Shanta Gold: Don't let scale fool you, New Luika will be a ‘cash machine’

Small is beautiful. Just ask Gareth Taylor, the chief operating officer of Shanta Gold (LON:SHG).

His is a company that makes a mockery of the cost and capex models of some of the big gorillas of the industry.

Its strategy is to pick off fairly narrow, steeply dipping quartz vein deposits that the big boys ignore on principle because they are just too small to mine economically if you carry the sort of overhead of a Newmont, Newcrest or African Barrick Gold.

Shanta’s New Luika mine in Tanzania is a case in point. Where say ABG’s costs might be in the order of US$1,000 an ounce to get the precious metal out of the ground, the AIM-listed junior expects to be able to do this for as little as US$560 an ounce, or US$610 at worst.

And its capex costs of US$29.4 million are piffling in comparison with the amount a major would have to sink into infrastructure, plant and machinery.

However don’t let the small scale of New Luika fool you. When the plant is fully commissioned in December this year it will very quickly become a cash machine.

In the first three years, production is expected to be 175,000 ounces to 190,000 ounces. 

The maths is very simple given the cost structure outlined.

New Luika will pay for itself within the first year, and there will be enough there to bankroll a second mine at Singida, also in Tanzania, where there are almost 1.4 million tonnes of ore at 4.97 grams per tonne of gold.

The feasibility study for Singida is due for release any day now, and when this plant is up and running in 2013 the group could be producing as much as 100,000 ounces of gold a year.

What Shanta plans to do is roll these US$30 million mines and processing facilities out almost like a franchise model, or where it is practical truck in ore to existing production facilities.

“Our aim is to build three or four through more successful exploration,” Taylor reveals. 

“At the moment all we can promise is New Luika and next at Singida. But hopefully we can build on after that. 

“When we build Singida we will be at 100,000 ounces (of gold a year). 

“Hopefully we will be successful with our Great Basin Gold joint venture ground. 

"This is blue sky thinking, but if we could replicate another two mines that would put us in the 200,000 ounces a year range.”

In all, the company has a not-too-shabby resource base of almost 2.5 million ounces. 

It is spread across the inferred, indicated and measured categories at New Luika, Singida and third project Mgusu. New Luika has 1.2 million ounces over eight ore-bodies.  

New Luika and Mgusu are on a very tight area of approximately 15 square kilometres. Singida is over 30 square kilometres.

The exploration potential comes via a joint venture programme with Great Basin Gold, which has 3,800 square kilometers of land, in the Lupa gold camp, around Shanta’s New Luika project. 

The map of the area is peppered like a dart-board with tiny dots denoting the sites of former colonial and artisanal mines.

The JV with GBG will be 80 per cent owned by Shanta, which is handing over US$7 million in shares and the same figure again in warrants. 

In the next three years, Shanta have committed to spending US$12 million indentifying the next generation of potential mines.

At the moment investors appear to be holding back to see whether Shanta can bring New Luika into production on schedule.

And it is a case of so far, so good, according to Taylor who confirms there has been little deviation from the time-table outlined on July 11 when it came to the market for the £15.1 million it required to complete New Luika project.

All the major pieces of equipment, including generators and mills, are on order and scheduled for delivery soon. 

The mine will be contractor-run and is currently slated to produce for 11-years. 

And while the costs at the back end of the schedule appear to rise precipitously, Taylor expects them to come down as the process of infill drilling proves up gold grades of the various ore bodies.

Tanzania is a politically stable place to do business, says Taylor who lives in the capital Dar es Salaam and has been living and working in Tanzania for the last 7 years.

The next elections are four and a half years away, and while the Shanta chief operating officer expects a robust challenge to the ruling party in the next election, he predicts the process will be peaceful and civilised.

While not the easiest backdrop for the business of mining, it is far from the worst particularly for the Shanta board, and its senior managers who have a great deal of experience working in Africa.

However, the one thing you must have is what Taylor describes as a “social licence” to operate in Tanzania.

This means having a plan of engagement with the local population. Shanta does, but aside from ensuring cleans sources of water for the local villagers, there won’t be any handouts.

Yes funds, and significant funds at that, will be ploughed back into the local community and wider district.

But this will be done via programmes supported by the government and villagers.

The idea, Taylor says, is to leave a lasting legacy, a trust type fund or similar mechanism that will be there long after Shanta has upped sticks.

The net present value of New Luika is around US$66 million. You combine that with funds raised during the recent cash call and it adds up to the company’s current market capitalisation. 

So there is no value ascribed in there for Singida, or the other projects that might come on stream and push Shanta towards Taylor’s notional, blue-sky, 200,000 ounce a year goal.

And actually if you examine the company generated NPV, you realise it was calculated at US$1,200 gold. At the current US$1,600 an ounce, the project is worth closer US$100 million, a back of the envelope calculation reveals.

“I don’t think the market has really spotted our potential,” Taylor says.  “All we can do is carry on as we are now and in time it will."