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Shanta's Golden Prospects

Analysing companies' finances and value from their financial statements using ratios and formulae
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Shanta's Golden Prospects


Postby Miningbug » August 29th, 2020, 11:45 am

(SHG) Let the Lion Roar. 16.2p (28/08/20)

A heads up to all readers. Sorry that it has taken me this long after my first company profiling of Hummingbird. I took ill with covid (not aymptomatic but not in hospital) and had issues around my job that has meant I have been very distracted from the markets. I am on the recovery road on those things now so I can return my focus to these profiles. For those who are not aware I invest solely in mining stocks (all manner, base, precious, battery) as that is where I think I have expertise. In my absence I am pleased to see HUM make decent progress to 36p (+24%) and the gold price crack to new all time highs. I have responded to the HUM thread with my up to date thoughts there.

Turn to my new long idea. I'm staying true to where I started these profiles, in precious metals. Today I pick out Shanta Gold.

Shanta translates to serenity, or calmness. Shareholders can be forgiven to laugh at that, because that is all but what Shanta has been on a 10 year horizon. True of many gold producers, the 5 years previous to 2019 were far from exciting with gold that treaded water. But equally true of many gold producers, since the start of 2019 has been much better with the share price rallying from 6.2p to 16.5p. This is the highest level since 2013, but it reflects real positive development in the business. On the basis of recent newsflow, and with a hectic news schedule into year end, I think SHG should double again on a 6 to 9 month outlook.


A quick update on gold. After is charged through $2000 an ounce without wanting to take a moments rest, it has pared back to $1950. A still extremely healthy level and the upward trend remains fully intact. I expect a retest of $2000 in the coming days/weeks and psychologically I think that will be massive for all the producers because it will get investors into the mindset of $2000 being here to stay and not a flash in the pan level that we only see once. I think we are in a multi year bull market for gold as after 2008, gold peaks several years after the crisis, not during it. Monetary support will need to stick around, interest rates will remain rock bottom and inflation will pick up eventually. That means real interest rates on bonds go lower, the dollar weakens over time and gold moves higher.

Turning to Shanta. Let's start by looking back on the past years

Shanta has been operating in Tanzania for nearly 20 years, and has been producing there for the last 9 at their New Luika gold mine. After bringing the mine into production the company embarked on a long period of reducing debt on the balance sheet as the gold price languished from the highs seen at the start of the decade. Current CEO Eric Zurrin would agree that this business was overleveraged through much of its producing history, and this shackled the company in many different directions. It shackled the ability to more aggressively explore at New Luika and increase resources and reserves. It shackled the ability to more aggressively expand into new prospects. It shackled the progress of the company to deleverage itself because they paid higher interest costs. In total this all shackled the ability of management to extract shareholder value. The effect is that Shanta was seen as a single asset company, operating in Tanzania (which like many African companies, has its obvious shortfalls), in a gold price environment that was subdued. Important to the turnaround strategy was management change with the main events being the appointment of Eric Zurrin as CEO in August 2017 and CFO Luke Leslie in January 2018.

Those shackling dynamics have now completely changed, led by the gold price, as have the fortunes for Shanta. For good.

New Luika is Shanta's heritage and its fat cash cow

Before I get onto the really interesting parts of the Shanta tale from here, shareholders should pay respects to what is allowing Shanta to move to the next stage in its history. That is the producing asset, New Luika. New Luika has been churning out consistent gold ounces for years and even if it alone is not a growth asset, it provides great leverage to the price of gold. This reliable production is the rock solid underbelly for shareholders and puts Shanta in the middle of the small and medium sized producing pack.


and it does this consistently at an AISC which is attractive compared to most producers


The life of mine based on defined reserves is to 2024 but there is very obvious areas to extend that based on a 1m ounce resource base (at just under 2.8 g/t). The story of New Luika has transformed the balance sheet of Shanta given the very strong cash flow generated. They have gone from almost $50m of debt, to a net cash position for the first time in their producing history at the 2020 first half results. For as long as gold is $1500 let alone $1900 this will continue at pace, further transforming the balance sheet.


