Highland Gold Mining Limited

Highland Gold Mining Limited (HGM) is an AIM-listed gold mining company which acquires, consolidates and develops a portfolio of quality gold mining projects in the Russian Federation. The company is a well-established gold producer with a world class Russian asset base and its operations are located around three main hubs in Russia. The company has three exploration properties, three development projects, and four operating mines in Russia, as well as in Kyrgyzstan in Central Asia. The group’s operations are differentiated in five operating segments: Development and exploration, Polymetallic concentrate production, Gold production of Chukotka region, Gold production of Khabarovsk region, and Other. Denis Alexandrov is the Chief Executive Officer of the group.

Operating Results
On 25 April 2019, the company announced its operating results for the three months ended 31 March 2019, in which it reported that the company produced a total of 71,961 oz of gold and gold equivalent in the first quarter of FY 2019, representing an increase of 21% from 59,311 oz in Q1 2018. During the quarter, average realised gold price was $1,307 per ounce. The group anticipates producing 290,000-300,000 oz of gold and gold equivalent in 2019.
Financial Highlights (FY 2018, in $m)


(Source: Company Filings)

Total production during the year decreased by 1% to 269,500 ozof gold and gold equivalent, but was within the guidance range, while average realised price of gold and gold equivalent increased by 0.7% to $1,171 per oz. The company sold 263,795 oz of gold and gold equivalent, representing a 2.4% volume decrease versus 2017, and total revenue amounted to $311.2 million with $196.6 million from sales of gold and silver and $113.8 million from sales of lead and zinc concentrates.In 2018, EBITDA amounted to $153.1 million (2017: $155.3 million), while operating profit increased to $109.2 million in FY18 from $102.2 million in FY 2017. As net profit was adversely impacted by high deferred tax, it declined by 15% to $56.1 million. As a result, earnings per share declined to $0.154.

Share Price Commentary

 Daily Chart as at June-25-19, before the market closed (Source: Thomson Reuters)
 
On 25 June 2019, at the time of writing (before the market closed, GMT 1:50 pm), HGM shares were trading at GBX 209.8, up by 5.05% against the previous day closing price. Stock's 52 weeks High and Low is GBX 210.60/GBX 125.10. The company's stock beta was 1.67, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £726.76 million, with a dividend yield of 3.71%.

Conclusion
The company is one of the most competitive gold mining enterprises in the world and its low cost/high margin credentials remain solid, giving it an edge over its competitors. However, a significant and prolonged decline in the commodity prices of the metals could have an adverse impact on sales and profits, as product prices are subject to international supply and demand and can be volatile and its capability to invest in growth projects is limited during periods of low commodity prices. The group can be negatively impacted by adverse economic conditions or uncertainties as interest rate may fluctuate in such a scenario which may adversely affect the financial results.

Based on the headwinds faced by the company, we have given a “WATCH" recommendation at the current price of GBX 209.80 (as on 25 June 2019, before the market close), while we look for any upcoming catalysts.
 

Shanta Gold

Shanta Gold (SHG) is an AIM-listed gold company which focuses on production, development and exploration in the East Africa region. The Company is focused on the New Luika Gold Mine, its flagship asset, which is located in southwest Tanzania and is a low cost and cash generative operation boasting high grade resources. Alongside this mine, the company owns Singida, an exploration and development stage project, located in central Tanzania, and also holds exploration properties covering over 1,560 km² in the under explored ex-colonial mining areas of Lupa Goldfield. The aim of the exploration programme is to increase resources at Singida project in central Tanzania as well as target new resources to extend the mine life of New Luika. Eric Zurrin is the Chief Executive Officer of the group.

Recent Development
On 20 June 2019, the company announced an update from the second phase of its Bauhinia Creek drilling campaign, which is one of three active sources of ore currently being mined at New Luika Gold Mine. After high grade results were intercepted in May 2019, the latest campaign provided further evidence of the continuity of the orebody to the west of Bauhinia Creek Central, as phase 2 drilling intersected high-grade mineralisation over significant widths.

Financial Highlights (FY 2018, in $m)
Due to a proportional increase in quantity sold during the year, revenue of $103.8 million was reported, representing an increase of 2.3% over FY 2017. At average realised gold price of $1,259 per oz, the average selling price realised for the year was slightly lower than that of 2017. Operating profit was $19.3 million, up by 75% from 2017, while EBITDA rose by 21% to $45.7 million. Profit before taxation was $13.1 million, up from $3.6 million in 2017 and profit after taxation was $8.0 million, up from $4.2 million in 2017.

Valuation Methodology
Method:  EV/EBITDAApproach (NTM)


Share Price Commentary
 
Daily Chart as at June-25-19, before the market closed (Source: Thomson Reuters)
 
On 25 June 2019, at the time of writing (before the market closed, GMT 2:30 pm), SHG shares were trading at GBX 8.00, down by 5.32% against the previous day closing price. Stock's 52 weeks High and Low is GBX 8.65/GBX 3.82. The company's stock beta was 1.52, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £66.53 million.

Conclusion
The group reduced its debt to its lowest level in 6 years by reducing net debt by 21% in 2018, as it continued to successfully execute its cost strategy. It has identified several key targets within its licence area and has doubled its exploration budget for 2019.

Based on the healthy prospects and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the current price of GBX 7.90 (as on 25 June 2019) with single digit upside potential, based on 2.34x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
*The speculative buy recommendation is valid for the current price as covered in the report (as on June-25-19).
*All forecasted figures and peers have been taken from Thomson Reuters.

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