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Hummingbird preparing for flight

Analysing companies' finances and value from their financial statements using ratios and formulae
Miningbug
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Hummingbird preparing for flight

#313515

Postby Miningbug » May 29th, 2020, 11:04 pm

Ahoy LF readers. I am putting a placeholder here as I am starting a series of mining stock threads in the company section over the next few months. I invest solely in mining stocks (all manner, base, precious, battery) as that is where I think I have expertise. My first one will be Hummingbird Resources code HUM and I will post my detailed view over the weekend. I think its a doubler. Merry sunny weekend in the meantime.

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Re: Hummingbird preparing for flight

#313517

Postby AsleepInYorkshire » May 29th, 2020, 11:16 pm

Can't wait

AiYn'U

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Re: Hummingbird preparing for flight

#313597

Postby Miningbug » May 30th, 2020, 10:24 am

(HUM) Preparing for flight. 29p first targeting 50p (30/05/20)

I have a twitter handle I have set up. If you enjoyed this please follow me as I start to write my thoughs. @TheMiningBug. I have bought shares in HUM in February, March and April.

Hummingbirds are the smallest migrating bird species and can be a few centimetres long. They are the only birds which can fly backwards, and hover. To long term investors in Hummingbird resources, these two final points may be the ones that stick in the mind. Hummingbird came to the London Stock Exchange in 2010 at 167p and hit 29p for the first time in 2013 (the fly backwards). 10 years on the share price is still at 29p (the hover). It has done well this year as the market cues in but not on a 2 year view. The stock has recently hit fresh 12 month highs so I think this could be on the cusp on a big move. The times a'changin. HUMs woes should be in its past and from here I think HUM can be a real performer.

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The Three Ws. What went wrong?

At the start, not a lot. The company listed in December 2010 into a solid gold market. Prices had ran up from $260 an ounce from 2001 to around $1,400 an ounce and would go on to peak at over $1,800 in 2011. However, then gold entered a long slide, dipping to $1,060 in 2015.

HUM was mainly progressing its Liberian gold deposit (Dugbe) at the time, but this was pure exploration and at the end of a price cycle, explorers get whacked. Mining projects do not happen overnight. Unless you can find a major partner to help fund progress, you frequently spend 2-3 years on exploring alone, proving up a resource size and that is before you scarcely consider economic studies to define what you've found. As it turns out, HUMs Liberian exploration was a roaring success, hitting economic gold on almost every drilled set of holes.... but investor appetite for gold explorers waned and in a falling gold environment, there was no prospect of HUM generating cash any time soon.

In April 2013 HUM published an economic study on Dugbe. By this point it had grown into a major 3.8 million ounce gold resource. But gold was $1400 and falling and at $1,300 an ounce, the upfront capex requirement was over $200m, the net present value of the project was $186m and the IRR was 29%. Thats not dreadful, but its also not fantastic and not enough to get the market interested. The result, a languishing share price with no real direction. They had a project, but no cash flow, a vision, but no way to execute without diluting shareholders hugely. A sticky patch.

Beginning the transformation. Buying Gold Fields Mali Assets

From where we are today, this was a crucial step. Without this I think HUM would be long gone from the markets. Gold was closer to $1,250 at this stage (30% off its 2011 peak), and HUM decided to pursue a producing asset so they opportunisitically went and bought Gold Fields' Mali asset, a 1.8 million gold ounce resource, paying $20m in shares. The promise - near term cash generation. The result was slightly different as it took longer to complete drilling and economic studies to prove up the resource to get it into production. They raised $67m in June 2016 to start construction and entered commercial production in April 2018. Against a still languishing gold environment, the share price ebbed and flowed without real progress to this point. It is always hard for miners stocks to work when funding is being injected at non optimal rates. Even considering it's a huge resource, Liberia fell into the background and has remained there ever since. HUM is now a mid-tier miner.

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2018: the year that wasn't.

