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Hambledon Mining – Proposed Fund Raising to Improve Operating Costs and Advance Underground Mine: Speculative Buy with an 8p Target Price

Hambledon Mining’s decision, confirmed on 14th March, to raise up to GBP9.09 million gross GBP8.52 million net by way of a Firm Placing and Open Offer to shareholders is driven by the need to upgrade the infrastructure and accelerate underground exploration at its leading Sekisovskoye operation. The company is emerging from another typically harsh Kazak winter and expects these improvements to secure its electrical supply in the long term, lower process waste capital and operating costs, maintain its environmental compliance and continue with its minimal social and environmental impact.

Hambledon’s proposed offer is comprised of two parts – up to GBP7.03 million (gross) by way of a Firm Placing of 175,720,950 shares at 4p each to existing and new institutional shareholders, and up to GBP2.06 million (gross) by way of an Open Offer of 51,608,923 shares at 4p each to existing shareholders at a ratio of 1 share for every 10 currently held.

The proceeds from the Firm Placing will be used to upgrade Sekisovoskoye’s surface infrastructure, with costs and expected operating cost savings per ounce of gold produced estimated as follows. GBP2.6 million for the installation of a plant waste management system (saving $55/oz), GBP1.1 million for the establishment of dual high voltage electrical infrastructure to the project’s site (saving $15/oz), GBP1.3 million to upgrade some of the plant process systems (saving $35/oz), GBP0.6 million to expand the engineering workshops (saving $15/oz), and GBP0.9 million in corporate development (no operational cost saving). The total of $120 /oz in operating cost savings will make a significant difference to the company’s net margin. Hambledon’s last published cash costs of GBP581/oz relate to the April, May, June quarter in 2010, and while admittedly not being particularly representative due to low production levels, we are not talking about a high cost operation at Sekisovoskoye.

The proceeds from the Open Offer will be used for working capital purposes and to continue with the exploration and development of Sekisovoskoye’s underground project which has been ongoing since the beginning of 2010.

Production in the 3 months to 31st December 2010 declined from 2,359 ounces of gold and 5,035 ounces of silver in October, to 1,864 ounces of gold and 3,451 ounces of silver in December. This decline reflected the similar decline in temperatures, and while the completion of the first phase of Sekisovoskoye’s winterisation certainly mitigated the weather’s impact on plant operations, phase 2 will be carried out in conjunction with underground mine project construction works. Gold grade is, and will remain, erratic until the open pit mine is further deepened, while the current 84% recovery should increase to 90% with the planed plant improvements.

Hambledon requires shareholder approval to authorise the proposed share issue at its general meeting on the 30th of March. The company already has the support of 18.14% of existing ordinary shareholders, and unanimous support from its directors. Nonparticipating shareholders will be diluted by 44%, but the significant operational cost benefits appear a reasonable trade off and the company’s long term business objectives could be hampered if the fund raising fails. Valuing Hambledon on a multiple of just 2 times expected 2012 earnings of 4p per share produces a target price of 8p, and while this is perhaps overly punishing the company for its past indiscretions, there is plenty of upside for new investors. Speculative buy.

Financial Record & Forecast Table

^ Excludes cost of developing underground mine at Sekisovskoye