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Hummingbird Resources: Market's valuation of gold junior creates an opportunity

Published: 02:59 11 Apr 2014 EDT

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There have been some signs of renewed interest in the gold mining sector, particularly as the price of the precious metal has continued to tick higher.

That said, it is mainly the producers that seem to be benefiting from this spike in demand. Many of the explorers are still being priced to fail – even where there is conclusive evidence to the contrary.

But remember, these anomalies create opportunities for investors with a good eye for real value and the iron will to go against the prevailing negativity.

The disconnect between risk, in-the-ground value and price make Hummingbird Resources (LON:HUM) a prime example of this sentiment driven mismatch.

The recent resource upgrade from the Liberia-focused gold mine developer revealed why.

Its Tuzon deposit, on the Dugbe 1 Project, is now estimated to contain 2.5mln ounces of gold, a 300% increase on the previous estimate, with 2.12mln ounces sitting within a pit shell designed to be economic at US$1,200 an ounce.

Just under 1.9mln ounces were in the higher-confidence indicated resource category.

What’s more, it would have just under 1mln ounces within a US$600 an ounce pit shell.

The report, based on a comprehensive programme of infill drilling, also delivered an increase in the grade to 1.56 grams per tonne from 1.23.

Effectively, it removed the greatest risk items from the company’s definitive feasibility study, which should be completed in the third quarter.

It also allows the group to draw down the final tranche of the US$5mln of royalty funding provided by Anglo Pacific.

So this was a good news announcement. Yet the market’s reaction has been lukewarm to say the least.

It is worth stepping back just to see what Hummingbird has and is.

Its Dugbe 1 Project now has a global resource of 4.2mln ounces, though the geology suggests there is more gold to be found.

What’s more, the AIM-listed group is sitting on the beginnings of what looks like a new mining district.

It also has a direct US$5mln investment from the IFC, part of the World Bank group, that gives third party validation of the property and its potential.

Okay, there are challenges. One was grade; however, this was addressed in the recent resource statement and now stands at a fairly robust 1.56 grams per tonne even within the US$1,200 pit.

And there are challenges to working in Liberia and the country’s Eastern Jungle. They are challenges, not insurmountable roadblocks.

Neither are the project economics deal-breakers – far from it.

At US$212mln, the capital expenditure (capex) is debt financeable – more so given the recent upgrades. Rational analysis suggests 60% of that figure could be met from debt, while it is understood that lenders are keen to back the project.

Dugbe’s net present value is US$186mln at a gold price of US$1,300 an ounce, rising to US$337mln at US$1,500. The latter figure gives an internal rate of return of over 43%.

The share price certainly doesn’t reflect this. It is a third of the 2010 initial public offering valuation, which was at a point where the group had just 812,000 inferred ounces of gold and a pipe-dream.

Mali-focused Papillion Resources demonstrates the sort of re-rating that could be on the cards once the market tunes into Hummingbird’s potential.

Its 4.2mln ounces at the Fekola Project are at a grade of 2.38 grams per tonne. This is a higher than its AIM-listed peer and it is looking at a more aggressive 300,000 ounces a year production (versus Hummingbird’s 125,000 ounces).

However, Fekola’s mine life of nine years is less than half Dugbe’s 20 years, while the initial capex of US$298mln is also significantly higher than investment in the Hummingbird project. On all-in production costs, the two are evenly matched and towards the bottom of the curve.

But where Hummingbird is valued at US$60mln, its Australia-listed peer is worth exactly seven times that sum.

As the Americans would say, go figure.

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