Shanta Gold: Lessons Learnt

Here’s an investing disaster of mine, with a catalogue of errors along the way, which could have ended worse. Hopefully with some lessons learned.

Shanta Gold (LON:SHG) is a junior gold miner in Tanzania, and was on the threshold of production. I know, you’re probably cringing already. Given the good prospects, I bought in at 32p in April 20122, and topped up again at 24p in Jan 2012. This was shortly before production was due to start. Around about Feb, if memory serves, there were commissioning problems, and finances were stretched. The company had arranged some debt to tide them over, so everything looked OK despite the problems.

Around about April, someone posted a link to a YouTube vid on quite an experienced mining guy who explained how junior miners on forward PEs of 3 can become forward PEs of 100. Long story short: production delays, overestimations, cost escalations, and heavy dilutions are what do you in. Sufficiently frightened by the contents, and realising the huge risk I was taking, I sold out at 20p. What happened next? Well, of course, over the ensuing months, the price climbed to 34p. It occurred to me that I was the victim of a successful deramp.

I hadn’t been following the story much since April, but when I had a look at earnings estimates awhile ago, I noticed that they were not as good as I thought, and probably were not interesting enough to buy anyway.

I subscribe to ADVFN news, and SHG was on the list, so I received an interesting RNS. SHG said that they would have a placing. They needed to $30m (£18.6m). The initial funding would be by a placing of (up to) 80m shares. The tricky bit is that if they don’t raise enough money (which it now looks like they wont … more about that in a second), they will will seek approvals from shareholders on 15 Nov to issue more shares to make up the funding shortfall.

There are 318.8m shares of SHG in issue, so an extra 80m is obviously significant dilution. The dilution is likely to be greater, though. I see that analysts put EPS earnings at 0.93p for y/e 31-Dec-2013, giving it a forward PE of 22.4. That’s before the issue, though.

Today’s news of the placing has sent the shares down 15% to 17.76p at the time of writing. It seems likely to me that the institutions will want a significant discount even to that price.

To be honest, I don’t see how there’s an investment case in this company – not at anything like current levels, anyway.

“A mine is a hole in the ground with a liar at the top” (Mark Twain)

ADDENDUM:

I did some crude, and admittedly naive calculations on how much I thought SHG might be worth. Very very crude, so feel free to flesh it out to more specifics if you wish. I’m not invested in SHG, so I’m not taking much trouble to do good sums. I’m not going to pour over estimated future production volumes. Notwithstanding that …

Forecast earnings for 2013 for SHG is 0.93pps. Maybe a PE of 5 might be reasonable (PAF – Pan African Resources – is on 8, and that’s a huge outfit). Given shares in issue of about 318m, that makes SHG worth about £15m (0.93*318*5) BEFORE the rights issue. SHG has a current market cap of £67m, so it’s suddenly looking way overvalued. Now, admittedly, that the EPS of SHG will presumably rise in 2014 and beyond, and I’m doing my calcs based on PEs rather than EVs – BUT – given that SHG needs to raise $30m (and some people are estimating ultimately much higher), the shares in SHG look distinctly overvalued, despite the fall of 17% today.

Very risky, and I think that current investors may be anchoring on recent prices, without necessarily realising that the shares might be severely overvalued.

Not trying to deramp, just saying