The Shanta Gold (LSE: SHG) share price is down by more than 20%, as I write, after the Africa-based gold miner warned that 2021 production would be up to 15% lower than expected. Shanta shares have now fallen by nearly 40% over the last 12 months.
Today’s fall was triggered by news of technical issues at its New Luika gold mine in Tanzania. These have now been fixed, according to CEO Eric Zurrin. My sums suggest that if Shanta’s 2022 forecasts remain unchanged, this stock could be seriously cheap after today’s crash. Should I consider buying Shanta Gold shares for my portfolio after today’s crash?
What’s gone wrong?
Gold production at Shanta’s flagship New Luika mine has been held back during the fourth quarter by two technical issues. The company says it’s experienced “operational difficulties” relating to supplies of an “unreliable emulsion product” and problems with underground charging units.
According to chief executive Zurrin, emulsion supplies are back to normal, and the charging units have now been fixed.
Unfortunately, these issues forced the company to temporarily change its mining schedule to focus on less productive areas of the underground mine. As a result, Shant’s 2021 gold production is now expected to range 55,000-57,000 ounces this year. This compares to previous guidance in August for 60,000-65,000 ounces.
Why I think Shanta could be cheap
Today’s news is disappointing, but it doesn’t sound too serious to me. 2021 was always expected to be a transitional year for Shanta Gold, with much lower profits than in 2020.
However, 2022 forecasts suggest a strong recovery in earnings. Ahead of today, broker consensus estimates for next year suggested Shanta could generate a net profit of $18.6m in 2022. That’s equivalent to forecast earnings of $2.1 cents per share. At Shanta Gold’s current share price, I estimate that this would price the stock at just six times 2022 earnings.
It’s too soon to be sure, but based on today’s announcement, I don’t see any reason why 2022 forecasts should be cut. If I’m right, then I can see some potential value here, especially as Shanta’s financial position remains strong, with around $20m of net cash and available resources.
Should I buy now?
Shanta has several interesting exploration projects underway but, at the moment, all the company’s revenue comes from the New Luika mine. This means any disappointment here can have a big impact, as we’ve seen today.
One concern for me is that Shanta’s gold production also fell during the first half of this year. This was caused by lower quality ore containing less gold than in 2020. Today’s disappointment adds to this shortfall.
After such a difficult year, I’m not sure how confident I can be in forecasts for 2022. More problems might lie ahead. Although I can see some attractions at Shanta Gold, the situation feels too speculative for me.
For this reason, I won’t be buying Shanta shares today. However, I will keep watching for further news.
