John’s Mining Journal: featuring Hummingbird, Solgold and more…

Veteran mining analyst John Cornford revisits some of his favourite gold mining stocks in the wake of the precious metal’s continued move higher…

I’ve been conscious that my pieces on particular miners tend to be intermittent, leaving big gaps in comment on news or developments. So given that it is news that moves, and that gold’s strength (and, surprisingly, that of a few other metals like nickel – see my Oct 2019 piece on Horizonte Minerals) is bringing newcomers into the limelight, the editor is allowing me a more regular column to try to keep readers more up-to-date.

As before, my initiating reviews are not necessarily immediate buys, but ideas with, hopefully, enough initial detail and pointers as to what to look out for, for readers to assess in their own time. Space constraints mean that updates, or new ideas, can only be sketchy, perhaps needing fuller analysis later. It would help if readers let the editor know for which ones they would like a fuller review.

Such a case is Hummingbird (LON:HUM), which I advised three years ago had met its potential. But it is now recovering from the depths it plumbed subsequently after I recently suggested buying again on its deal to buy another gold mine to plug the production gap investors were fearing. The economics of its new 1.2 Moz Kouroussa mine in Guinea look nearly as good as for Yanfolila five years ago, whose entry into production spurred HUM’s shares to their first peak in November 2017. Kouroussa requires at least $100m and two years to get to first production, so the shares might take time to get back to those levels, especially now there are more shares in issue, so that HUM seems a good candidate for chartists to advise when to jump in and out on the way back – and hopefully up.

Since my last piece two months ago, gold has risen only moderately and most goldies have marked time. So, as usual, the investor herd seeks quicker gains by switching from one to another, while companies whose projects are taking time, or whose commodities remain weak, fall out of the limelight.

On the other hand, the charts show that my larger picks, the streamers and, particularly, Pan African Resources (LON:PAF), look to be on an unstoppable upward trend – provided, of course, that gold doesn’t collapse.

A glaring exception is Solgold (LON:SOLG), who one would have thought should also be unstoppable from its current 20p levels, now that it has raised funds to arrange external financing for its very large Alpala copper-gold project, and to resume its promising exploration throughout the rest of Ecuador. But there is now so much corporate rumour-mongering surrounding the shares, involving speculation about bidders jostling (which I think unlikely) and the probable failure of its resumed bid to buy out Cornerstone Capital with its 15% share of Alpala, that predicting when they will move decisively looks impossible. The log-jam might be cleared when Solgold publishes its updated Alpala feasibility study later this year.

Two smaller log-jams can be found in the Celtic world. Scotgold Resources (LON:SGZ), which I reviewed two months ago, is ahead by 40% and slowly recovering from the covid lockdown, but I have yet to suggest Galantas Resources (LON:GAL), which is on the same Dalradian, Scotland-Ireland, gold-rich trend. Its Cavanacaw mine in Omagh is not far from the large, high grade Curraghinalt mine in Co Tyrone, owned by Canada’s Dalradian Resources which is close to production.

Cavanacaw, although in limited production, has been restrained since 2013 by a minority local opposition using planning appeals to delay Galantas’s plans to expand. And although Cavanacaw now has permission to do so, it still faces a hurdle in the form of the Northern Ireland police, who say they don’t have the manpower to ensure that the explosives needed to open up underground mining can be kept out of the hands of terrorists.

That is a pity because, according to a 2014 technical report, Cavanacaw has a gold resource that over a six-year life and at a mere £800/oz gold price would deliver a 72% IRR and an 8% NPV of £49.4m – all in return for only a £11.6m investment. At today’s £1,400/oz gold price that NPV would be doubled, and the mine would deliver more than £70m in cash profit over the same six years. But the delays have made Galantas too financially strapped to continue, so it has recently put itself up for full or partial sale to someone with deeper pockets.

While a buyer wouldn’t pay that same NPV, its margin above GAL’s present £6m market value is so large that some investors want to keep supporting the company – as last year when £2m was raised, and as announced in only the last few days when they want to subscribe more than GAL is gain asking for. If gold continues upwards, something must surely happen to break this particular log-jam.

A commodity I have not yet covered is graphite – just as important for e-vehicles and batteries as is lithium, but whose price is holding up in the face of covid-19 delays better than the latter. A snag, however, is that graphite demand is for a variety of grades and purities, so that it is how well a miner can match its product to users’ needs that will determine its success in the market.

One that thinks it can successfully is Armadale Capital (LON:ACP) with its Mahenge project in Tanzania, where a number of other would-be producers are exploiting the easy-to-mine and high grade deposits. ACP has progressed far enough with a feasibility study and willing customers as to be already in discussion with potential funders or partners, to finance construction to start next year and to be in production by early 2022.

The project will be profitable enough to start in two stages, whereby after a low initial cost, the full stage only four years later can be financed from cash generated by the first. Such a plan has enabled ACP recently to upgrade the mine’s economics to where a modest $40m initial cost will produce a 15-year project generating an exceptional IRR of 91%, and an after-tax NPV of $292m at a conservative 10% discount rate.

While news about those discussions might stir the shares out of their recent 3.5p trading range and £15m market cap, and although I have bought some for myself, I have some reservations before making a strong recommendation.

They are that ACP has a complex series of loans and warrants outstanding which I haven’t yet analysed fully enough to assess their potential to dilute value per share, while it is also usually a good idea to wait for full details of funding and off-take agreements. In this case also, there are two Australian would-be graphite producers in the same part of Tanzania – Black Rock Mining, and EcoGraf (formerly Kibatran) – whose market caps are around the same low level as is ACP, despite their different sizes, and despite all three having very high looking NPVs.

So it might be that investors are not yet convinced the market is robust enough or that graphite demand won’t be affected by a slower than hoped recovery from Covid-19. Lithium, certainly, is weak enough for a number of suppliers to have shut down production.

In two weeks’ time I’ll discuss what might happen if and when lithium recovers.