Delevered and diversified. A news-packed end to 2020 is in store


Shanta is no longer a one legged story. A recent acquisition (West Kenya) and development of the Singida project in Tanzania offer real opportunity to drive higher shareholder value. The image above from Shanta puts onto a timeline the different share price catalysts into the end of 2020. I address 6 major ones below

1) Singida Economics + Financing Plan
Singida is Shanta's second Tanzanian project with a resource base of 0.9 million ounces at 2.38 g/t. I think of it as a smaller brother to New Luika which should offer attractive shareholder returns at low cost. The previous economic study from 2018 showed it to be a 26,000 ounce a year operation at under a $800 an ounce cash cost. This at a 10% discount rate and $1500 gold gave a $40m NPV and a weighty 91% IRR. Previous management plans for Singida included floating it on the Dar Es Salaam stock exchange, but economics and the gold price have changed rapidly, and now the focus is on Shanta retaining the value within. A significant amount of work has been going on since the last economic study including an upgraded reserve statement and in a presentation in May the management team said that they expect the economics to still be significantly better now. As do I. This could be a very interesting project for Shanta that they should be able to get into production in 2022 at a capital expendiure price tag under $20m (unless revised economic study suggests a bigger more valuable operation with higher capex) . The life of mine is 7 years just based on reserves and there are nearly 350k of inferred resources outside this. "Financing discussions are advanced" and all permitting is completed. I expect the release of this study and financing plan to show highly attractive economics and a route to production within 15-18 months.


2) West Kenya Technical Detail Release
Kenya? Who mentioned Kenya? Singida may be New Luika's smaller brother, but West Kenya is New Luika's bigger and higher quality brother. Shanta acquired the West Kenya gold project this year and closed the deal completely on August 19th. This diversifies Shanta into the East African neighbour.

The West Kenya project has passed through the hands of Acacia Mining (a Tanzania focused gold producer) although it was never one of their primary focuses for a whole bundle of reasons. Acacia was bought out by Barrick Gold (the world's second largest gold producer) and was sold to Shanta shortly after. It is a 1.2 million ounce resource base, grading a phenomenal 12.6 g/t of gold, and had $55m of historical exploration spend and over 220K metres of drilling done on it. That is a phenomenal grade of gold that is scarcely comparable, and puts it towards top of the list for highest grading 1 million ounce+ gold deposits in Africa. Part of this potential has been production-proven with the Rosterman mine within one of the prospecting licences having produced over 250,000 ounces at 12.3g/t before it stopped in the 1950s when gold was in the $30s.


The majority of the defined resource base today lies within the Isulu deposit, which is over 1m contained gold ounces at around 13 g/t. Within that deposit is 135,000 ounces grading 42.6 g/t in an open pit shell. That is staggering and compares to the next best open resource Shanta have seen which is a Russian Polymetal (£POLY) mine which is 175,000 ounces at 18 g/t. Beyond the existing resource areas, Shanta think they have a 3 million ounce drill target to expand the base. In a proactive interview from the last two weeks, CEO Eric Zurrin was excited with the West Kenya asset, to put it mildly - "We've been tight-lipped on this for, the better part of about 7 months, and its kind of that feeling you get when you've been dealt the royal flush but you just don't want to blow your cover sitting the table"

What is the catch? Why would Acacia/Barrick sell if it is so good? There are several reasons for this;

A)Pricing timing. Shanta paid $7m in cash, $7.5m in stock (stock now worth $12m) and a 2% net smelter royalty for the asset. Shanta spent 12 months in due diligence on West Kenya with Acacia and when the Barrick acquisition of Acacia was announced, Shanta went very quickly unconditional on the deal. The key is that the deal terms of $14.5m + NSR was priced when gold was only slightly over $1200 an ounce. That is chalk and cheese to where we are with the gold price today and represents a huge value uplift already for Shanta shareholders... and one of those is Barrick Gold who now own 6.4% of Shanta. Let us not forget that Barrick was also busy tying up their merger with former FTSE behemoth Randgold.

B) Scale. Barrick looks for tier 1 assets which are assets with the capability of delivering half a million producing ounces a year and a minimum 10 year mine life. The project is major for Shanta but is more of a 100k gold ounces a year scale. On Acacia's side before the deal, they were facing major difficulties with their Tanzanian business and a run in with the government through this whole period, which led to them focusing of their main producing asset areas and not working much on their Kenya, Mali or Burkina Faso exploration properties.

