In recent months it’s been a bit of a bumpy ride for investors in Shanta Gold Limited (LON:SHG), as political rumblings in Tanzania have taken the shine off an otherwise admirable gold mining growth story.
Shanta’s on track to produce around 80,000 ounces of gold this year from its New Luika gold mine, including new underground workings, and might even have gone higher if the company had felt confident enough to initiate trial mining at Singida, potentially an even bigger project than New Luika.
But although plenty of work at Singida will happen in the coming twelve months, early production is on hold until there’s a bit more clarity about the new business environment in Tanzania.
In terms of African mining, Tanzania is a relative latecomer. Mining there was only really opened up to the global economy in the 1990s, and after a generation or so it’s now undergoing a deep review of approaches to the sector.
Major operator Acacia Mining (LON:ACA) has been hit with a billion dollar tax bill, Petra Diamonds (LON:PDL) has had diamond shipments held up and the word corruption has been bandied around by politicians a fair bit.
There’s also been a general hike in the royalty rates on gold production, which is likely to cost Shanta in the region of an extra US$3 mln per annum.
But Shanta has met that news head on with the robust declaration that it will in turn find US$5 mln per annum in cost savings in order keep the profit and loss account looking healthy.
And chief executive Eric Zurrin is sanguine when pressed on how it feels to be operating in a country which is currently out of favour with investors.
“The important thing is to recognise that the operations are sound and robust,” he says. “We must focus on running the business and how we sustain ourselves through the trough of the political cycle.”
It looks bad now for all companies operating in Tanzania, but investors with long memories will remember the damage done to the Zambian mining industry by government intervention in the 1970s. This is nothing like that. This is nothing, even, like the complex set of variables which pertains in South Africa.
Rather, it’s simply a national government asserting itself on the issue of just who exactly it is who is in control of the natural resources in the ground.
After all, there’s more than one type of risk, as Zurrin himself points out.
“A year ago, investors in Shanta faced the risks associated with us taking our operations underground,” he says.
And that risk has now been almost completely ameliorated.
“Here we are in September 2017 with four and a half kilometres of underground development completed and we are ramping up production. We have four shafts and two declines. We are producing at the planned grades and there has only been one lost time injury since mining started.”
The picture is clear: this is a company that knows how to get the job done in Tanzania. There is gold coming out of the ground, cash coming in, extensive social and outreach programmes in place and skilled jobs for 188 locals.
The company’s debt is likely to drop by more than US$20 mln over the next couple of years, such that the discussion will turn to one about optimal levels of gearing rather than repayment schedules.
All told, this is a company that’s set fair. There’s even a US$15 mln VAT repayment due to come in from the government, the same government that’s causing such ructions for the likes of Petra and Acacia.
Will sentiment get worse before it gets better? Probably. But Shanta is now a company with a valuation of less than three times earnings, with a strong track record and a good operating outlook.
It looks likely that some form of partnership deal will be done on Singida, but that won’t be the crux of any forthcoming re-rating.
The company’s shares are slightly off their August lows, but a full-blown recovery based on fundamentals is likely to be gradual rather than sudden. Still, there’s a strong probability though that the upside from here will be considerable as the political risk slowly dissipates over time.