Shanta Gold (SHG) – Multiple Catalysts, Multiple Risks, Low Valuation

Opened a very small, c1.2% portfolio weight position in Shanta Gold.

Q3 hedge fund letters, conference, scoops etc

Shanta is a London-listed Tanzanian small cap production company. It has a 33m GBP market cap and is trading at a forward PE of around 2.6 / historic of 3.2 or EV/EBITDA of c2. (source).

The company is a standard, small, gold producer.  It has a good cost base – cash cost c $505/oz / all in cost of c$750/oz. There appears to be lots of opportunity in its holdings to expand production. They have just released an RNS valuing their Singida project at c $31m USD at a (highly optimistic) 8% discount rate. They say they will develop it at no cost to existing shareholders – as the company is worth c$44m Equity and c$35m  net debt this is potentially significant – even if we say it’s only worth c $20m.

They are also owed a $17.9 VAT receivable from the Tanzanian government which has been withholding it from many companies.  Their last refund was $3.4m in November 2017. Very significant in light of the market cap. There is no guarantee whatsoever that this will happen any time soon, or will happen at all.

They have also said they will evaluate a dividend policy in January 2019. So we have Singida/ Vat resolution / Dividend as potential catalysts for a rerating.

There are potential risks here. As a small gold miner I am not sure the resources are good, though I think they are. There is always risk here, there is also risk / opportunity associated with the possibility of a lower / higher gold price, though government will no doubt want a greater share should the price of gold rise.

Tanzania’s president may be going the way of Zimbabwe / Venezuela.  A ridiculous, confiscatory claim was made against Acacia, due to supposed corruption. Tax rises and the ability for the government to claim ownership in mines / raising local input/ raising tax has also been introduced (link). Investor confidence is on the floor.

Most of Shanta’s mine/infrastructure seems to be built.  At current production rates / prices net debt is falling very rapidly c $10m the last 9 months /$3m a quarter. There don’t seem to be issues getting capital / gold out of the country.

Shareholder register looks good institutional holders.  Management are not paid too much and will only make real money if the share price goes up. I saw management at Mello in London, it seemed a decent enough idea at a valuation that is very attractive. Bit concerned they were talking to investors to raise the share price prior to a placing – as it does go on at these sort of events, and to me debt is a bit high, no way to tell definitively though, and the share price hasn’t really risen

Gold miners are new to me but seems a good enough opportunity. It isn’t perfect, very, very high risk but there is decent upside chance here and with a bit of luck even if nothing happens debt can slowly be paid down and a dividend paid. This is a tiny, tiny weight for me so it won’t really hit if it falls.  I need to gain expertise outside my usual stomping grounds of liquidating companies / trusts and the only way to do it is to explore things like this.  Not sure I would follow me in here, but it seems to me there are a few opportunities for good news / rerating. Criticism / comment of my ideas is welcomed – I am very new to investing in miners so any primers on what to look for is appreciated.

I would like to do what a number of other investors do on stuff like this and build a basket maybe of 2/3 more stocks on an undervalued, producing miner theme, any ideas ?

Article by Deep Value Investments


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