Look back at HUMs share chart. 2018 looked real positive ahead of time, the company was meant to be beaming, but it was just a downside slide over the whole year and into early 2019. This is where you can account for HUMs main geography, Mali. By all factors its not a bad place to be and they are surrounded by other companies, but there's terrorism up North. South of Bamako where most miners are is almost fine. However, HUM had a security incident. In May 2018 Malian soldiers on site shot dead 3 people who were protesting for the right to mine on HUMs licence. A horrible event, but a small economic issue and the CSR environment has improved a lot since with no big community problems. The bigger issue in 2018 was that there was a very very wet rain season, and the public bridge and only route into the site had been flooded. One of the pit walls of the mine had also become unstable and needed remedies. Production targets were missed, and additional time and money had to be spent.

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A word on their geographies. "We're not in Kansas (Australia, or Canada) anymore" . Obviously. However Mali and it's not that bad down South and the economic framework is stable. It is not a whole deal worse than Zimbabwe (where Caledonia operate), South Africa, Egypt or Tanzania, all which have their own curious quirks from currency risks to slow tax repayments to power instability to lack of stable legislation.

2020 should be transformational...2019 will only show the start of the transformation

Fixing the problems of 2018 took until the first quarter of 2019. All in sustaining costs (AISC) were high until this point. This means 2019 results due within the next 3 weeks will not be great. 2019 was a year of catchup. In tandem, Gold prices only started to move up in the second half of 2019. We can have our own views on gold - my view is that unprecedented quantitative easing, and the double threat of inflation and deflation will keep prices well above $1,650 for the foreseeable future. My view is also that we move above $2,000 an ounce

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For HUM, production is now up to levels long talked about. They have delivered several quarters on what they said they would. Which means the cash is flowing in. 2019 EBITDA should be about $40m. That is the important number for investors in the 2019 results.

2020 is more important. With gold at $1,700 (1,725 today), analysts are forecasting nigh on $90m of EBITDA in 2020. That is truly transformational for the business. From $39m net debt in 2018, they were down to $9m in the first quarter of 2020, and they expect to be net cash in the second half (imminently). Analysts expect them to end the year at $24m net cash, rising to $61m in 2021. That would be a whopping 48% of the £ market capitalisation today. This is while maintaining an exploration budget to help keep the replacement ratio positive (of resource used to resource defined).

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The risks are operational distress, gold down, and life of mine

A word on risks. The obvious one is gold prices start to fall back to $1,500. They would still chuck off cash faster than I can write this at that price level, but it would clearly be less. Operational distress remains a risk. The 2018 issues are not going to hit them in the same way this time due to remedies taken, but anything can happen (to any company).

The other one is Life of Mine in Mali. This is a simple equation. If you only have enough defined reserve and resource for 2 years and no prospect of increasing it, a mine has a very short life of mine, and that's negative. Today HUM have enough resource for 5-6 years of production minimum. Their rolling 5 year mine plan shows this.

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Life of Mine was an element which some onlookers into Anglo Asian Mining were concerned about with regards to their stock in the past but quite frankly in both cases it's not a real problem. There is more than enough resource to drill out. In 2020, HUM are drilling out two existing resource areas, and several greenfield targets to "convert significant resources to reserves". They have in the past converted resource to reserves at 55% showing excellent ability here. They also own over 10% of Cora Gold (aim junior) which has found resource and itself published has a very attractive scoping study that went under the radar in January. The SS showed a whopping 84% IRR at $1,400 gold with a $31m NPV. Cora and Hummingbird are working together to see if a close cooperation on making this commercial this can be achieved. My view is Life of Mine is more likely to extend into the 2030s when all is said and done. Putting that against 48% of the market cap set to be in cash at the end of 2021 shows the scale of cash generation.

Valuation: Cheap gold producer bringing in the cash still in the second innings. Net cash soon.

Outside of a loyal (and disgruntled!) HUM holder base the stock is not in investors' sights today while other gold producers that have performed well are. It is a virtuous circle of recognition. The opportunity is that is has also lagged gold producers since the start of 2018. Net cash is guided to be announced in the second half of this year and gold strength should mean sooner rather than later.

