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Shanta Gold breaks more records in Tanzania

New Luika produced just under 81,900 ounces of gold in 2015
Shanta Gold breaks more records in Tanzania
Probable reserves at both surface and underground are 2.65Mt at 5.9 g/t gold or 506,000oz.

A record-breaking performance from its New Luika mine in Tanzania in the last two quarters of 2015 marked a strong recovery from a difficult start for Shanta Gold (LON:SHG).

New Luika is the company’s major asset and getting the mine back on track after first half re-development problems enabled it to finish the year with higher production, lower debts and sharply reduced costs.

It was a handy combination for the junior miner in the current tough climate and the shares initially jumped more than 10% both on the numbers and management’s upbeat tone.

Costs are being driven down at New Luika

New Luika produced just under 81,900 ounces of gold in 2015, not a huge amount by some standards but all–in costs for the year were a very competitive US$845 per ounce.

Shanta has just started work on an underground operation at New Luika that aims to have 70% of mined below ground by next year. The costs of this development are put at US$38mln.

Production in the quarter to June 2016 Totalled 23,900oz (24,340), with sales of 26,100oz at a higher than spot price of US$1,246 per oz. All-in-costs were US$664 per oz.

For the full year, Shanta maintained its production guidance at 82,000-87,000oz with the forecast for all-in-costs reduced to US$730-780 per oz.

Pit reserves in the last estimate in September totalled 177,000oz.

Shanta has instigated a five-year plan to boost these and extend the mine life through the combination of going underground below the existing open pits and exploration of the surrounding deposits.

New Luika comprises nine deposits in the south of Tanzania.

Two of these, Bauhinia Creek and Luika, are the current source of the ore being processed but an exploration programme has already identified additional resources in the nearby prospects.

It was better than expected grades at Bauhinia Creek alongside changes to the mine operations and plant feed grade that boosted production above forecasts in 2015.

The pit at Bauhinia Creek has a remaining life of around two years, after which it will be replaced by underground mining.

High-grade ores from the underground mine will be mixed with lower grade ores from open pits.

Annual production will average 84k oz at a sustaining cost of US$695/oz from 2016-2020 using base case numbers.

By mid-2017 around 70% of gold will be mined underground. Total costs of the development have been put at US$38.4mln.

Probable reserves at both surface and underground are 2.65Mt at 5.9 grams per tonne (g/t) gold or 506,000 oz.

Not all of the potential is reflected in stated reserves, however.

The Elizabeth Hill prospect, for example, has an indicated resource of 116,000 oz not included yet in the mine plan.

The current estimate of the Total resources that sit outside of the plan was 514,000 oz in September 2015.

Power station financing secured with Tanzanian bank

In March, the miner said it had agreed a US$9.1mln financing package with a Tanzania bank to build a 7.5 megawatt (Mw) power station at New Luika, which it said would cut costs of supplying energy significantly.

Demand at the mine is forecast to more than double to around 6Mw during development and operation of the underground mine.

The plant's arrival in the first quarter of 2017 is timed to start with underground production in the second quarter that year and provides a longer term power facility to cater for an extended mine life as additional resources are brought into the mine plan.

What's the company worth?

Shanta generated cash of US$34.9mln during the 2015 year, with net debt of US$41.1mln at the end.

The good cashflow has continued with the amounted generated from its mining operations in the three months to June rising to US$13.1mln.

Cash at the end of the quarter was US$30.5mln (US$16.3mln). Net debt was US$44.5mln.

Shanta has been one of the few current miners that has sold its production forward,

Toby Bradbury, chief executive, said development of the underground is the major focus for 2016, but it will also continue to explore in the surrounding area.

Away from New Luika, Shanta has three prospecting licences at Singida, also in Tanzania, which is likely to be where Shanta re-focuses once the underground work at New Luika has been completed.

There are other exploration licences in Tanzania, but they are at an even earlier stage of development.

With just one mine in operation, it currently essentially comes down an assessment of costs, future production and potential cash flow from New Luika.

Financing takes out a chunk of risk says brokers

A reboot of its finances has left Shanta well funded to shift production underground at New Luika, says Peel Hunt.

In April, the gold miner raised US$10.5m through a placing, a US$5.25m silver stream deal and paid off US$10mln worth of convertible loans. A open offer raised a further £176,000.

As a result, Peel Hunt has re-calculated its estimate of net asset value to 8.2p (8.8p), though this becomes 10.3p at current spot gold prices of $1,250/oz.

“The added cash headroom comes from having reduced the peak net debt by US$9m-10m. This significantly de-risks the balance sheet through this key investment phase.

“With the gold price sustaining at a higher level than we conservatively forecast, the cash headroom is likely to be even higher than expected, which in itself should create an opportunity for the group to add value.” 

Another broker, finncap, has a target price of 12p.

Like Peel Hunt, it said the financing, critically, removed the risk of having to repay the US$25m convertible loan note in April 2017.

The operational improvements at New Luika were also highlighted by finncap., with some  66% of the 81,873 ounces of gold recovered in 2015 coming in the second half.

“New Luika is now operating at nameplate capacity, and work has started on the transition to underground mining from 2017 onwards.”

 ‘Buy’ is its recommendation with the miner expected to become strongly cash positive (US$14.4mln, US$27.5mln) in 2017-2018.

 

--updates for latest production update in July 2016 --

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