C) Know how. Acacia had talked about the potential to mine the Kenya resources with "conventional mining methods" which they said were typically used in smaller scale mines than they were used to. That led them to seek out partners for the West Kenya project in the first place looking for partners who can bring in the conventional mining expertise to lead the project forward. They commissioned a third party consultancy who believed that a conventional mining method was expected to "significantly enhance" the economics of the project. What does that all mean in English? Shanta's mining know-how at Bauhinia Creek at New Luika is in longhole open stoping mining and Shanta have proven themselves to be one of the lowest cost practitioners of this method. They intend to use this same method at West Kenya, and because they do the mining in house, they also save on third party contracting costs.

The release of technical study data should shine a light on data which has not been in the public eye before. Data around drill intercepts will help us get a better understanding of the nature and scale of the asset. Basing this on the limited public data shared before the deal was completed, it looks like bonanza grades and intercepts are the order of the day and should glisten in the market. We already know some intercept data from several expansion targets, and today they are a mere fragment of what we know Isulu is.


3) West Kenya Scoping Study Release
This will help investors understand how much NPV is in the West Kenya project. We do not have a lot to work off but given the exceptional grade and resource size, it should be big, and a lot bigger than Singida. We have half a clue, with the CFO saying on May 11th 2020 that "the majority of Shanta's NPV could in fact, soon be, in Kenya". My opinion is that New Luika alone has a NPV over 50% higher than the market cap of the company and then on top of that you have Singida. Therefore any confirmation that West Kenya is as big as it could be would be .... well, big.

4) New Luika Gold Mine Exploration Results and Updated Reserves
Progress at New Luika is to extend the mine life over time. Each year they extend it by the producing rate of +80k ounces a year, that offers almost $100m EBITDA at 1900 gold. I think is that there is a lot of running room at New Luika, shown in recent years' very modest exploration efforts. In 2019, with only $1m of capital expenditure they added 135k ounces of gold to the base, far exceeding depletion during the year. They are no longer shackled by a weak balance sheet and they have increased exploration spend for the group by two thirds this year. This exploration update and updated reserves number should hopefully show a further expansion of the mine-able base. Shanta have spent time focusing on the Luika deposit within the New Luika area and it is an area they say they "didn't give much credit previously" but they are "seeing some pretty interesting outcomes there." I look forward to some of these outcomes.

5) West Kenya Drilling Begins
The market finds favour in producing companies that also have exciting exploration plans at their fingertips and West Kenya will match that. Shanta want to get the drill bit turning by the end of this year and I look forward to seeing some of the fresh grades and intercepts they uncover. Shanta are not focused on further M&A but now extracting all of the potential in their three assets (New Luika, Singida, West Kenya). West Kenya provides the medium term expansion to the company. Infill drilling, a mineral resource estimate, a pre-feasibility study and definitive feasibility study will precede the construction decision.

6) End of previous hedging books
One hindsight mistake Shanta made is that they embarked on a hedging scheme in previous years. I understand why they did it because the company was heavily indebted and this gave them security over being able to make debt repayments if gold prices weakened. I also dont think they remotely expected the gold bull run to commence as soon as it has (the federal reserve and covid being the catalyst). The problem is the hedges were around spot prices when agreed, which was back were in the $1200s. As gold is well over 1900... these hedges are hurting. The impact is exaggerated because the hedges are not a legitimate cost to offset for tax purposes because they represent a "speculative activity" and can only be offset against other speculative activities. In the first half of 2020 the hedge losses were $8.3m.

The end of these hedges like at Resolute Mining will undoubtedly be rejoiced. Shanta are winding these down quickly. At the end of the first half they had 27000 ounces of hedges left and this reduced to 18600 at August 24th. Shanta are aiming to get these fully extinguished by the end of this year which means investors can look forward to a clean 2021. The market is forward looking so I do not see this as a major catalyst compared to some of the previous ones but it is an important signal as Shanta moves from strength to strength.