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The HUM story today is about Yanfolila (in Mali)

Yanfolila is bringing home the bacon (the cash) and puts the stock on some of the best economic metrics of peers. Moving up to 2x EBITDA would be 33% upside, 2.5x 67% and so on. The market has begun to price the stock more like fair value but this process has only just begun and it is still very cheap in my view. Cash production will turn them net cash and I expect them to announce a dividend policy at the end of the 2020 unless they find something too good to turn down. Each of these milestones will bring recognition that HUM today is a mid-tier force.

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and that totally ignores the value of Dugbe (Liberia)

Dugbe isn't close to production, we know that but there is a hell of a lot of latent value there and HUM are looking for partners to develop it. At rising gold prices, it becomes more and more valuable. At $1,500 the stated values are a net present value of $337m and an IRR of 43%. That is different grade to the $186m NPV and 29% IRR at $1,300. It would be a 20 year life of mine averaging 125,000 ounces of production. The historic spend on Dugbe itself is alone is over £57m. At $1,700, the NPV must be pushing on $500m with an IRR more like 55%.

That is game-changing if you believe gold stays where it is.
Consider it a bet that they strike a development agreement with 20% odds of paying off that could be worth more than the market capitalisation by itself. "Hummingbird continues in talks with interested parties, in tandem to conducting internal studies to reflect the recent increases in gold price. These include evaluating options around viability of a heap leach operation."

This value is captured in this picture created by data from a broker in HUMs presentation on total HUM resource base
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If gold stays between $1650 - $1750, this is truly cheap and the upside to downside possibilities feels immense. It gold goes to $1,500, it's cheap. If gold goes to $2000 or above the internal value leverage here is among the best I've seen because not only do you have Yanfolila producing but you also have Dugbe. Trickling to a new 12 month price high, the humming has begun. The bird has had enough hovering and is ready for flight.

Do your own work on the name please, don't take everything I have written at face value.

MiningBug

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Re: Hummingbird preparing for flight

#313721

Postby TheMotorcycleBoy » May 30th, 2020, 4:54 pm

Hi MB,

Brilliant post! Thanks for taking the time to set it all out.

Matt

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Re: Hummingbird preparing for flight

#313810

Postby Miningbug » May 30th, 2020, 9:59 pm

Thank you Matt

I own 12 mining stocks today worldwide. I hope I can shed some light on this part of the market because there is not a great deal of focus here for even the real producing businesses.

MiningBug

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Re: Hummingbird preparing for flight

#313856

Postby johnhemming » May 31st, 2020, 7:14 am

How does it compare for example to Pan African?

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Re: Hummingbird preparing for flight

#313873

Postby TheMotorcycleBoy » May 31st, 2020, 9:33 am

Miningbug wrote:Thank you Matt

I own 12 mining stocks today worldwide. I hope I can shed some light on this part of the market because there is not a great deal of focus here for even the real producing businesses.

MiningBug

Our portfolio is fairly diversified. Though probably more biased towards tech (e.g. Microsoft, Cisco, Intel, Spirent, Softcat).

However we do own one miner, that being Central Asian Metals CAML. I bought this first in early 2019 and it initially rallied, then it dropped some (esp. post cv-19). But I've topped up in the odd dip. I like the fact that they *seem* fairly vigilent on their cash, and I like the metals they mine - copper, zinc and lead.

My Dad has just added Rio Tinto to his (quite concentrated, dividend focussed) portfolio. I hope they do well for him!

Matt

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Re: Hummingbird preparing for flight

#314270

Postby dealtn » June 1st, 2020, 2:34 pm

Miningbug wrote:Thank you Matt

I own 12 mining stocks today worldwide. I hope I can shed some light on this part of the market because there is not a great deal of focus here for even the real producing businesses.

MiningBug


There is a "Mining & Metal" Board you might not be aware of. Not saying this is not necessarily the right Board but you might find another audience there, worthy at least of a "cross-post".

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Re: Hummingbird preparing for flight

#318479

Postby IronPyrites » June 15th, 2020, 8:59 am

Hi Miningbug

Many thanks for the write up on Hummingbird.
We are in interesting times and like many I suspect that gold will be a safer haven than many investments particularly if you believe that the current market rise is simply a bear rally. Therefore I have been looking both at gold ETFs and researching stable gold producing miners in recent weeks.
Hummingbird hadn’t crossed my radar because its recent history didn’t flag it up as a stable producer. However I can see that it could well be heading that way and my interest was tweaked by your write up.

