The Shanta Gold share price has doubled in 5 years. Can it keep going?

It’s been a good few years for the Shanta Gold share price. Our writer explains why he remains upbeat on the stock’s outlook — but isn’t investing.

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Sometimes, slow and steady wins the race. As a long-term investor, I always try look at the big picture over a period of years. Take Shanta Gold (LSE: SHG) as an example. The shares sell for just pennies each. But they have moved up 17% over the past year. In five years, the Shanta Gold share price has more than doubled, moving up by 118%. There is also a dividend, albeit the annual yield of 1.8% is modest.

Could this be a glittering share worth tucking away in my portfolio for the coming years?

Positive developments

Lately a couple of things about Shanta have caught my eye.

Last month, the company updated the market on its reserves and resources. For the fourth year in a row, it has extended the mine life at its New Luka project in Tanzania by at least a year, thanks to exploration. The project now has 394,000 ounces of proven and probable reserves.

By growing its reserves and extending mine life, the company can potentially benefit from larger future sales volumes than would otherwise have been the case. Extending the life of a mine also means development costs can be spread over a longer production period, helping improve profit margins.

Last Autumn, Shanta announced that it had received approaches from three separate companies that could lead to a potential offer for the company.

In the end, no bid materialised. But the fact that a trio of mining companies had run the slide rule over Shanta and were mulling the potential attractiveness of buying it outright has made me reconsider the investment case for the company in more detail.

Share price outlook

A bid can push up a company’s share price (although that is never guaranteed and sometimes a bid has resulted in me receiving less money for my shares than I had paid to buy them, as for example, in the case of Stagecoach). But as a long-term investor, I buy shares based on a company’s financial outlook, not the potential for future takeover bids.

Improvement in the Shanta Gold share price over the past five years partly reflects its growing reserve base. That could continue growing with ongoing exploration.

The shares have also benefited from a strong gold price. However, with such a strong focus on the the yellow metal, Shanta’s profitability has been all over the place. In 2021, the company made a loss of $6.2m, but that followed a profit of $17.2m the prior year.

With a market capitalisation of around £115m at the current price, I think that sort of earnings potential when gold prices are high means the shares could offer me value.

But clearly, changes in the gold price are also a key risk for both revenues and profits at the business. With ongoing economic uncertainty around the world continuing to drive demand for gold, prices could remain high. If that happens, I think the share price could keep rising.

The company has no control over the gold price, however.

Its operations are concentrated in two east African nations. I think that means it faces higher political risks than larger miners with more diversified portfolios. Shanta does not meet my risk profile so I will not be investing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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