(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.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 AssetsFrom 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.
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.
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 transformationFixing 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
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).
The risks are operational distress, gold down, and life of mineA 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.
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.
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.
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
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