Things seem to be moving at quite a pace for them at present.

The results were out on 3rd June:

https://www.investegate.co.uk/hummingbi ... 40278019O/

As you say Yanfolila is up and running and cash producing:

Following the production of 30,282 ozs in Q1 we are pleased to maintain full year production guidance of 110,000-125,000 ozs and confirm that we remain on track to move from net debt to net cash position prior to the end of 2020.


Net cash inflow $44m
Net profit was $7.8m compared with a loss of $12m last year. And is above the forecast of $2.5
Debt reduced from $39m to $31m.

Exploration continues with positive signs:

Of particular note is the outstanding drill results coming in from our 2020 exploration drill programme.
These holes are intended to prove up underground resources at Komana East and also target new greenfield anomalies. No new targets have been drilled at Yanfolila since 2012 and so it is particularly gratifying to see the intersections at the Bolobi Coura target, prioritised due to their proximity to the plant, looking so strong.


Meanwhile on 4th June it was announced that a deal with ARX had been agreed regarding Dugbe:

https://www.investegate.co.uk/hummingbi ... 00079000O/

Some commentators were less than complementary:

https://seekingalpha.com/article/435310 ... or-peanuts

In brief it is a valuable asset:
The net present value was $337 million using $1,500 per ounce of gold and a 10% discount rate.

But Hummingbird will loose 49% of this:
Hummingbird’s stake in the project can be converted into a 51% stake in ARX.

Regarding their future ‘partners’:
ARX has an impressive team of mining veterans.

This and past problems are cited as a sign of poor management:
Over the past few years the company has also had significant issues at its flagship Yanfolila mine in Mali and this is why I think Hummingbird is a badly-managed gold producer which should be avoided.


Daniel Betts (CEO) commented that this was in fact a ‘good’ deal for Hummingbird.
Firstly they receive a $2m non refundable deposit upfront.
Then a $10m exploration programme from ARX.
And finally a best practice feasibility study which will involve ARX drilling a number of sites (not cheap) for 49%.
Hummingbird will end up with 51% stake in ARX
He also pointed out that with time moving on and doing nothing would risk loosing the exploration licence and leave them with a $70m debt on the balance sheet. They have been sitting on this asset for a number of years.

The market however seemed underwhelmed and the share price has dropped from 29p to 25.5p (9%) in recent days.

This I think is understandable given the potential of Dugbe however it was obviously too big a project for them to take on and this does seem to be a pragmatic way to add a some actual value rather than potential value to Hummingbird while they focus elsewhere.
Regarding the quality of the management I think the article’s comment is a bit glib. There were both political and practical problems at Yanfolila as you outlined and these seem to have been dealt with evidenced by the current production rate. I’m therefore prepared to reserve judgement on management and wait and see how Yanfolila and the development of Kouroussa (see below) progress.

One area that will need ‘managing’ is the effects of covid-19:

We continue to experience cost pressures related to COVID-19; particularly employment costs and logistics costs coupled with, potential, extra material movement later in the year as we look to take advantage of higher gold prices and re-sequence our mine plan to ensure the long term profitability of the mine.  These factors may contribute to as much as an additional US$100 per ounce in our 2020 ASIC and we will provide further guidance on this as matters clarify.


Covid cases in Mali remain on the increase.

On 8th June the acquisition of the Kouroussa gold project was announced:

https://www.investegate.co.uk/hummingbi ... 00072305P/

The acquisition of the Project turns Hummingbird into a near term multi-asset producer with jurisdictional diversification in line with the Company's strategy


Gold produced in 2 years, 100,000oz pa and a 5 year mine life.
Good synergy with Yanfolia
Cost is $10m (a 9.1% share dilution)
Development cost estimated at $90 with Coris Bank International, to provide up to US$100m for the development of Kouroussa.

Daniel Betts commented:
“It is of the scale, geology, process circuit design and grade that are all perfect for our team's experience to be put to immediate use, and it is in line with our strategy to focus on high margin projects.”

