Hummingbird Resources (OTCPK:HUMRF) is a London headquartered exploration and development company focused on Western Africa. Its flagship projects are located in Mali (Yanfolila - 2.2 million toz gold) and Liberia (Dugbe - 4.2 million toz gold). The Yanfolila gold mine construction has already started, it is fully funded and first gold production is expected in Q4 2017. It should produce approximately 130,000 toz of gold in 2018. The cash-flow generated by Yanfolila should be subsequently used for development of the Dugbe mine.
Hummingbird's share price bottomed in January, at $0.15. As the gold price started to grow, the share price peaked at $0.48 on April 19. The current share price of $0.32 is well below the April levels, however it is important to note that a huge share dilution took place in June. The company has issued 225,188,781 new shares to raise $71 million to fund the Yanfolila gold mine construction. As a result, the current market capitalisation of Hummingbird Resources is approximately $110 million, which is almost 6x more than in January 2016 and 3x more than in January 2014. And there is still a lot of space to grow.
The Yanfolila Project
The Yanfolila Project is located in southern Mali, close to the Guinean borders. It contains total resources of 1.8 million toz gold and an non-compliant exploration potential of 390,700 toz gold. The proven and probable reserves include 709,800 toz gold. The project is located in a highly prospective area and there is a high probability of further resources and reserves growth.
The mine construction has already started. It should cost only $79 million which is a very acceptable price for a mine with an expected average annual production of 107,000 toz, over an initial mine life of 7 years. Over the initial 7 years, gold will be produced in 2 phases, from 5 pits. The initial production will come from the Komana East and Komana West pits that contain mineralisation grading 3.18 and 3.06 g/t gold respectively. In phase two, three smaller satellite deposits (Guirin West, Sanioumale West, Sanioumale East) will be mined.
Source: Hummingbird Resources
In phase 3, that is not included in the current mine plan, reserves or DFS, the Gonka, Kabaya South and Soloba/Koma pits will be mined. According to a desktop study released back in February, the Gonka deposit contains inferred resources of 385,000 toz gold of which 169,000 toz should be mined over a 6 year mine life (92,000 toz gold at 2.3 g/t gold from an open pit mine and 77,000 toz gold at 4.5 g/t gold from an underground mine). More ounces should be added to the mining plan over time, as Hummingbird's exploration concessions in the Yanfolila area cover over 1,200 km2 and the company has identified some interesting exploration targets. For example in the Malikila area, intervals of 25 meters grading 4.38 g/t gold or 8 meters grading 7.23 g/t gold were intersected.
According to the updated DFS released in February, Yanfolila should produce 132,000 toz gold in the first year of production (most probably in 2018) and it should produce 107,000 toz gold on average over its life time. The grades are very high for an open pit mine and the recoveries should be around 92%. As a result, thecash costs are estimated at $620/toz and AISC at $695/toz. Given that the CAPEX is low as well ($79 million), the resulting after-tax NPV(8%) is $162 million and the after-tax IRR is 60%, at gold price of $1,250/toz.
The Dugbe Project
The Dugbe Project consists of three deposits that contain 4.2 million toz of gold. The Dugbe F deposit contains inferred resources of 1.76 million toz gold at gold grade of 1.28 g/t. The Tuzon deposit contains inferred and indicated resources of 2.47 million toz gold at gold grade of 1.47 g/t. There is also the Sackor deposit that lies 2.1 kilometers to the south-west of Dugbe F. It contains some economic mineralisation but a resource estimate hasn't been finished yet.
Source: Hummingbird Resources
The Hummingbird's Liberian land package covers 2,300 km2. Multiple high-priority exploration targets have been identified across the area (map below). There is a high probability that further economic gold deposits will be discovered in the future, as Hummingbird has at least 25 years to explore the area, according to the Mineral Development Agreement signed between Hummingbird Resources and the Liberian government.
Source: Hummingbird Resources
According to the 2013 PEA, the Dugbe mine should produce 125,000 toz gold per year, over its 20-year mine life. The projected CAPEX is $212 million but it can decline to $143 million if the contract mining option is chosen. The main weakness of the project are relatively high production costs. The expected cash costs should range from $759/toz, over the first years of production, to $904/toz before the end of the mine life. Based on the PEA, it is reasonable to expect average life of mine AISC around $900, which is a high number compared to the majority of other gold projects that are being developed right now. As a result, the after-tax NPV (10%) is $186 million and the IRR is 29.4%, at gold price of $1,300/toz.
But it is expected that the ongoing DFS will provide much better results. The PEA included only the Tuzon deposit, while the DFS should include also the Dugbe F deposit. Also the mine plan should be optimised in order to increase the cash-flow over the first years of production. But the biggest savings should be realised on energies. According to the PEA, the energy should be generated using diesel power generators. The Brent oil price averaged $111.63 in 2012 and $108.56 in 2013, when the PEA was completed. In 2015, it was only $52.35. The energy costs accounted for more than 1/3 of the total cash costs. At the current oil price, the cash costs and AISC should be lower by more than $100/toz.
