Shanta Gold* (SHG LN) 31.5p, mkt cap £57m - Company breaks ground at the New Luika Gold Mine

BUY - Target price 71p

Please see here the link to view Shanta Gold's new presentation.

• New Luika Gold Mine (Chunya): Shanta Gold has broken ground at the New Luika Gold Mine in Tanzania. Clearance has started and the site is now being prepared for mining and for construction of the new gold processing plant.
• We expect the new Luika Gold Mine to ramp up production through Q4 2011 towards 75t per hour. We expect the plant to expand further to a throughput of around 100tpa in time.
• The mine plan includes reserves from the 643,000oz resource grading 2.39g/t. The new capital cost estimate for the expanded mine is $30m up from £23m and gives an NPV of $57m at a 13% discount rate and a gold price of $1,400/oz.
• Gold production could rise to around 40,000ozpa from the 28,000ozpa forecast in last year's scoping study.
• Cash costs forecasts for $649/oz should come down with the additional throughput but higher power costs will offset some of the benefit.
• Resources: Shanta's resource statement shows the company has a total of 2.2moz of gold in the measured, indicated and inferred categories including 858,485oz at Singida, 642,716oz at Chunya both at a very mineable 1g/t cut-off grade and 741,000oz at Mgusu at a 0g/t cut-off. We expect the resource to rise to >2moz at Singida and Chunya this year and for the total resource to potentially rise to >3moz next year.
• Exploration: the discovery cost of gold resources within the Chunya license area is around $8-10/oz. Shanta's team of 'well respected' geologists now understand the structure and geological controls of the historic Lupa Goldfields and are confident of identifying further resources for similar discovery cost. Management intend to maximise their exploration advantage within the Lupa gold fields through the acquisition of further licenses in the area.
• The known strike length of gold resources within the Chunya license are has doubled in the above presentation to 6km from 3km bringing the number of orebodies within the resource area to 7 from 5 within the 3km long area.
• This leads us to expect a significant upgrade to the resource at this site, eg >1moz. This should also enable the mine to raise its production rate to >40,000ozpa and to potentially raise the gold grades to be mined.
• Singida: Feasibility study on track for completion in June. The mine is forecast to produce some 54,000ozpa from 480,000tpa throughput but the feasibility may change this early estimate. Capital costs are estimated at $75m in the pre-feasibility work. Singida hosts relatively high grade ore at an average of 4.97g/t.
• Mgusu (near Lake Vicotria): Shanta may gain access to this valuable prospect. Artisanal miners have been on site for some 23 years but fatalities last year caused by heavy rains appears to be forcing government and the local administration to take action. Shanta are proposing a working arrangement with the local artisanal miners to create a safer working environment and allow Shanta access to work the prospect using Western techniques.
• Songea (Uranium prospect): a uranium expert is reviewing the potential for the Songea prospect. Uranium stocks were sold heavily last week on news of the Japanese nuclear crisis and potential delays and early closure of nuclear facilities around the world.
• Power supply: The Tanzanian government has publically stated that it wishes to restrict power to mining companies. This is more political posturing and may benefit Shanta in the longer term but for now Shanta must assume that it needs to self generate power at its mine sites.
• Risks: Logistics delays through the port of Dar es Salaam and bad weather are the two key risks to the New Luika project starting in Q4 this year. Forex, SA rand rates have strengthened to around SAr7/US$ from SAr7.5/US$ raising the cost of plant, equipment and construction much of which is contracted from South Africa. Dilution; geologically the orebody is quite well controlled and mining dilution should be kept to a minimum as a result.
• We are hosting an investor lunch for Shanta Gold today at Fairfax. Please contact us if you would like to attend?

Conclusion: Shanta Gold looks good value on our peer group valuation matrix below. The average EV per resource ounce is valued below at around $159/oz with Shanta valued at just $63/oz. We feel that Shanta Gold remains substantially undervalued and that its proximity to gold production in Q4 this year and to the release of an increased resource at Chunya should see a rerating of the stock towards our target price valuation of 71p/s.

* Fairfax IS plc acts a nomad and broker to Shanta Gold

PEER GROUP TABLE (African miners / explorers)

Source: Company information, Bloomberg financials priced as of 3^rd March

15/03/11

Shanta Gold* (SHG LN) 28p, mkt cap £52m - new data to assist resource remodelling and mine design

BUY - Target price 71p

• Shanta Gold have updated the market on the design and progress of the Chunya, New Luika gold mine.
• The statement shows that drilling has 'successfully intersected mineralised structures in the vast majority of RC holes drilled.' This leads us to expect a significant upgrade in the gold resource at Chunya and the statement goes on to say that "newly tested targets suggest significant potential to upgrade the currently published Chunya Resource."
• The data also shows extensions to four of the known mineralised targets and also added detail to four more target areas. This is good news for future resource potential and indicates that the New Luika gold mine is going should continue to grow in scale beyond current market expectations.
• The update explains that the new resource statement has been delayed due to technical details in lining up the various drill holes and pit designs undertaken on the project. Eg the error adjustment to the GPS coordinates used for the new data.
• The work covers the results from 10,000m of RC drilling and samples from 196 surface trenches. With that many trenches the site must look like a mining camp already!
• Despite the delay, management are pressing ahead with preparation of the mine site with mobilisation of the mining fleet within the next two weeks.

Conclusion: The announcement indicates to us that the resource should see some upgrade and that the scale of the mining operation may also be enlarged as the "information currently available will impact positively on the resource remodelling process and the design of the pre-strip and mining scheduling."

* Fairfax IS plc acts a nomad and broker to Shanta Gold

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