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Shanta Gold starts to adjust to changing backdrop in Tanzania

New Luika comprises nine deposits in the south of Tanzania
picture of gold mine
Underground mining will be the future

Shanta Gold PLC (LON:SHG) has started to adjust to recent changes to the finance and mining laws in Tanzania and continues to make good progress at its New Luika mine.

Eric Zurrin, formerly chief financial officer, has taken over as chief executive and the focus going forward will be on cost control.

Toby Bradbury, chief executive for the past two and half years, stepped down in August.

READ: Shanta Gold set for transformation as it unveils acquisition, fundraiser and debt deal

Regulatory overhaul in Tanzania puts miners on back foot

Shanta operates the New Luika gold mine in Tanzania, where the government recently passed laws giving it the power to renegotiate contracts, demanded more local ownership, upped royalty payments and imposed a 1% clearing charge on mineral shipments out of the country.

Shanta expects that its next gold shipment will see royalty rates increase to 6% from 4% in addition to the clearing charge.

Production not affected

The changes have not affected production. The miner produced 40,073 ounces (oz) of gold in the first half of 2017 at an all-in sustaining cost of US$755/oz.

Production in July has been maintained at those levels, Shanta said, and it remains on track to meet full year guidance of 80,000-85,000 oz at sustainable costs of US$800-US$850/oz.

In the six months, the firm sold 41,234 ounces of the yellow metal an average price of US$1,257 per ounce, compared to average spot price of US$1,239 per ounce.

Revenue for the first half came in at US$52.7mln (2016: US$55.7 mln).

The loss before tax narrowed to US$649,000 versus a loss of around US$3mln in the same period last year.

The firm has cash of US$13.8mln and  forward sales agreed for July to December this year, of 37,000 ounces at an average price of US$1,278 per ounce.

Helio acquisition off the table

The Tanzania uncertainty has come at time when Shanta was poised for a major expansion drive.

Shanta has already started to ramp-up production from a new underground section at New Luika.

In June, it unveiled a series of transactions that seemed set to transform the long term future.

READ: Shanta Gold chief executive steps down in management reshuffle

This included the acquisition of Vancouver-based Helio Resource Corp  (which owns a huge tract of land next to New Luika) for US$5.6mln; a US$14mln fund raise and a debt restructuring deal to boost its facility to US$50mln.

That Helio deal has now been terminated as a result of the legal changes.

What the broker says

John Meyer, analyst at SP Angel, has reassessed his view on Shanta following the upheaval in Tanzania and chopped his price target to 4.1p from 12.2p.

Some US$52mln has come off estimated asset value due to the mining legislation changes and reluctance of local authorities to honour previous obligations, such as VAT refunds, which S&P suggests are now a sunk cost.

Higher royalty payments on gold shipments and an additional 1% clearing fee will also push sustainable costs up to an average $827/oz from $791/oz.

Even so, Meyer adds that New Luika and Singida are both high quality assets that offer potential to deliver high grade tonnages and extend the current life of mine.

'Hold' is his recommendation. Shares on 1 September were 4p valuing the company at £16mln.

--updates for broker comment --

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