Gold miner sees its production soar

By Graeme Dickson
Updated: 12:10 EDT, 27 April 2011

Given the backdrop of a soaring gold price, it is not often you can buy a gold mining production company when it is just off its 52 week lows.

But we have identified one in the form of Hambledon Mining (HMB) a gold producer and explorer in Kazakhstan:

The company recently raised £8.6 million at 4p to help fund infrastructure upgrades, secure electricity supply and an integrated waste management system at its flagship Sekisovskoye mine.

Hambledon announced earlier in the month that it had produced 4,449 ounces of gold in the first quarter of 2011, which is up 72 per cent compared to production for the same quarter in 2010.

Cash costs (for the life of the mine) are expected to fall from US $930/ounce to $810/ounce compared to the current price of about $1,500/ounce for gold, suggesting decent margins for the miner.

The company is aiming to produce 100,000 ounces of gold per annum over the next few years, in which the current drilling programme will assist in proving up the resource, which under a JORC compliant statement currently stands at 2 million ounces of indicated/inferred of gold and 2.9 million ounces of silver, of which 634,000 ounces of gold is proven and probable.

On a crude calculation, given the estimated cash costs per ounce and the high gold price, its gross profit could equate to approximately US $69 million which at an exchange rate of £1:$1.6447 equals £41.9 million.

Take away an estimated £5 million in administration expenses and another £5 million for provisions of unexpected costs, it brings the profit figure to £31.9 million, less 26 per cent corporation tax gives a net profit of £23.6 million.

Divide this by 743 million shares in issue, brings you to an earnings per share of 3.17p.

If you believe the company can prove up the resource and potentially double the size of the reserves, this would bring the life of the mine to about 12 years.

A price to earnings ratio of say five times, may look like a harsh rating, but would equate to nearly 16p, given that I am not taking into account silver production or the company's other projects.

Bear in mind, my assumption is that the gold price, exchange rates, production rates, costs of production and corporation tax remain constant – many of these variables will change and may enhance or reduce the overall outlook for the company.

Political risk may also come into question, but for now Kazakhstan seems to be an agreeable place to do business.

Update

Biofutures (BIP) - suggested to buy at 6p, the stock slipped to 5.75p – continue to hold for now.

Geong (GNG) – suggested to buy at 34p, the shares remain at 34p – sit tight as we await developments. GTL Resources (GTL) – suggested to buy at 88.5p, the stock closed at 84p yesterday. The company is diversifying its income stream by developing zein protein at its Illinois River Plant on top of its substantial ethanol production. Hold.

Avanti (AVN) – suggested to buy at 454p, the stock closed at 496.75p. Continue to hold.

Globo (GBO) – suggested as a buy at 17.25p, the stock closed yesterday at 28.25p. I met the management team briefly last week and it looks as though there will be a lot of excitement for its Go Enterprise initiative, which should allow corporate servers to communicate with any mobile and not be tied in with a specific brand. Continue to hold

Optare (OPE) – tipped as a buy at 3p, the stock closed yesterday at 2.625p: hold for now after the company won a £1.2 million order from Manchester Airport. Rheochem - now renamed Lochard Energy (LHD) - tipped as a buy at 15.13p the stock closed at 14.875p. Continue to hold after the company successfully disposed of its fluids business last week.

Evolution Group (EVG) – tipped as a buy at 78.5p the stock closed yesterday at 71p. Keep the stop based on a close below 70p.

OMG (OMG) – tipped as a buy at 43.75p, the stock closed yesterday at 39.5p.The company is likely to release a trading statement in the next few days that should provide us with a better insight to its operations and contract progress.

ZincOx (ZOX) – tipped as a buy at 60p, the stock closed at 51p. Continue to hold as the company trades at a slight premium to its cash in the bank and attributes little value towards its flagship South Korean project.

Pendragon (PDG) - tipped as a buy at 23p - it closed at 23.5p. The stock has not performed in the time frame I would have liked and given the general backdrop of retail gloom, I would be inclined to take a small profit and move on.

Cyan Holdings (CYAN) – suggested to buy at 1.325p, the stock closed at 0.925p. Continue to hold but if it closes below 0.8p, cut the position.

GB Group (GBG) – suggested to buy at 36.75p, the stock closed yesterday at 39.25p. The company delivered a profits upgrade in its trading update last week and I would be inclined to hold out for further upside.

SocialGo (SGO) – suggested to buy at 3.55p, the shares closed yesterday at 2.2p. The company has gone a bit quiet as it focuses on launching its Version Two of its SocialGo offering. Sit tight for now.

Active Energy (AEG) – suggested to buy at 6.13p, the stock closed yesterday at 6.625p. The stock was at one stage the worst performing tip to date. However almost all is forgiven after it announced it was buying Red Line Engineering Services for just under £500,000 allowing the enlarged group to offer 'end-to-end' installation and maintenance of power installation/cabling requirements primarily for the rail/transport sectors. Given that the entry level for the idea was down more than 50 per cent at one stage, to see the stock back in profit, gives temptation to take the near 10 per cent profit. However, my inclination would be to partially de-risk and sell half and see what happens with the other half after.

Edenville (EDL) – mentioned as a buy at 1.195p, the stock closed yesterday at 1.265p. Having already suggested to sell one's investment stake out at 2.51p, the balance should be in for free. Continue to hold.

Weatherly International (WTI) – suggested to buy at 8.1p, the shares closed yesterday at 11.875p. Continue to hold and buy on any significant weakness.

Toumaz Holdings (TMZ) – tipped as a buy at 8.625p, the stock closed at 7.25p. Continue to hold as the company addresses some time and cost saving technology as well as making life much easier for patients with wireless nodules contained in the plasters it provides.

Renewable Holdings (REH) – tipped as a buy idea at 15.25p, it closed yesterday at 15.5p. Its Carnegie Wave Energy investment, in which it holds 27 per cent of it, is starting to show commercial success in its trials and this could lead to a much larger deployment further down the line as it showcases its wave energy installation.

Bowleven (BLVN) – tipped as a buy at 177.25p, the stock closed at 290.75p yesterday having already suggesting to sell half the investment after it doubled several months back. Tissue Regenix (TRX) – suggested as a buy at 16p, the stock has picked up from its lows and is now trading at 12p. This might be a good time to pick up stock after signing a deal with a commercial entity and a university both based in Brazil. Sit tight for now.

The material for this report comes from Sharescope. The writer does not hold any shares or derivatives in the above mentioned companies except Globo, SocialGo and Weatherly International. Some clients of Optiva Securities may hold shares in the above named mentioned companies.