Risks are gold price, LOM, political

The first one I always like to start with is commodity price risk. Gold has run up well over the last year, and stands at all time highs. My view is that the gold price outlook has changed permanently with a new floor at higher levels based on the federal reserve's outlook on interest rates and money base expansion. The risk is that I'm wrong and hold prices fall back to $1500. At that price they would still be throwing off cash but it is wrong to think the market would not see it as a negative compared to where we are today.

Next up is Life of Mine at New Luika. The current LOM extends to 2024 based on existing reserves. I have described up above that I do not think this is a problem given the resource base. Add to this, the expansion at New Luika can now be pursued more easily with a better balance sheet and they have been able to replace depleted resources on minimal capex in recent years gone by. LOM is a commonly cited risk with most small producers but in many cases I think this is a concern born out of cash constraining the ability to build a bigger resource base, rather than that resource being available. That means it rarely ends up being a serious concern (as companies like £AAZ have proved).

Another key one is political. As Mali has with terrorism, Tanzania has its own challenges. The one here is around mining code and taxation in years gone by. Readers may be familiar with a company called Acacia Mining which was in the UK market and had a torrid time in 2017 when the Tanzanian government claimed they had understated their gold exports and slapped on a huge tax bill. Until that was resolved, Acacia was unable to export gold concentrate. That export ban ended up being lifted in 2019, although Acacia shareholders were spared much of the nuisance after a takeover from second largest global gold producer, Barrick Gold. It was all a bit nonsense as the tax bill Tanzania claimed they were due was more than 200% of the total tax that all the top 5 gold producers had paid globally between 2000 and 2017. But that is the sort of nonsense you sometimes come across with in emerging economies. Mali, Zimbabwe, South Africa, Egypt, Nigeria and more. They all have their own risks. As a global gold titan, Barrick have been working with the Tanzanian government around the tax code and stability since the Acacia takeover finished and the impression in the country is that the relationship is now strong, and Tanzania recognise that they need to be more corporate friendly in the future after the Acacia spat caused reputational damage for investment. That will not change overnight, but it is a small step forward.

The situation around Acacia was very specific to Acacia. Shanta has been operating in Tanzania for 19 years and has been producing for 8 years. There has been no issue nearly as big as Acacias, and Shanta say their government relationship is very healthy and transparent (culminating in their praising of Shanta's environmental efforts recently, and Shanta's 99% Tanzanian workforce). However relating to taxation is VAT payments around gold, and most of the gold producers in country have tax receivables they have not been received from the government yet relating to a historic period around 2-3 years ago. Shanta's sum here is over $23m. Shanta expect to receive this money over time and they have received some payments around VAT in the past, but I think this will be slow and a resolution will be over 2-4 years, not 2-4 months.

"Shanta as a junior is generating $90m of cash flow per year at the current gold price"
Tying all of this renovated story together is back to the square one reality that the New Luika producing mine is throwing off huge amounts of cash. There are no brokers giving forecasts for Shanta after I think Numis dropped their mining sector coverage over the summer but we can calculate Annualising the first half of 2020 when they realised a gold price of about $1530 shows revenue up 29% yoy, EBITDA up 44% on flat y/y gold ounces.


That means the EV/EBITDA multiple on the basis of $1530 gold is only 2.8X. This cheap valuation becomes more apparent when you look at 2021 and use gold of $1900 as the base (vs +1950 today and I think will move +2000). At this point, as confirmed by CEO Eric Zurrin in an interview on August 21st, the cash generating power of Shanta is $90m a year (£67.5M). I think the actual number is about $95m (£71M).

I exclude VAT receivables from my enterprise value calculation as I don't think that will be collected soon but even so that puts the company on only about 2x EBITDA. Adjusting for capex/depreciation, tax and the end of hedging, I make that 2021 a year of £42M free cash flow from New Luika, a free cash yield of +30% at 1900 gold. That is a remarkably low valuation to see during a bull market in a metal which does not have a tight supply source (like vanadium or rhodium where prices can invert quickly). It is true that £HUM and £SRB trade equally as cheap on EV/EBITDA so this is not just a Shanta issue or an excuse for the market. If gold stays where it is, all three (and many more in the list) will demand a serious repricing. What I like about £SHG is the quality of the gold grades, the delevered position, and the sheer number of catalysts in the space of a few months.


