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Shanta Gold to hit top end production this year

Published: 11:23 27 Jul 2016 BST

Cashflow from gold production has increased
The New Luika open pit

More good numbers from Shanta Gold Limited (LON:SHG) earlier this month as the company released quarterly results from its New Luika gold mine in Tanzania.

Total gold produced in the three months to 30 June amounted to 23,896 ounces, down slightly on the 24,341 ounces produced in the previous quarter, but produced at a lower cash cost.

More significantly, cash generated from operations jumped quarter-on-quarter from US$2.8 mln to US$13.1 mln.

All of which keeps the company well on track to meet its full year guidance of between 82,000 and 87,000 of gold.

Indeed, according to chief executive Toby Bradbury, the company now looks likely to come in “at the top end of guidance.”

Investors will be equally as encouraged to know that while gold production is likely to be up on last year’s numbers to a new annual mine record, the estimate for all-in sustaining costs has been further cut, to somewhere within the range of US$730 and US$780 per ounce.

In the current economic environment the gold price has been holding firmly at above US$1,300 and looks unlikely to weaken any time soon, so margins will be substantial, even if the picture is slightly complicated by a moveable hedge.

More to the point, costs are likely to fall still further once the company completes its ongoing transition from open-cast to underground miner. That’s a process that’s now underway, after tunnelling started in June.

“We anticipate first underground ore production in the second quarter of next year,” says Bradbury. “And lower costs will come through once we get into the higher grade underground.”

In the meantime, the cash generation continues and is helping significantly with the ongoing plan to fund the capital program and reduce debt.

“We’re punching above our weight in terms of cash generation,” says Bradbury, “and we’re now paying down our debt.”

He hastens to emphasise that this debt is “all legacy debt” and that the development work at New Luika is being paid for by ongoing operations.

“Our cash flows are very robust in terms of delivering on our capital commitments,” he says.

He also emphasises that although the markets remain open to fund junior miners at the moment, Shanta has no intention or requirement to issue any more equity to cover off the rest of the debt, which currently stands at around US$44.5 mln.

The existing notes are convertible, but at a 28p price – maintained deliberately high at the last restructuring to ensure that existing shareholders won’t get overwhelmed if conversion does occur.

“As a quid pro quo, we paid a higher premium,” adds Bradbury, but even so, with the debt now falling, the company’s overall interest bill is lower.

So exactly how the financial future of the Shanta unfolds now depends largely on the price of gold.

“Our business plan was based on US$1,150 gold,” says Bradbury. “We’ve mitigated the risk by forward selling some of our production and in the last quarter we were actually able to sell gold at a higher price than the spot price.”

Peel Hunt expects sales of US$98.4 mln this year, based on a gold price of US$1,190 per ounce. For 2017 the broker then expects sales to come in at US$100.5 mln, generating profits of US$8.5 mln. But of course if the gold price stays significantly higher than the one used in Peel Hunt’s modelling, and for a decent amount of time, then those numbers could be improved upon substantially.

It’s noteworthy that Shanta’s current 7.88p share price is now just a whisker away from the 8p target set by Peel Hunt earlier in the year, although on the back of the strong recent performace Peel Hunt has now boosted its target to 9p. The next stop will be the 12p target set by Finncap.

 

 

 

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on 10/8/23