By Dr. Michael Green
Investors looking for an under-priced opportunity amongst precious metals stock have been re offered an opportunity in Hummingbird Resources. With poor sentiment surrounding gold prices and moribund summer activity setting in we believe the stock is primed for re-rate as detailed HERE in-depth.
The continued weakness in the gold price provides the chance to get into Hummingbird at an attractive discount to recent levels. It is a compelling story for two main reasons.
Firstly, there has been rapid progress in developing the Yanfolila Gold Mine in Mali which demonstrated cracking production results for the Q2 2018 & which have really shown that this mine is delivering results. Secondly, there is the company’s Dugbe Gold Project which at 4.2Moz is the largest gold project in Liberia. Here, there is tremendous scope to build a large-scale project and ongoing negotiations could bring in a strong financial partner which could potentially fund Dugbe right through to production.
The Yanfolila open pit gold mine is producing at a rate of 110,000oz pa but this is set to rise to 120,000 – 130,000oz pa this year at this high-grade low cost mine illustrating the compelling economics. On the back of the strong cash flow from Yanfolila, the management team is seeking to develop further gold mines in West Africa. Certainly, successfully putting Yanfolila into production has demonstrated the team’s expertise in developing new mines and bringing such projects on stream in a timely fashion with an all too rare impressive control of costs. All for a capex figure that its peers should envy.
It’s worth looking at those gold production numbers from Yanfolila for the quarter ended 30 June 2018 in a little more detail. These numbers cover what was the first full quarter of commercial production since the end of the ramp up period at the gold mine. During that quarter, a total of 33,101 ounces of gold were poured at an all-in sustaining cost level (AISC) of US$790 per ounce with an average grade of 3.43g/t gold. Gratifyingly, the all important recoveries were comfortably ahead of the design figure of 93%, which is all down to good management of the mine and the mill. The cash now clearly coming into Hummingbird could clearly become transformational. As at 30 June 2018, the company had gross cash of US$46.2 million and US$15.6 million net of debt.
Sensibly, the management team is committed to spending US$8 million a year on planned infill drilling at Yanfolila & which is designed to boost reserves, increase mine life and ensure that Hummingbird benefits from its enviable strong cash flow for many more years to come. This work is expected to extend the mine life of Yanfolila by converting Resources to Reserves through exploration. The current goal is to extend the mine life from 6.5 to 10 years which will come from a new reserve statement. This will form the basis of the new mining plan, which is expected to be published by the year-end & which could well mean that we may need to up our current target price of 46.43p quite significantly.
Matters seem to be hotting up at the Dugbe Gold Project in Liberia too where the last we heard was that the Mineral Development Agreement (MDA) was going through the final phase of approval from the Liberian President. This agreement provides the long-term, 25-year framework for future mine development at this project. The 4.2Moz Dugbe Gold Project has a Preliminary Economic Assessment (PEA) for a 125,000 ounce per annum mine. But, there is obvious scope for a far larger project which is expected to be outlined in a forthcoming DFS and which looks as though it will serve as the basis on which to agree a joint venture deal for the development of this project.
There does seem to be so many positive developments going on at Hummingbird that we believe are presently not reflected in the share price. By any yardstick as our full note lays out, shares in Hummingbird are undervalued whether it be NPV, cash flow multiples or peer group comparisons. By and large, in the normal course of events when a resource company successfully puts its first mine into production the shares get a re-rating. However, Hummingbird’s stock price has gone into reverse, we believe due to poor sentiment surrounding the gold price and which we expect to reverse sooner rather than later.
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