Shanta Gold Ltd

Shanta Gold Ltd (LON: SHG) is a FTSE AIM All-Share listed Company, which is involved in gold exploration and production in Tanzania.

Investment Rationale – SPECULATIVE BUY at GBX 8.00

• Robust Fundamentals: SHG has a strong balance sheet, exceptional safety record, and self-funded exploration or development programmes.
• Guidance: SHG has increased production guidance for FY22 of 68,000 - 76,000 oz.
• Growth Drivers: SHG has increased grade control at New Luika underground deposits, which shall create long-term opportunities for the Company’s portfolio. Moreover, the growth projects at West Kenya and Singida continued to be on track, and the Company expects to provide an update in early 2022.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~32.49) is in the oversold zone, while the stock price is hovering near the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, and Price/Earnings metrics are quite undervalued against the median of the Basic Materials sector.

Key Risks

• Gold Price Fluctuations: The rising treasury bond yield and US Dollar strengthening can dent the gold prices trading around a two-month high level.
• Business and Macroeconomic Risks: New Luika mine is the sole source of revenue and change in mining rules can increase the State’s royalty take. The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Tanzanian Shilling, Euro and Sterling.

Q4 FY21 Production and Operational Update (for the quarter ended 31 December 2021, as on 24 January 2022)

• Operational Safety: SHG recorded zero lost-time injuries during Q4 FY21, while delivering annual throughput of 834,607 tonnes in FY21.
• Production: It delivered the total gold production of 55,280 ounces ("oz"), which was in line with revised guidance of 55,000 - 57,000 oz announced for FY21.
• Liquidity: At the end of Q4 FY21, SHG reported cash and liquidity of US$15.9 million.

One Year Share Price Chart

   (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (FY21) (Illustrative)

Conclusion

SHG has robust net cash, low debt, ongoing government support, and a stable dividend policy to deliver sustainable returns. It demonstrated exploration success in FY21 and discovered new high-grade resources at both New Luika and West Kenya projects. It also looks confident of its long-term prospects. By 2023, SHG targets to become a 100,000+ ounce of gold producer. The stock made a 52-week High and Low of GBX 18.50 and GBX 8.00, respectively.

Based on the ongoing exploration success, solid fundamentals, positive outlook, with support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Shanta Gold Ltd at the current price of GBX 8.00 (as of 26 January 2022, at 8:05 AM GMT), with lower double-digit upside potential based on 6.34x Price/NTM Cash Flow (approx.) on FY21E Cash Flow Per Share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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