This year has been truly transformational for Hummingbird Resources (LSE:HUM), with the firm transitioning comfortably into the production phase after ramping up its Yanfolila gold mine in Mali to nameplate capacity. The company’s ability to deliver its gold project on time and within budget through harsh gold conditions and a challenging operating environment was a testament to its management’s skill and sets it up well for the future. With Hummingbird’s market cap continuing to hover around £110m, we caught up with Robert Monro, head of business development, to discuss the business’s exploration programme and its potential in Liberia.
Ramping up
Hummingbird’s core focus in recent years has been its Yanfolila Gold Mine in Mali, which has a resource of 2.2Moz gold at 2.4g/t and reserves of 710,000oz at 3.14g/t. After a period of rapid development, the business delivered its first gold pour from the site in December 2017, on time and budget. It then began ramping up production, and by the end of Q1 2018 both Yanfolila’s mine and its plant were operating at nameplate capacity, with commercial production declared from 1 April.
The firm produced around 10,000oz of gold in both March and April and is now targeting full-year production of between 105,000-115,000oz. Hummingbird is yet to officially publish its all-in sustaining costs per oz at the site, but analysts are currently predicting that it will come in at between $750-$800/oz for year one. The upper estimate for both production and costs would suggest the site can generate nearly $60m of revenue in its first year at current gold prices of $1291oz ((115,000 * $1291) – (115,000 * $800).
Now that Hummingbird has brought Yanfolila into production, the business is embarking on a fully-funded 2018 Exploration Programme. The work is expected to cost between $8-10m but will not exceed 15pc of operating cash flows from the site. Monro told us this limit reflects the firm’s strict focus on capital allocation:
‘One thing we are conscious of is that the distribution of capital in the mining industry has sometimes been poor and therefore has a certain scepticism attached to it. We are very keen to focus on our high-margin project and deliver shareholder returns through the measured and sensible distribution of funds.’
The exploration programme aims to extend Yanfolila’s life of mine beyond seven years by targeting 1.5Moz of indicated and inferred resources outside the current mine plan. The business will undergo 50,000m of drilling at six deposits to convert 400,000oz to reserves. It is also looking at increasing nameplate processing capacity to 1.5Mtpa from 1.24Mtpa.
An essential part of this work will be Gonka, a deposit based 5km away from Yanfolila’s processing plant. Gonka has an inferred resource of 385,198oz at 3.1g/t, a significantly higher grade than Yanfolila’s current supply. According to Monro, Gonka has the potential to add an incremental 30,000oz a year of production to Yanfolila, which could increase gold production to up to 150,000oz a year and extend the site’s life of mine to 10 years. Monro believes this could move the needle for the Hummingbird’s shares:
‘I think there is still value growth to be had with Yanfolila. I do not believe the fact that it is a 110,000-120,000oz pa gold mine has been reflected in our share price yet. Generally speaking, this is understandable; there have been numerous companies that have seen their first mines fail before getting into production, so there might be a lag between us delivering and us getting real value for the results.
‘I think the value upside from this $8m budget is considerable. The aim is to carry out all of the drilling in three to four months from June. Then, crucially, we should have updated reports and reserves by the end of this calendar year. This timetable is no doubt aggressive, but by working with four rigs and drilling those metres as quickly as possible, I think it is doable. By the end of the year, we want to show that while we might have spent a year of mine life exploring, we have been able to add four or five years in the process. This progress will be key to our developing equity story.’
Flying high
Hummingbird’s other key asset is the Dugbe Gold Project in Liberia, which contains the country’s largest-known gold deposit with a resource of 4.2Moz. The firm has owned Dugbe for some time, and before acquiring Yanfolila, it was close to completing a definitive feasibility study on the project. However, Monro tells us that due to capital constraints and Hummingbird’s focus on maximising the use of its shareholder’s money, its focus has shifted to Mali over the last three or four years.
Work carried out so far at the project has given it an NPV of $186m at a gold price of $1,300/oz, a 20-year life of mine, and anticipated production of 125,000oz of gold a year. With all-in sustaining costs coming in at around $900/oz – higher than Yanfolila – upside at the site will benefit from continued gold price strength.
With Hummingbird recently deploying a team in Liberia, this development hiatus looks set to end. The firm will now look at realising value from the licence, focusing in particular on around 2,000km2 of virtually unexplored exploration ground. It will also look at converting measured and indicated resources from beyond the main ore body and will schedule low-strip, shallow ore from other deposits. Monro told us he feels that the market has incorrectly perceived Hummingbird’s move away from Dugbe in recent years as a sign that the asset is weak:
‘That perception is far from the truth. Dugbe is a high-quality asset, it has a low strip ratio, very good metallurgy, and is only 70km from a deep-water port, which means that building infrastructure will be straightforward. Dugbe has a huge amount going for it, and we now need to put in the time and the effort to complete the feasibility study and move it to the next stage so we can start getting value for it on the market.’