But the current low oil prices probably won't last for too long. This is why Hummingbird in collaboration with IFC InfraVentures (a subsidiary of IFC (International Finance Corporation - a member of the World Bank Group)) prepared PFS for a hydroplant that should supply the Dugbe mine, as well as the local communities in southern Liberia. Five alternatives were prepared (capacities of 10, 15, 20, 25 and 30 MW). Thanks to the hydro plant, Dugbe's energy costs should decline from $0.28/kW to $0.05/kW. The $0.05 cost doesn't include the financing costs of building the hydro plant, but even assuming that the final price will be $0.1/kW, the cash costs should decline to the $620 - $770/toz range and the average life of mine AISC should decline below $800/toz as well. Moreover the construction of the hydro plant shouldn't be too expensive, as the 10MW option should cost $51.5 million and the 30MW option should cost $143.5 million. It is also able to expect that a big part of the construction (if not the whole construction) will be financed by IFC or by the Liberian government.
Taking into account the optimized mine plan (probably more reserves and higher annual production), the significantly lower energy costs and also the significantly weaker Liberian Dollar (the USD/LRD exchange rate increased from 75 in 2013 to 93 in 2016, or by 24%), the DFS should present notably lower AISC, as well as higher NPV and IRR. Moreover the NPV will probably use a less conservative discount rate of 5% or 8%, which is a standard nowadays.
There were 332,141,250 shares outstanding as of June 30, 2016. Another 11.1 million shares were issued in August, to raise further $4 million. Adding to it 5,494,000 share options and 9,899,504 warrants, there should be approximately 360 million shares fully diluted. At the current share price of $0.30, the fully diluted market capitalisation is nearly $110 million.
The Yanfolila NPV(8%) is $162 million, at gold price of $1,250/toz. Moreover Gonka has to potential to add further $24 million, according to the desktop study. It means that taking into account only the NPV of the Yanfolila Project, the price target is around $0.5 at the current gold price. Adding to it 90% (as a 10% stake on the project was transferred on the Liberian government) of the NPV(10%) of the Dugbe Project, the price target grows to $0.98, which means a more than 226% upside potential.
Valuing the company based on the expected cash-flows, the upside potential is even more tempting. Conservatively using the average annual production instead of the higher production numbers expected over the first years, Yanfolila should produce 107,000 toz gold at AISC of $695. At the 30% tax rate and gold price of $1,250/toz, Yanfolila should generate earnings of almost $42 million per year. It equals to EPS of $0.117. Using a conservative P/E of 10, we can come to a share price of $1.17, based on the Yanfolila mine alone, as soon as in 2018 which should be the first year of full production. Using the dated Dugbe PEA numbers and the Liberian tax rate of 25%, the Dugbe mine should be able to generate earnings of almost $30 million, or EPS of $0.083, which lifts the price target by $0.83, to $2 per share.
The Dugbe mine construction will be financed by cash-flow generated by Yanfolila and it will start only after the Yanfolila mine is completed. The construction will probably start sometimes in 2018 and it should take approximately 18 months. As a result, Dugbe probably won't get into full production before 2020. It means that if the current gold price prevails, Hummingbird's share price has a big potential to grow by more than 560% over the next 4 years.
There are three main reasons, why investors are hesitant to invest in Hummingbird Resources and the shares remain to be cheap:
- the huge share dilution
- the political risks
- the high production costs at Dugbe
- the operating risks
The management of Hummingbird decided to issue more than 200 million shares to finance the Yanfolila mine construction. The share count grew by more then 200% which is really a painful dilution. It is logical that the confidence of some of the old as well as the potential new investors in the management has been shaken. But once Yanfolila gets into production, there should be no need for further dilutions. In 2018, Yanfolila is expected to generate free cash-flow of approximately $70 million and cash-flows of more than $60 million should be expected over the following years, assuming that the current gold price prevails. It should be more than enough to finance a better part of the Dugbe mine or to secure a loan at some favorable terms, if needed.
Also the political risks weigh on Hummingbird's share price. Although the situation is stable in Liberia right now, there was a civil war that ended only 13 years ago. There were also some issues with the Ebola virus that killed 4,809 people in Liberia in recent years, however the whole West African region was declared Ebola-free in January 2016. Also Mali experienced several cases of the Ebola virus. Moreover the northern part of the country is often endangered by attacks of islamists groups. Fortunately, the Yanfolila Project is located in the safer and more stable southern part of the country.
The Dugbe production costs are relatively high, which hurts the project especially in the current environment of relatively low gold prices. But as I stated above, the ongoing DFS will most probably lead to significantly lower AISC and notably improved economics of the project.
And there are also the operating risks related to the mine construction and to the ramp-up process. However, as the construction progresses, the extent of the operating risks should keep on declining. It is able to expect that the market will start to re-rate Hummingbird from an explorer to a producer sometimes in the summer or autumn of 2017.
Hummingbird Resources is a near-term gold producer with a huge growth potential. The construction of its first mine is fully financed and it should be completed by the end of next year. The cash-flow generated by the first mine will be used to develop the second, bigger mine. Although there are some political risks related to investing in Hummingbird Resources, the risks are far outweighed by the potential rewards. As the share markets start to re-rate Hummingbird from an explorer to a producer, the share price will start to climb. At gold price of $1,250/toz, the share price of Hummingbird has potential to grow by more than 500% by 2020. Any growth of gold price only adds to the upside.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HUMRF over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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