Shanta Gold Ltd (LON: SHG) – Delivered Strong quarterly (Q2 FY20) performance

Shanta Gold Ltd (LON: SHG) is a FTSE AIM All-Share listed Company, which is involved in gold exploration and production in Tanzania. It was founded in 2001 as a private gold exploration Company in Tanzania. Presently, the Group is focussed on the New Luika Gold Mine, located in southwest Tanzania. The New Luika Gold Mine is a cash generative, low-cost mine with established operations for high-grade resources. Besides New Luika, the Company also owns Singida (exploration and development stage project), which is located in central Tanzania. In Tanzania, the Group holds exploration licenses covering approximately 1,500 square kilometres. Moreover, in February 2020, the Company announced the purchase of the West Kenya Gold Project, which has an inferred mineral resource estimate of 1,182,000 ounces. The West Kenya Gold Project is considered one of the highest grading 1 million+ oz gold deposits in Africa.

Key Fundamental Statistics



Industry Outlook Dynamics

The Gold prices broke the London Bullion Market Association’s (LBMA) all-time record at US$1 940.90/oz on 28 July 2020. According to the World Gold Council (WGC), the onset of the Covid-19 pandemic has made gold’s relevance as a hedging tool even more prominent, which accelerated the price performance. The gold prices increased by ~17% during the H1 2020 and soared by an additional ~10% in July. The Covid-19 pandemic may bring structural shifts to asset allocation, and there are strong fundamentals to support the gold investment in the longer term. As of 28 July 2020, the Gold prices had significantly outperformed all major assets, which is driven by persistently low-interest rates, market volatility and positive price momentum. According to the global demand trends report from WGC, the gold demand in H1 2020 declined by 6% against last year comparatives. The jewellery demand plunged 46% (year on year) in H1 2020 as consumers were deterred by the high price and with a reduction in the disposable income. Similarly, the bar and coin investment declined sharply in Q2 2020 due to Covid-19 led lockdown. However, the increased investment by Central banks and robust inflows into gold ETFs amid the pandemic, zoomed the gold prices. Overall, the fundamentals for gold bull market is intact. However, as gold has moved sharply higher in the past month, the price may experience some consolidation in the near term.

On the other hand, Gold Mining in Tanzania has been prominent for more than a century, which make it the fourth largest gold producing country in Africa. However, the country remains comparatively under-explored.

The chart below shows the performance of LBMA Gold Price over the past 3 years, which closed at US$1,964.90 per oz on 31 July 2020, reflecting around 56 percent growth over the last 3 years.


 (Source: World Gold Council)

Growth Prospects and Risk Assessment

The recent purchase of the West Kenya Project will supplement Company’s producing mine at New Luika and development Project at Singida for future growth. The Group expects to become a geographically diversified Company with a solid pipeline of high-grade assets in East Africa. SHG’s gold production and AISC (All-in Sustaining Cost) was better than guidance in FY19, which provided increased flexibility to reduce debt and pursue value-driven growth. The Company has demonstrated a sharp fall in debt since Q3 FY17, which can be seen in the image below:


(Source: Presentation, Company Website)

In Q2 FY20, the Company unveiled decent production and operational performance. Net production and costs were in line with the Company’s guidance. The Group managed to reduce all-in sustaining costs and cash operating costs for the current period. In Q2 FY20, the Company has shown a strong performance backed by continued industry-leading safety record (Zero LTI’s since December 2017). Free cash flow at US$38.8 million in 2020 (annualised) also improved substantially from 2016.


(Source: Company Website)

However, the Group is also exposed to various risk and uncertainties, including fluctuation of the interest rate, credit risk arising from failure by counterparties, liquidity risk due to the mismatch of maturities for assets and liabilities, and currency fluctuations pertinent to Tanzanian Shilling, Euro and Sterling. It is also exposed to the production risk arising from the Covid-19 led restrictions. Moreover, the volatile demand and supply conditions can adversely impact the commodity prices, and thus, the Group’s profitability. The delay in the delivery of material and equipment can lead to a higher cost of production.

Segment Analysis

The Company is organised into one main operating segment, which is involved in mining, processing, exploration, and related activities. The operations are divided into three projects – New Luika Gold Mine, the Singida Project, and the West Kenya Project.


(Source: Presentation, Company Website)

Synopsis of Recent Developments

20 July 2020: The Company announced that the major conditions for the West Kenya Project are now satisfied, including approval from the Competition Authority of Kenya. Regarding the guidance for FY20, the Company reiterated the production of 80,000 - 85,000 oz.

10 February 2020: The Group announced the acquisition of 100% participating interest in licences of the West Kenya Project from the Barrick's subsidiary Acacia Exploration. It is one of the highest-grade gold projects in Africa.

Measuring Non-Financial Key Performance Indicators

There was no LTI (Lost Time Injuries) during FY19. By the end of FY19, the Company had surpassed 3.9 million man-hours without an LTI.


 (Source: Presentation, Company Website)

Top Shareholders Statistics

 Production & Operational Update for Q2 FY2020 – Increase in Production and Cash Position


(Source: Company Website)

On 20 July 2020, the Company provided the production and operational results for the quarter ended 30 June 2020 (Q2 FY2020). The gold output increased by 10% quarter-on-quarter to 22,216 ounces (Q1 FY20: 20,167 ounces). During the period, 176,415 tonnes of ore was milled, an increase from the previous quarter (Q1 FY20: 174,069 tonnes). The silver production rose by 11% quarter-on-quarter to 21,378 ounces (Q1 FY20: 19,294 ounces). On 30 June 2020, the Group had sold forward 27,000 ounces to January 2021 at an average price of US$1,251 per ounces.

