When a firm announces that it has launched a 1oz gold coin minted with the portrait of Musa I of Mali, often referred to as the richest man in history, it is probably safe to assume that it is fairly confident in its prospects. On Tuesday, gold producer and developer Hummingbird Resources (LSE:HUM) did just this, explaining that the coins will be crafted from gold originated at its Mali-based Yanfolila mine, which is due to begin its first gold pour next month.
There’s no question that the move is a publicity stunt; the real issue is whether or not investors should buy into this company? AIM-listed Hummingbird is currently verging on the biggest development in its recent history after a busy period of news.
Since September, Humminbird shares have risen from 32.5p to 38.9p, with the firm regularly reassuring investors that it will deliver first gold from Yanfolila by the end of 2017 with 132,000oz gold production forecast for year one of production. A year ago they were just 18.9p.
Hummingbird’s ability to deliver a gold project on time and within budget, throughout a variety of different gold price conditions and in a challenging operating environment, is almost unheard of in its industry. It is especially noteworthy when rivals like Avocet Mining (LSE:AVM) and Acacia Mining (LSE:ACA) remain highly exposed to volatile gold prices and are curtailed by strike action and vicious government disagreements. When you then consider how savage the prolonged Bear Market was Hummingbird really does stand out from the crowd.
Likewise, with all-in sustaining costs of just $695 per ounce, based on a projected gold price of $1,250 per ounce, production costs fall well below that of many of its rivals.
Hummingbird currently has a market cap of around £133.5m. Were Humminbird operating in a different country this valuation would look incredible cheap, however the level of risk associated with operating in Western Africa often plays strongly in investors’ minds. Take from that what you will, but the company’s valuation compares extremely favourably to Hummingbird’s estimates for its first year of production at Yanfolila.
At a gold price of $1,250 per oz, the mine is expected to generate additional operating revenues of around $73m if it meets a production target of 132,000oz next year. In a bull market scenario, where gold prices hit $1,400 an ounce, free cash flow could reach around $92.3m, indicating plenty of upside potential.
The only downside here, apart from the location, seems to be the Yanfolila’s limited life span, at just 7.5 years. However, it is worth noting that Hummingbird claims to have over 1Moz of gold in resources that it will look to convert to reserves once the mine is in production.
Aside from the excitement for next month’s maiden gold pour, the market seems to have been largely unresponsive to several potentially promising updates from Hummingbird in recent months, which could provide even more upside.
Hummingbird’s stock showed little movement at the end of September, when the firm bought 50pc interest in Mali-based Kobada Gold Project in Mali owned by African Gold Group (TSX-V:AGC). This came despite the purchase potentially adding an additional 50,000oz per year of production at Yanfolila.
‘This deal with AGG gives us a path to 150,000oz production per year within three years from now combined with the organic extension of mine life from existing resources extending it well beyond 10 years,’ said chief executive Dan Betts.
Likewise, in October, Cora Gold (LSE:CORA) – in which Hummingbird owns a 33.9pc stake valued at $5m – listed on the AIM market in a £3.5m IPO. Cora believes its Sanankoro project in Mali has the potential for a standalone mine.
Finally, later in October, shares edged up slightly after Hummingbird further demonstrated its confidence by calling a general meeting to propose a reduction of its share premium account – a largely, restricted, un-distributable reserve.
Aside from its willingness to focus on shareholder returns, Hummingbird said this move will greatly contribute towards eliminate a $13m deficit – read debt – on its profit and loss account. This means future revenues can be put towards more useful initiatives like investing in growth.
The company, which is was founded by members of the Betts Metal family and has the backing of senior figures from power generation company Aggreko and Rose Petroleum, also has a highly promising site in Liberia called the Dugbe Gold Project, made up of three separate discoveries.
Potential is clearly there at Hummingbird, but whether or not you are confident enough to buy one of their gold coins depends on how seriously you take their projections for Yanfolila and where you believe gold prices will go in the near future.
This year has seen investors flock to gold – often seen as a safe-haven asset – for protection throughout periods of heightened political risk. To name but a few, these events have included growing tension between the US and North Korea, Hurricanes Irma and Harvey and political tension across the developed world.
Indeed, Citi analysts recently said that the ‘new normal’ of elevated geopolitical tension is likely to see gold prices push north of $1,400 per ounce through to 2020. With Donald Trump sparking up yet more online outrage by retweeting anti-Islamic videos on Twitter as I write this, this outcome doesn’t seem so unlikely. Hummingbird could well find its seven-year life of mine at Yanfolila coincides with a golden period for the price of the yellow metal. Any weakness in the company’s shares could present quite an opportunity.
The author of this piece does not own shares in any of the companies covered in this article.