Shanta – time to call it quits?

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Shares in AIM listed Tanzania gold miner Shanta Gold (LSE:SHG) have not covered me in glory. It has not been a disastrous share tip but it would be a lie to say that the stock has flown. I did have hopes of lift off as the shares reached 24p in January but today they sit at 18.375p, a stock becalmed in a sector unloved. Does that mean that it is time to call it quits?

Steve Moore and I first recommended these shares at 21.5p in July 2011 back in our days on t1ps.com and the journey since has been far from smooth. My first post tips analysis was still a bullish one and much of what I said then still stands today – you can see that analysis here.

Admittedly the company legged private investors over with a ramp followed by an institutional placing in the Autumn (see here). That left a bad taste in the mouth but none the less the shares were not ones to sell – the fundamentals still stacked up.

The latest update came on 14th January when Shanta reported Q4 2012 production of 5,748 ounces of gold, with a further 1,917 ounces absorbed on carbon which has since been converted to dore. It noted that the performance reflected “very poor plant availability and low volumes of tonnes milled” as the initial crushing circuit did not have the capacity to handle the run of mine ore. However, an upgrade in early January, as well as a removal of other plant bottlenecks, saw the company expecting a continued increase in plant throughput and believing it has “a sound base to meet the 2013 production target of 70,000oz+” from its New Luika mine.

I also noted in January that a member of the vast Red Kite group of funds (also involved with EMED) had acquired a 5.2% interest in Shanta and that, on a value basis, I could see why.

The company has a number of assets but its core value is in New Luika in Tanzania which the company has stated will produce 70,000 oz this year and has an 8-10 year life of mine. With a cash cost of $560-610 we might humour the gold bears and assume an average 2013 gold price of just $1600 and this mine will still throw off almost £40 million of free cashflow. It should do the same again in 2015 and 2016 and £25 million a year thereafter. I suspect that drilling around the core pit will result in production guidance from 2017 actually being lifted and also the LOM being extended.

Shanta has other less developed assets which add to the upside and you can add £4 million a year to free cashflow for every $100 on the gold price above $1600. With a market cap of £85 million it is thus trading on just over twice annualised 2013 cashflows with all the Non New Luika assets valued at nothing. As such Shanta remains a very cheap stock. My target price remains 39p.

 Tom Winnifrith writes for 10 US and UK websites and you can get links to all his free to access comments by following him on twitter @tomwinnifrith or by checking out his own blog www.TomWinnifrith.com

Steve Moore, bear raider Lucian Miers and Tom Winnifrith combine to produce the premium Nifty Fifty which is where all their best ideas go first. For more details of that product – for serious investors only – go HERE

 

 

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