Shanta Gold Ltd – Delivered robust FY20 performance and remained highly cash generative.

Shanta Gold Ltd (LON: SHG) is an FTSE AIM All-Share listed Company, engaged in 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 West Kenya Gold Project in February 2020. This project is considered as one of the highest grading 1 million + oz gold deposits in Africa.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

Gold mining in Tanzania has been significant for more than a century, and it is the fourth-largest gold producing country in Africa. The recent purchase of West Kenya Project will supplement the Company’s production mine at New Luika and development project at Singida will reap future benefits. SHG had demonstrated an increase in gold production during Q4 FY20 from the levels of Q3 FY20, and Q4 FY19. The Q4 FY20 prices remained higher than the levels shown during Q3 FY20. The Group had forecasted FY21 gold production to increase throughout the year.

(Source: Company Presentation)

However, there are certain risk and uncertainties to business growth like fluctuation of the interest rates, credit risk arising from failure by counterparts, liquidity risk and currency risk pertaining to Tanzanian Shilling, Euro and Sterling. SHG is also exposed to production risk arising from Covid-19 led restrictions. Moreover, the volatile demand and supply conditions can adversely impact the commodity price and the Group’s profitability.

Industry Outlook Dynamics

Global gold ETFs had demonstrated a net inflow of 13.8 tonnes during January 2021. It had shown outflows in two consecutive months of November 2020 and December 2020 of approximately 148.80 tonnes. Gold prices were plunged by around 1.30% to US$1,863.8/ounce during January 2021, and it became one of the weakest performing assets compared to other commodities. The trading volume remained at US$186 billion per day, more than the 2020 average of US$183 billion per day. The commodity had shown robust performance during 2020.

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/ounce to US$2,000/ounce.

The chart below shows the performance of Gold Future Prices over the past three years, which was trading at US$1,818.20/ounce on 15 February 2021, reflecting around 34.36% growth over the last three years.

 (Source: Refinitiv, chart created by Kalkine Group)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Shanta Gold Ltd.

Recent Developments

On 5 January 2021: The Company has appointed Mr Yuri Dobrotin, P.Geo as a Group Exploration Manager.

Q4 FY20 Production and Operational Update (for the quarter ended 31 December 2020, as on 25 January 2021)

(Source: Company Website)

• The Company delivered good prospects and shown a growth of 3.25% in gold production, with no LTI's (Lost Time Injuries) since Q4 FY17.
• In Q4 FY20, it witnessed strong cash, and available liquidity, with net cash of USD 37.3 million.
• During the quarter, the adjusted EBITDA was USD 15.6 million and All In Sustaining Costs (AISC) stood at USD 870 /oz, with cash costs of USD 559 /oz.
• The Company’s mine construction and infill drilling are underway at Singida and West Kenya.
• In FY20, the Company achieved TRIFR (Total Recordable Injury Frequency Rate) of 0.97, which is significantly below the industry average.
• The gold production for FY20 was in line with the guidance at 82,978 oz.
• The adjusted EBITDA for FY20 increased to USD 63.8 million as compared with the previous year.
• In FY20, AISC was at the lower end of 2020 guidance, with cash costs of USD 579 /oz and gross debt of USD 11.4 million.
• The Company has shown new all-time record throughput of 712,945 tonnes milled.
• In the last quarter of 2020, the unrestricted cash balance was USD 41.6 million, with VAT receivable increased to USD 27.8 million.
• For FY21, the Company expects gold production to increase and AISC to be at USD 900-950 /oz on a like-for-like basis.
• In Tanzania, 2021 exploration budget surged by around 50% to USD 8.0 million.
• Overall, in 2020, the gold production and costs were in line with guidance and produced another industry-leading safety performance.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 24 August 2020)

(Source: Company Website)

• During the first half of 2020, the Company noticed a strong gold price environment, with a decent net cash position and a highly complementary asset.
• In H1 FY20, the revenue increased by 36% year-on-year, driven by a higher average selling price and the increase in ounces sold.
• For the first half of 2020, the operating profit stood at USD 15.8 million, which was higher than the operating loss.
• During the period, the total liabilities surged by USD 0.3 million, with gross debt decreased from USD 22 million to USD 13.4 million, and net debt declined by USD 16.4 million. Therefore, the net cash position was USD 2.1 million at the end of the first half, with unrestricted cash of USD 12.9 million.
• In H1 FY20, the gold production was relatively consistent with H1 FY19; however, there was a higher average selling price per ounce and a 7.2% increase in ounces sold.
• Including sustaining capital, the capital expenditure was at USD 7.4 million.
• The Company expects to become a geographically diversified Company with a robust growth pipeline of high-grade assets in East Africa.
• 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 Company 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.

Financial Ratios

Share Price Performance Analysis

On 15 February 2021 (before the market close, at 8:10 AM GMT), Shanta Gold’s shares were trading at GBX 15.68, down by 1.25% against the previous day closing price. Stock 52-week High was GBX 20.50 and Low of GBX 6.00, respectively.

From a technical standpoint, 14-day RSI (46.22), 200-day SMA (15.34) and 200-day EMA (15.04) support the upside potential.

In the last two years, Shanta Gold Ltd share price has delivered a positive return of around +188.11% return as compared to around +34.41% return of FTSE AIM All-Share index and nearly +5.08% return of FTSE All-Share Industrial Metals index, which shows that the stock has outperformed the benchmark index and the benchmark sector.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

Shanta Gold had achieved its core objectives during 2020 with gold production, and cost remained in line with the guidance. The Company believed that gold demand would remain strong in the medium term as gold has a range of industrial uses, including jewellery and various medical applications. SHG had anticipated the full-year 2021 production of approximately 80,000 ounces at AISC ranging from US$900/ounce to US$950/ounce on a like-for-like basis and US$1,050/ounce to US$1,100/ounce including development costs. The Group had forecasted gold production to show an uptrend throughout 2021 driven by the ramp-up of the third mill. SHG had forecasted 2021 exploration budget in Tanzania to grow by approximately 50% to US$8.0 million during FY21. The Company is currently focusing on financing and commencing Singida’s construction and expansion of the resource base at the West Kenya Project. The Group remained committed to becoming geographically diversified Company with a robust growth pipeline of high-grade assets in East Africa.

As per decent FY21 production guidance, operational conditions improving towards normal levels, robust financial & liquidity position, lower leverage ratio, sustainable business model, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Shanta Gold at the current price of GBX 15.68 (as on 15 February 2021, before the market close at 8:10 AM GMT), with lower-double digit upside potential based on 2.56x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.).

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

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