A sustained programme of operational and financial improvements at Shanta Gold’s (LON:SHG) New Luika mine in Tanzania is now starting to take effect.
At the beginning of the year all-in sustaining costs per ounce of gold produced was measured at a chunky US$1,450 per ounce.
But as the year has progressed that figure has dropped markedly.
Second quarter costs dropped to just under US$1,160 per ounce, while third quarter costs came in at well below US$700.
It puts Shanta well on track to meet guidance for 2015 overall of between US$850 and US$900 per ounce, and sends a strong signal out that for 2016 costs will be much lower.
Indeed, the company’s base case plan for operations at New Luika, released a couple of weeks ago as part of a wider general update on expansion plans, shows that projected all-in sustaining costs over the next five years are likely to run at US$695 per ounce.
That sort of number provides a huge safety net in terms of the gold price, which is currently hovering at just below the US$1,200 Shanta has used in its modelling.
In that context, the margins on offer on the company’s plan to produce around 84,000 ounces of gold look very attractive.
The underground portion of the mine, which will account for around 310,000 ounces, is likely to deliver a pre-tax internal rate of return of 56%.
Although New Luika looks safely profitable at a far weaker gold price than the one currently prevailing, Shanta’s chief executive Toby Bradbury points out that the attractions on the upside are not to be sniffed at either.
With costs currently pegged lower than larger peers like Acacia (LON:ACA), Randgold (LON:RRS), Centamin (LON:CEY) and Semafo (TSX:SMF), if the gold price were to rise significantly, the leverage at Shanta would be far greater.
“If the gold price goes up,” he says, “the upside is massive.”
In the immediate term though, the focus is on making sure that New Luika can deliver on its expansion plans and move to underground mining in fairly short order.
In theory, Shanta ought to be able to use existing cash flow to cover the US$38.4mln capital required to get the underground mine going.
But Bradbury is leaving nothing to chance.
“It’s very close to self-funding,” he says. “But if it’s going to be self-funding that will be dependent on the gold price.”
With that in mind, it looks prudent to offset some of the risk where possible. The obvious area is vendor finance for the underground mobile equipment and power plant, although as a back-up there’s also a finance facility available from Investec.
The plan is to push ahead relatively rapidly now, with portal development slated for the second quarter of 2016 and first underground production scheduled for the second quarter of 2017.
Under the current plans, the five years at 84,000 ounces will be followed by a final year’s production at a lower rate, but come the early part of the next decade there’s every likelihood that Shanta will be thinking about prolonging that life as new ounces are brought into the reserve category.
Already there’s 514,000 ounces indicated and inferred in the near neighbourhood.
“We believe we can increase the reserves and bring these ounces into the mine plan,” says Bradbury.
“Exploration is the real value-add.”
Down the line, there’s also the company’s second asset, Singida, where work to relocate 12 families is ongoing.
That process is running smoothly, but until it’s complete the real focus is likely to remain on New Luika.
Watch this space.