The price of gold has hit an all-time high in British pounds as a new wave of banking crises has shaken markets already weakened by inflationary pressures, supply chain chaos and the uncertainties of the Ukraine crisis.
At over £1,600 an ounce, we’re in completely new territory, and while the US dollar price hasn’t quite hit its own records yet, it’s just a whisker away.
So these are unprecedented times for gold.
But how can you really make money from a high gold price?
While physical gold rises and falls with the markets, it is the prospectors themselves who ultimately make the big bucks in a gold bull run.
Bright money: Physical gold naturally rises and falls with the markets, but it is the prospectors themselves who ultimately make the big bucks in a gold bull run
That’s because they mine the stuff and sell it on a fixed cost basis.
So when the price goes up, the margins expand and, because of the nature of the margins, they grow exponentially faster.
In a mining bull market, returns on capital are invariably better in gold stocks than in physical gold.
But you need to pick and choose your gold mining company carefully.
Preferably it will be one with a track record of production, maybe that’s unloved lately, but that also has a huge advantage both operationally and in terms of exploration.
A company that fits this bill is Shanta goldwhich has optionality everywhere.
It should only be a matter of months as Shanta’s production returns to 100,000 ounces per year.
The flagship, the New Luika mine in Tanzania, long overdue for mining under the original plan, is the gift that keeps on giving.
The new Liika should continue to produce in the order of just under 70,000 ounces of gold for a few more years, with the current official lifespan ending in 2028.
That’s a cornerstone sturdy enough to build a prospector around.
However, the incremental change will come from Singida, also in Tanzania, which will start producing significant amounts of gold within weeks.
Generally a smaller project, but newer and probably more efficient, Singida appears to be adding between 32,000 and 37,000 ounces of gold per year.
It took some time for Singida to get off the ground, in part because no equity was invested in it.
Instead, debt and cash flow from New Luika have funded these additional production ounces.
But given the strength of the gold price, the debt seems to be gone by the end of the year.
Indeed, on current models, broker Liberum has Shanta close the current year with a total of US$1 million in net cash, rising to $29 million the following year, on revenues of $151 million for 2023 and $181 million for 2024.
As far as the accuracy of those predictions goes, a lot will depend on how the gold price develops over the next 24 months, but with its recent run towards $2,000, all signs are that it will be high enough to knock Shanta’s margins. right along.
Liberum estimates underlying earnings to be $60 million by 2024 and pre-tax earnings to be $38 million.
Over time, Singida production can reach as high as 50,000 ounces.
But the longer-term growth within the company will come from north of the Tanzanian border, in Kenya.
However, this is not exactly new territory.
The famous Lake Victoria Goldfields district straddles the Tanzania-Kenya border, so that while New Luika, Singida and a few other famous mines lie south of the old colonial demarcation line, Shanta’s major exploration project, Western Kenya lies just to the north .
By some standards, Western Kenya ranks at the top with the best gold exploration projects in the world.
How big will it eventually be? There is some casual talk in the market that it will eventually go up to three to five million ounces.
That’s enough to put Shanta on the radar of many a major player in gold, from outsized middle class players all the way up to the majors.
However, what really matters is not the potential overall size, but the figure. Kenya quality is excellent by industry standards, keeping costs low and profits high.
In recent months, however, the focus has been to some extent on Singida’s startup. But now that the first gold is looming there, the spotlight can be turned back on Western Kenya.
It’s a big project, but this is a company that seems to be generating about $50 million a year in operating cash flow.
It can afford to set aside a fairly substantial budget to propel Western Kenya, even after the now-established dividend has been paid.
When you add it all up, the rising gold price, established track record, new production and the bright side of exploration, you get the sense that Shanta (12p) is about to fire on all cylinders.
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