Enjoy this free share recommendation on Hummingbird Resources extracted from the latest edition of the premium Trendwatch newsletter…
Hummingbird Resources is one of those mining companies whose revenue is set to leap from zero to over $100 million as it opens a new mine.
For more than 250 years, the Betts family has been involved in gold smelting and refining in Birmingham. Ten years ago, Dan Betts, then aged 31, took the bold decision to diversify into mining the stuff. Hummingbird Resources is his baby.
Hummingbird is a West African gold explorer and developer which listed on AIM in December 2010. Since the IPO, the company has significantly grown its resource estimate from an initial 0.8m ounces to 4.2m ounces of gold at its Dugbe Gold Project in Liberia, West Africa. With the acquisition of Gold Fields’ gold assets in Mali, Hummingbird is now a multi-project, near-term producer with a 6m ounce gold resource and around 4,000 sq km of exploration area.
Pivotal to the present investment case is the purchase, development and production of the Yanfolila Gold Project in Mali. The mighty Gold Fields’ decision to accept Hummingbird shares as consideration for the acquisition underlines the potential of the project, and of its portfolio in Liberia and their confidence in Hummingbird’s ability to bring projects into production.
The Yanfolila Gold Project provides Hummingbird with a fast, simple and low cost route to production, and the company expects to commence gold production this very year at an initial rate of 130,000 ounces in year one. The project has excellent grade with low capital expenditure and operating expenses, and has been acquired at an attractive valuation of $11 per ounce of resource.
But looking beyond this, Hummingbird’s flagship project Dugbe remains a key focus. The company published a positive preliminary economic assessment in April 2013 and is currently progressing its detailed feasibility study. Dugbe was the first mining project in Liberia to secure investment from the IFC, a member of the World Bank Group.
In the short-term, it’s now focused on the Definitive Feasibility Study, completed in January 2016 and the Optimised Mine Plan, completed in February 2016, which reinforced the promising economics of the project: an average 107,000 ounces per year (an increase of 60% on the previous estimate); an internal rate of return of 60% (at an assumed gold price of $1,250 an ounce), and an all-in sustaining cost (“AISC”) of under $700 per ounce… all of which were significant improvements on previous expectations.
With the improvements in project economics and planning, the company set out to fully fund the project. It achieved this through new equity funding of $76m, completed in 2016, followed by mandating the then-bank Taurus to provide a $45m debt facility, plus an undrawn $10m cost overrun facility in December 2016. Post the year end, the company replaced the Taurus facility with Coris Bank International. So to all intents and purposes the finances are fully in place to allow production to commence this year.
In Liberia, where the Dugbe project is located, a hydro power prefeasibility study has been completed. Hummingbird is continuing to evaluate the best ways to develop the asset into a mine.
Here are the forecasts:
|Pre-tax profit £m||3.43||47.87|
|Earnings per share p||0.65||7.06|
The forward price:earning ratio for next year for Hummingbird Resource is only 3.8. What’s not to like?
The prospects for the gold price is perhaps the first thing we should look at. Is it set to move up or down. We can’t answer that, of course. But the current price is almost identical to that quoted above in the Optimised Mine Plan. Some might say that President Trump may be just the man to get gold moving upwards, as he leaves a trail of instability in his wake.
And you can’t ignore the political risk. Mali has endured a civil war for well over a decade, and you don’t have to have many grey hairs to remember that marked disagreements between powerful (not to say armed) sectors of Liberian society engaged in unpleasant quarrels. However good the relations may be between mining companies and the political leaders of the countries in which they operate (which is the case here), you cannot discount the political aspects when considering the investment case.
A separate but perhaps related point comes from the melancholy fact that although we have engaged with the sector with great success in the past, the fact remains that we have presented cases such as that of Hummingbird Resources on many occasions, enterprises standing at the threshold of figures to die for; but all too often, the dying is done by the investment case.
To be fair, despite his delight being on the cusp of actual earnings, the chairman himself has waved an admonitory finger at anyone underestimating the prospect of a slip ‘twixt cup and lip.
On the other hand, there’s no reason to doubt the sincerity of the company’s management, the degree to which it has been endorsed by the said Gold Fields deal, or to cast doubt on any of the figures presented. The portfolio can afford the risk.
Our resolve is stiffened by the degree to which the short-term prospects are backed by these alien half-hidden French words on the Royal coat of arms: honi soit qui Mali pense!
BUY HUMMINGBIRD RESOURCES (26.75p; yield: nil; market capitalisation: £93 million; initial stop-loss: 22p; EPIC: HUM; sector: Mining; classification: AIM; website: www.hummingbirdresources.co.uk; tel: 020 3416 3560).
We hope you enjoyed this this free share recommendation extracted from the latest edition of the premium Trendwatch newsletter…