The cash operating costs and AISC (All In Sustaining Costs) of US$512 per ounces (Q1: US$630 per ounces) and US$771 per ounces (Q1: US$833 per ounces), respectively, were achieved in the second quarter of 2020. The Company's acquisition of the West Kenya Project is on-track with major completion conditions were satisfied (comprising approval from the Competition Authority of Kenya). The transaction is projected to close in the third quarter of 2020.


 (Source: Presentation, Company Website

Regarding the financials, the adjusted EBITDA stood at US$19.4 million (based on an average realised gold price) in Q2 FY20 (Q1 FY20: US$15 million). The free cash flow increased to US$15.5 million against the previous quarter (Q1 FY20: US$ 3.9 million). The Group also noted that it had net cash of US$ 2.1 million at the second quarter-end (Q1: net debt of US$15.1 million). The unrestricted cash stood at US$12.9 million (Q1 FY20: US$5.3 million), with US$2.5 million available to draw from the working capital facility. Overall, the cash and available liquidity were US$21.6 million in Q2 FY20 (Q1: US$15.7 million). It also witnessed a 34% reduction in gross debt from US$20.4 million to US$13.4 million at the end of the quarter.

Financial Highlights (for the year ended 31 December 2019)


(Source: Company Website)

Turnover for the year from sales of gold increased by 8.7% year-on-year to US$112.8 million (2018: US$103.8 million), driven by growth in the average realised selling price for the year. On 31 December 2019, the Company had sold 80,926 ounces of gold (2018: 82,457 ounces), with a further 2,841 ounces in transit to the refinery. For the financial year 2019, the operating profit stood at US$5.1 million (2018: US$19.3 million), heavily impacted by the non-cash loss on forwarding contracts and increased non-cash charges to cost of sales in the year. The non-current assets surged to US$129.0 million (2018: US$123.3 million). Overall liabilities decreased to US$72.2 million (2018: US$79.4 million) following continued deleveraging.

Financial Ratios


(Source: Refinitiv, Thomson Reuters)

EBITDA margin for the financial year 2019 was higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, Shanta Gold Ltd’s current ratio was lower than the industry median of 1.07. However, the Group has sufficient liquidity to meet the short-term obligations. On leverage front, the debt-equity ratio was 0.30x, which was lower as compared to the industry median of 0.40x, reflecting that the company is less leveraged as compared to the industry.

Share Price Performance Analysis


Daily Chart as on 3 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 3 August 2020, at the time of writing (before the market close, at 11:03 AM GMT+1), Shanta Gold Ltd shares were trading at GBX 15.90, up by 0.95 per cent against the previous day closing price. Stock 52 week High and Low were GBX 17.50 and GBX 6.00, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading well above the short-term support level of 20-day, 50-day, and 100-day simple moving average prices, which reflects an upward trend in the stock. MACD line is placed above the central line, indicating a bullish setup.

Shanta Gold Ltd Vs FTSE AIM All-Share Index (1 Year)
 
 

(Source: Refinitiv, Thomson Reuters)

In the last one year, Shanta Gold Ltd share price has delivered 76.10% return as compared to the negative 2.46% return of FTSE AIM All-Share index, which shows that the stock has outperformed the index during the last one year.

Valuation Methodology

EV to EBITDA Approach (NTM)


*1 USD = 0.763747 GBP.

To compare Shanta Gold Ltd with peers, EV/EBITDA multiple has been used. The peers are Petropavlovsk Plc (EV/NTM EBITDA was 4.62x), Goldplat Plc (EV/NTM EBITDA was 6.27x), Pan African Resources Plc (EV/NTM EBITDA was 3.91x) and Centamin Plc (EV/NTM EBITDA was 5.50). The Peers of EV/EBITDA (NTM) of the Company’s peers was 5.07x (approx.).

Business Outlook

The Company believes that gold demand is likely to remain robust in the medium to long term as the gold has an enduring appeal to manage risk for investors. Additionally, gold has a range of industrial uses, including jewellery and in various medical application. The Company’s near focus is on financing and commencing Singida's construction, replacing reserves at New Luika, and expanding the resource base at the West Kenya Project. The Group remains committed to the growth of underlying shareholder value and rigorous capital allocation to manage the sustainable and responsible mining Company.


(Source: Presentation, Company Website)

The Company expects to become a geographically diversified Company with a robust growth pipeline of high-grade assets in East Africa. The Group also expects the full-year guidance to be in between 80,000 - 85,000 ounces at AISC of USD 830/oz to 880/oz reiterated for 2020. SHG delivered robust net cash position with accelerated margins reported in the current quarter, primarily driven by a spike in the gold price and lower costs. Also, the Group expects to conclude the acquisition of Barrick's Kenya assets shortly and will own three projects with 3 million ounces of high-quality gold resources. In the short term, Shanta is expanding the resource base at the West Kenya Project and commencing Singida's construction.

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. Also, the advent of mobile applications for gold investments is expected to increase the proportion of retail investors into the market. Moreover, 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. Currently, the gold prices are trading close to their all-time highs, and any correction from hereon can have a negative impact on the gold stocks in the near term. However, we believe that the fundamentals of the gold bull market are still intact from a long term perspective.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 15.51 (as on 3 August 2020, before the market close at 11:40 AM GMT+1), with lower-double digit upside potential based on 5.07x EV/NTM EBITDA (approx.) on FY20E EBITDA (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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