Hummingbird also holds a 34pc stake in West African gold explorer Cora Gold. Cora floated on AIM last October after acquiring Hummingbird and Kola Gold’s gold exploration assets in Mali and Senegal. Since listing, the firm has been carrying out a 15,00m drill programme at its Sanankoro gold discovery, which is set to house a 1Moz standalone mine and is within trucking distance of Yanfolila. Stage one drilling at the site revealed impressive gold grades and a discovery. The firm has also carried out a reconnaissance drill programme at its Tekeledougou licence in Mali that has unveiled two new large-scale gold zones with high-grade intercepts.
‘A world-class exploration team leads Cora Gold headed up by Dr Jonathan Forster, who has made four discoveries which are now gold mines in West Africa; this is as good as track records come in this area. We have two board directors at Cora Gold – of which I am one. Like all non-executive directors, we have a good idea of what is going on,’ Monro told us.
Core strength
Hummingbird has said that existing resources will fund all its planned work and expenses in 2018. To recap, this includes spending up to $10m on exploration at Yanfolila, operational costs (which stood at just $649,000 for the whole of 2017 according to the firm’s results this week), and – crucially – debt repayments.
Last year saw Hummingbird fully draw down a $60m debt facility with Coris Bank International to help fund its development of Yanfolila. The facility has a four-year term, 9pc interest rate, and 12-month capital repayment deferral. Payments work out at $5m a quarter, or roughly $22m a year, including interest payments. Payments will begin next month, continuing for three years. As of 31 December 2017, Hummingbird had total liabilities of $109.4m, comprising the facility and additional current liabilities of c.$56m.
With cash sitting at $28m as at 31 March 2018, and Hummingbird expecting to generate $60-$70m of free cash flow in FY2018 after becoming cash flow positive in February, the business looks to have a long cash runway. Indeed, Monro tells us that net debt is expected to reach zero by year-end:
‘We are putting $8-$10m into exploration, and then from June, we have $5m of debt repayment per quarter, so that works out at $20m a year plus interest, or around $22m from June to June. We will, therefore, have significant surplus free cash flow left over given the size of our cash balance and free cash flow. It is fair to say that, assuming a flat gold price, we will be at zero net debt by the end of this calendar year.’
However, it is unlikely that this excess cash will be returned to investors any time soon, with CEO Dan Betts stating that it is too early to make ‘grand promises about dividend policies’ in this week’s FY2017 results.
Betts added: ‘We manage a finite and depleting Resource (our orebody) and if we are going to achieve our aim of building a world-class mining business then we must constantly re-invest in our business through a combination of prudent exploration and disciplined corporate activity, providing those options present real opportunities to create value.’
In the above slide from Hummingbird’s most recent presentation, the firm suggests it is undervalued against other African explorers against several metrics. With shares currently sitting at 33.3p and its market cap at £110.7m, the market is current ascribing Hummingbird an enterprise value of c.£61.5m, based on net current assets of $1.1m (£50m) as at the end of 2017 (current assets ($57.1m) – current liabilities ($56m)).
It is worth noting that this EV pits Hummingbird’s present market cap, informed by progress the company has made in 2018, against an EV calculated in December 2017, covering a period of no production and high OPEX. As a result, it will be worth revisiting once the firm has reported at least a full quarter of production at Yanfolila, post-ramp up. Given that Hummingbird has just emerged from a period of intense development, metrics such as these can become outdated very quickly. Monro told us a re-rate could be on the cards for Hummingbird’s shares as the market catches on to its progress:
‘We have been in positive cash flow since February, but I think it will take a bit of time for the market to catch onto this. When we have shown a full quarter of production and people can see the revenue we are generating, the story will start to look more real. I think the perception is perhaps always lagging behind the reality.
‘This year is about delivery. We have ramped up Yanfolila, and that has gone well, we have delivered production, and that has gone well- but we are certainly not sitting on our hands. We are 100pc focused on getting Yanfolila to deliver what we have forecasted, as we have done so far. Hopefully, this on its own should trigger a significant re-rate for the firm. I think there is still an opportunity for those who have only just learned about the stock to get in at a favourable price. If we can get Yanfolila’s mine life to 10 years- or indeed more- then this will maximise value.’
Flying high
Regardless of whether you agree with Monro’s belief in a re-rate, Hummingbird has undoubtedly proved a highly-disciplined approach to get Yanfolila producing, instilling faith in plans for its two core assets. Indeed, the considerable institutional backing secured by the company reflects the value of this track record: its largest investors include Capital (8pc), Gold Fields (6.2pc) and asset managers Odey (6pc) and Majedie (5.4pc).
With shares failing to make a break higher this year, a real inflexion point for the company is likely to be the publication of its results for Q2 2018, its first full quarter of production. Alongside this, it will be interesting to see how regular updates on the business’s exploration progress and developments in Liberia affect its shares. If -like Monro- you think the market is going to catch on and shares will re-rate, then it might make sense to buy now at 33.3p before Hummingbird flies the nest.