Plenty to mull over.
And I look forward to your next mining company write up :-)

Best regards Iron

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Re: Hummingbird preparing for flight

#332381

Postby barchid » August 11th, 2020, 11:36 am

Miningbug
I stumbled upon this stock just a few days ago & have started dipping my toe in the water but reading your analysis was fascinating.
Having made a couple of purchases I looked for HUM on this board, without much hope as very few aim stocks come up here but the precision of your write up has filled in a few holes I was wondering about especially the 49/51 jv.
With gold rather higher now than it was when you wrote first & with the covid risk apparently well covered if last weeks update rns was anywhere near accurate it seems to me that this, obviously like any miner, has risks but with debt reducing rapidly the risk seems to have reduced and the share price not totally reflective of our current position.
I look forward to your next post !

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Re: Hummingbird preparing for flight

#334481

Postby IronPyrites » August 19th, 2020, 8:34 pm

Hi All

Political unrest in Mali has caused shareholder concern.
https://www.aljazeera.com/news/2020/08/ ... 26841.html

Hummingbird is not the only miner affected by anxieties regarding the political outcome.
https://www.ft.com/content/dc14cfeb-4ba ... 8594f91996

Some are suggesting this is a buying opportunity as the situation is only a 'flash in the pan'.
It may well be that the miners are unaffected and Hummingbird and other Mali miners will recover and more from these market dips.

However rarely does sentiment reverse that quickly particularly when it is likely that and transition to a stabler situation will probably take months.
My suspicion is that the share price will drop lower before an eventual recovery and this will only occur if political stability resumes which is not a given.
On that basis I sold my relatively modest holding today for a small gain and will watch from the sidelines to see if a more advantageous entry point materialises.
I still remain bullish regarding both gold and gold miners and another gold miner untroubled by political unrest may well catch my eye in the meantime - Shanta Gold (SHG) and Anglo Asian Mining (AAZ) are both high on my watch list.

Regards
Iron

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Re: Hummingbird preparing for flight

#336446

Postby Miningbug » August 27th, 2020, 9:04 pm

Hi Iron and all

Sorry for my highly delayed response. I unfortunately took unwell with covid and have had issues around my job over the last few months that have kept me utterly busy. Thankfully those hindrances are out of the way now so I am back and will try to get back on track now. Here's my summary of recent £HUM events and I will try to get another company analysis done over the bank holiday! It's a company also operating in the PMs space with quite a rich pipeline of catalysts.

I am pleased to see £HUM making progress. I profiled it at 29p and today we are at 36p. Itdid get to above 41p but events in Mali have brought things spluttering back. The flight had begun, but early turbulence! I am not a geopolitical expert so I cannot shed light on what will happen on the ground. This will not help the valuation of HUM but there was already a big risk discount in place. I also hope that things calm down politically and Hummingbird, Resolute, Barrick and others have said so far that nothing much has really happened to hit their mining operations. It is a case of the less we hear from Mali over the next few months the better.

Other events!

A) Dugbe. I found the deal quite underwhelming for what is such a large asset. However there is at least now a development plan in place and there is no further administrative cost outlay to Hummingbird. On the whole, not a great deal, not a stinker. I think it is slightly dilutive to shareholder value in the long run but that is OK as it has reduced the risk profile and pushed the $15m Anglo Pacific royalty payment down the line. It is a bit of a mates rates deal, but shareholders will benefit very strongly if they advance this.

B) Kouroussa. This is interesting. It takes them into a new country, and the economics look great. A 70% IRR and $160m NPV at $1500 gold ticks all the boxes for a project that will end up looking quite like Yanfolila. Upfront capex $90m, its a thumbs up from me. My only reluctance is that this is based on management estimates rather than a third party independent source, but even so, the value of the project should be good even with a bit of a discount and doubly so at spot gold.

C) Q2 production. Very good all challenges taken in. $39m EBITDA. Net debt down to $20m. $27m operating cash flow and $45m before a build up in inventory. That has helped shake off some of the Mali concern. Wait until spot gold prices feed into Q3 production

This remains a very cheaply rated stock and one I very much like. It is not the best gold business out there by a big margin but it offers compelling value.