Then consider that is just New Luika.....
In the Q2 production report the company said "Future production at Singida is expected to significantly increase the company's cash flow". 26000 ounces would be another +30% compared to New Luika and would carry a lower capital intensity short term. Then remember again that the CFO on May 11th in an interview said that "the majority of Shanta's NPV could in fact, soon be, in Kenya". Shanta's valuation, the market, and investors have simply has not kept up with the step change in the gold price OR the company's asset changes. This is not just a symptom for Shanta but it is magnified at Shanta. This mispricing is clear to me when I look at gold producers from a worldwide angle, from the Scandinavian region, to the US, to Canada, to Australia. The UK smaller producers have been left behind, and this valuation mismatch I think prompted the takeover of Highland Gold on July 31st, and the mega valuation uplifts at Petropavlovsk and Pan African we have seen this year. The higher gold goes, the less this lag will persist, and the more catchup the UK stocks will do.

Too long didn't read?
Shanta's New Luika mine is a cash cow and at 1900 gold should generate over £40M FCF in 2021 on my assumptions, over 30% of the £137m market valuation. Shanta's two expansion assets Singida and West Kenya are in for free and combined are most likely worth well above what New Luika is. There are at least 6 catalysts between now and year end to look out for, keeping stock level interest high. I am positive on gold and a re-take of $2000, and this will shine a light back on the producers and small ones like Shanta are simply at the wrong (too low a) valuation. Dependent on gold prices remaining +1850 (and I think they move higher, not lower), I think Shanta should double on a 6-9 month view.

Do your own work on the name please, don't take everything I have written at face value. For investors interested in learning more about the story, Shanta will be attending the September 10th proactive virtual investor forum. There are also many management presentations from recent months on that are good.

MiningBug (disclosure I own stock and have been buying in recent months)

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Re: Shanta's Golden Prospects


Postby Itsallaguess » August 29th, 2020, 11:55 am

Just waiting for the Shanta Rally then...

I'll get my coat...


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Re: Shanta's Golden Prospects


Postby IronPyrites » August 30th, 2020, 12:49 pm

Hi Miningbug

Thanks for a great write up on Shanta Gold.
Looking at my notes from early August it was the Kenyan assets which to my mind made this African miner look very attractive. I note that the deal has now been signed off which is a significant milestone:

With the receipt of regulatory approvals in Kenya, including standard consents from the Mining Authorities to the assignment of interests and the transfer of Prospecting Licences, and approval of the Transaction by the Competition Authority of Kenya, all of the closing conditions for the Transaction are now satisfied. ... 17055706W/

As you say:
Then remember again that the CFO on May 11th in an interview said that "the majority of Shanta's NPV could in fact, soon be, in Kenya". Shanta's valuation, the market, and investors have simply has not kept up with the step change in the gold price OR the company's asset changes.

Also they are now debt free:
From the H1 ‘highlights’ recently released: 
Net cash of US$2.1 m (FY 2019: net debt of US$14.3 m)
Entering a net cash position in H1 was a major achievement for Shanta and followed sustained deleveraging over a number of years - Eric Zurrin, CEO ... 00088918W/

I spent a little time looking to see if they had a view on future dividends – there was nothing I could see in the last AR. Becoming cash generative is often a trigger for such considerations and demonstrates a degree of expected stability for future cash flows.

As always even if the story is compelling weighing up the downside risks is just important IMHO.
You mentioned three:

Commodity price:
Nicolaus Copernicus an astronomer and economist in 1500 not only put the sun at the centre of the universe but also surmised
“Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through its excessive quantity.”

Gold is seen as a safe haven and a hedge against inflation. Governments printing money as if it is confetti will cause inflationary pressures.
So like you I am bullish on the price of gold and fully expect the price to test $2000/oz again.
Remember also that assets under management will be adding gold in the current climate. Gold backed ETFs have had a hay day and there is considerable potential for further institutional investment.
Gold miners are naturally very sensitive to the gold price but that works in both directions.

