last two years, SHG’s stock price had delivered a positive return of around 58.18%, while the FTSE AIM All-Share index (benchmark index) had produced a return of about 45.17%, and FTSE All-Share Industrial Metals & Mining (benchmark sector) had generated a return of approximately 34.87%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

 Peers used in the valuation methodology (Price/NTM Earnings) 

Business Outlook Scenario

The Company had made accelerated progress regarding the financing and commencement of Singida’s construction and expansion of the resource base at the West Kenya Project. Moreover, the Company also begin the payment of dividends, reflecting SHG’ s increasing confidence in its outlook. However, SHG had posted disappointing gold production volumes and top-line revenue during H1 FY21. Nevertheless, the Company remained all set to achieve FY21 production ranging from 60,000 ounces to 65,000 ounces. In a nutshell, SHG would ensure lucrative long-term returns for the shareholders driven by strong fundamentals of net cash, low debt, and consistent operating cash flow.

Considering the excellent jump in net profit during H1 FY21, strong leverage position, impressive results from the West Kenya Exploration programme, well-positioned balance sheet, bright production outlook, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Shanta Gold Limited at the current price of GBX 13.00 (as on 27 September 2021 at 08:33 AM GMT+1), with lower-double digit upside potential based on 11.66x Price/NTM earnings (approx.) on FY22E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer

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