It looks like it will only be a matter of a few short months now before Shanta Gold Limited (AIM:SHG, OTC:SAAGF) is restored to its rightful place amongst the 100,000 ounce producers.
The flagship New Luika mine in Tanzania, which under the original plan ought to have been mined out by now, is the gift that keeps on giving. Operations there moved underground a few years ago, and as the equipment has aged and the easy ore has all been extracted, there has been the occasional glitch.
Nevertheless, New Luika looks like it should continue to produce of the order of just under 70,000 ounces of gold for a good few years yet, with the current official life running out to 2028.
So, with gold bumping around the US$1.900 mark, it’s a great cornerstone asset for any company to have under its belt.
The step change, though, will come from Singida, also in Tanzania, which will start to produce significant amounts of gold within a matter of weeks.
A smaller project overall, but newer and likely to be more efficient, Singida looks set to add between 32,000 and 37,000 ounces of gold per year to Shanta’s production profile. Singida has taken a while to get up and running, in part because no equity funding has gone into it.
Debt and cashflow from New Luika have financed these additional production ounces, and given the strength of the gold price, that debt looks like it could be gone by the year end.
Indeed, on current models, broker Liberum has Shanta closing out the current year with US$1mln in net cash overall, rising to US$29mln the following year, on sales of US$151mln for 2023 and US$181mln for 2024.
As to the accuracy of those forecasts, a great deal will depend on how the gold price moves around over the next 24 months, but with the recent run towards US$2,000, all the signs are that it’s going to be high enough to keep Shanta’s margins chugging right along.
Liberum reckons that underlying earnings will hit US$60mln in 2024, and that profits before tax will be US$38mln.
So, all in all, a business with a good financial platform on which to base further growth.
Where will this growth come from?
One answer is that in time, production from Singida might go up to as much as 50,000 ounces.
But the longer-term and more significant answer is: from north of the Tanzanian border, in Kenya.
It’s not altogether new territory, though, as Shanta’s chief executive Eric Zurrin explains.
The famous Lake Victoria Goldfields district, he says, straddles the Tanzania-Kenya border, so that while New Luika, Singida and a few other famous mines owned by well-known industry players sit south of that old colonial demarcation line, Shanta’s big exploration project, West Kenya is located just to the north.
And by some measures, West Kenya is up there with the best gold exploration projects anywhere in the world.
How big will it eventually get? That remains to be seen, though there has been some informal talk around the market that it will eventually go as high as three-to-five million ounces. That’s impressive enough, and enough to put Shanta onto the radars of many a larger player in gold, from outsized mid-tiers right up to the majors.
What’s really significant, though, isn’t the potential overall size – it’s the grade.
“We acquired West Kenya a little over two years ago with 1.2mln ounces of gold inferred,” says Zurrin.
“Since then we’ve grown the resource to 1.7mln ounces, and the indicated portion is 720,000 ounces at 11.45 grams per tonne. We’re very pleased with how that’s gone.”
In recent months, though, the focus has to a degree been on getting Singida up and running. But with first gold now looming there, the spotlight can well and truly be turned back on West Kenya.
It’s a big project, but remember that this is a company that looks set to generate around US$50mln per year in cashflow from operations. It can afford to earmark a fairly substantial budget to moving West Kenya right along now, even after its paid out the now well-established dividend.
This January, says Zurrin, was the best in terms of production numbers the company’s had in three years.
So, you get the sense that Shanta is just about to start firing on all cylinders. As it stands, the company’s shares are trading at just over half the level they were at two years ago, when gold was more than US$200 lower, and Shanta’s production was lower too.
Is there a re-rating looming? You wouldn’t bet against it.