LOM or essentially liquidity:
New Luika is currently providing the financial bedrock for Shanta. It has moved Shanta to a cash positive position and puts them on a firm financial footing moving forward. As you calculated at $1900/oz this equates to around £40m FCF for Shanta in 2021.
So how long can this last? There is a risk here but again I tend to agree. If the cash is there to explore and exploit the resource there is unlikely to be a problem. A bigger risk might be the speed with which new resources can be tapped. Experience tells me that a perfectly smooth path is unlikely even if the developments are reportedly steaming ahead:
Underground exploration drilling to replace depleted ounces ongoing at Bauhinia Creek ("BC") and Ilunga; drilling on the BC Deep West and Ilunga targets have generated encouraging results; and Surface exploration drilling has commenced to test the continuity of mineralization at depth at the Luika deposit, targeting conversion of Inferred resources.

This is trickier. There is a history of problems in Tanzania. Of course we can say that this was company specific and Shanta has a good track record. But governments change sometimes in less than democratic ways and sentiment changes. This I feel is not an insignificant risk.

To this list of risks I would then add:

Mark Twain had a view of ‘management’ in his day.
‘A mine is a hole in the ground with a liar standing next to it.’
Drawn from his experience of the Gold Rush in which he personally participated in the 1800s.
Tongue in cheek it is a useful reminder that management are an important consideration. Changes in personnel two or three years ago have led to the current strategy and recent successes all be it in a strong prevailing tail wind.
It is a well known behavioural bias to be over confident and over optimistic so time-lines and progress is often slower than that predicted by management.

Portfolio correlation:
This is more to do with how an investment portfolio is balanced. Gold is the current market’s darling and the temptation is to have ‘too many eggs in one basket.’
Mark Twain also reputedly had a view on this:
‘Put all your eggs in one basket and watch that basket.’

With gold and silver ETFs and well as a couple of gold miners already in the portfolio this is definitely a personal consideration – but I must admit revisiting Shanta has tempted me to take a small position or at least sleep on the idea :-)
Thank you for re-stimulating my interest.

Best regards

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Re: Shanta's Golden Prospects


Postby Miningbug » August 30th, 2020, 2:28 pm

Thank you Iron, all very good points you touch on there. I find it fascinating what we might be about to witness around metals prices in general. A weaker dollar will float all boats if the stimulus comes through globally to translate to higher metal prices. However this is a hugely uncertain time so nothing can be ruled out including lower basket prices.


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Re: Shanta's Golden Prospects


Postby wanderer101 » September 3rd, 2020, 7:51 am

New Reserves and Resources Update out today: ... 00068797X/


· Total group-wide reserves of 653k ounces ("oz") grading 3.15 g/t across the Company's two projects in Tanzania;

· Total resources of 3.2 million oz grading 3.58 g/t across all three projects in Tanzania (JORC compliant) and Kenya (NI 43-101 compliant);

· JORC compliant open pit and underground gold reserves of 410k oz grading 3.23 g/t at New Luika Gold Mine ("NLGM");

· JORC compliant open pit reserves of 243 koz grading 3.00 g/t at Singida Gold Project ("Singida");

· Exploration drilling year to date at NLGM has added a further 75,000 oz to Reserves at a conversion cost of US$12 /oz;

· Current reserve-based mine life to 2028 at Singida Gold Project, based on a minimum 7-year life of mine producing on average 31,000 oz per year from 2022;

· Reserves assume a life of mine gold price of US$1,350 /oz;

· Significant further potential upside through the inclusion of substantial resources that currently still sit outside reserves;

Zurrin quote: "Reserves have increased by 75,000 oz. The increase came predominantly from Luika and Black Tree Hill deposits where reserve grades were significantly higher than the inferred resource grade"

Detailed NLGM drilling update here: ... 00068796X/

All seems very positive.

New holder here, as of this week. Many thanks to MiningBug for highlighting this one.


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Re: Shanta's Golden Prospects


Postby barchid » November 20th, 2020, 9:07 pm

Miningbug wrote:Thank you Iron, all very good points you touch on there. I find it fascinating what we might be about to witness around metals prices in general. A weaker dollar will float all boats if the stimulus comes through globally to translate to higher metal prices. However this is a hugely uncertain time so nothing can be ruled out including lower basket prices.


I confess to only just having picked this thread up but have found it very interesting, I'll do some research on it myself but on the face of it this stock appears to tick a lot of boxes for me.
Thanks again

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