Let us not ignore that gold has rallied a lot since my article. It was $1730 an ounce and reached well over $2000 an ounce as I hoped for, "My view is also that we move above $2,000 an ounce". There is a lot of gold price volatility but my view remains that gold holds $1850 as a new base, and we move back above $2000 in the coming months.

That leaves Hummingbird very cheap... as it does my next mining pick! Stay tuned for that in the next few days!

MiningBug

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Re: Hummingbird preparing for flight

#336814

Postby IronPyrites » August 29th, 2020, 5:42 pm

Hi Miningbug

I am sorry to hear that you have suffered with covid over the last few weeks and glad to hear that you are now well on the road to recovery. So far my wife and I have managed to avoid contracting it despite an influx of holiday makers to our neck of the woods and an apparent reduction in risk reducing behaviours.
After your write up I did take a small position in Hummingbird at 25p taking advantage of a market pull back on the Dugbe news. Political upheaval is always a possible risk in African countries and the recent unrest in Mali introduced too much uncertainty for me and so I decided to exit at 31p.
So far things seemed to have stabilised with little disruption to the gold miners but I am happier looking elsewhere as there are other gold mining opportunities without the same active political risk.

As an aside I have recently taken a position in Anglo Pacific who now have an interest in the Dugbe Gold Project:
The largest discovery of gold in Liberia. Hummingbird Resources has entered into an earn-in agreement with ARX whereby ARX will undertake the feasibility study in return for up to 49% interest in the project. The Group has a 2% NSR royalty over this project which it carries at US$1m on its balance sheet but should the asset come into production sooner this would increase significantly.


https://www.investegate.co.uk/anglo-pac ... 00039507T/

I notice that you have completed a write up on Shanta Gold which has been on my watchlist – I look forward to reading and commenting later this weekend :-)

Best regards
Iron

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Re: Hummingbird preparing for flight

#336838

Postby Miningbug » August 29th, 2020, 7:37 pm

IronPyrites wrote:Hi Miningbug

I am sorry to hear that you have suffered with covid over the last few weeks and glad to hear that you are now well on the road to recovery. So far my wife and I have managed to avoid contracting it despite an influx of holiday makers to our neck of the woods and an apparent reduction in risk reducing behaviours.
After your write up I did take a small position in Hummingbird at 25p taking advantage of a market pull back on the Dugbe news. Political upheaval is always a possible risk in African countries and the recent unrest in Mali introduced too much uncertainty for me and so I decided to exit at 31p.
So far things seemed to have stabilised with little disruption to the gold miners but I am happier looking elsewhere as there are other gold mining opportunities without the same active political risk.

As an aside I have recently taken a position in Anglo Pacific who now have an interest in the Dugbe Gold Project:
The largest discovery of gold in Liberia. Hummingbird Resources has entered into an earn-in agreement with ARX whereby ARX will undertake the feasibility study in return for up to 49% interest in the project. The Group has a 2% NSR royalty over this project which it carries at US$1m on its balance sheet but should the asset come into production sooner this would increase significantly.


https://www.investegate.co.uk/anglo-pac ... 00039507T/

I notice that you have completed a write up on Shanta Gold which has been on my watchlist – I look forward to reading and commenting later this weekend :-)

Best regards
Iron


Thank you Iron. I think you are in the stance many would take as 'war'/'coup' risk is one that is impossible to model and means the worst case scenario can be very grim. I do like Anglo Pacific at current levels.... maybe I will invest some time at some point in the future although current focus for now is on the base miners who are most leveraged to an upswing in metal prices. Royalty companies are a nice risk diversifier. I wish you a superb weekend

MiningBug

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Re: Hummingbird preparing for flight

#340048

Postby barchid » September 13th, 2020, 4:55 pm

Miningbug
Please also accept my best wishes re your recovery going forward.
Another GREAT update, end August, I really do appreciate that.
I see it appears the military in Mali have agreed an 18 month transition in government, which hopefully gives us stability, though only a guess as Mali politics are certainl not my forte !
I agree with you re the mates rates, but I do see that it makes a much better balanced business, in this political/economic climate we live in now HUM must be a very cheap insurance policy to most portfolios, and a "sitter" to a gold bug.
Thanks again


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