The run of good news from AIM listed Hambledon Mining continued on 8^th July with an upbeat production statement covering the second quarter of the calendar financial year. This confirms our belief that a ramp up in production from its open pit at Sekisovskoye is sustainable and that this operation should be capable of generating enough cash to fund the development of a larger underground mine on the site. At 6.875p our stance remains unchanged at buy with a maintained target price of 16.8p.

In the three months to June 30^th 2010 Hambledon broke records for tonnes milled at 213,034 tonnes while gold output surged by 16% on the prior quarter to a record 8,700 ounces. It is our expectation that output will be 26,000 ounces this year increasing to 40,000 ounces in calendar 2011. Output should be boosted further by the signing of additional third party processing deals. In March this year Hambledon reached agreement with the owner of another Kazak mine (Beskempir) to treat ore from that mine at its mill. It treated 4,406 tonnes of ore in April 2010 and 4,962 tonnes in May 2010. On 19 May 2010 it announced a second contract for the shipment of 10,000 tonnes and the delivery and treatment of this material commenced in mid-June. The company says that further contracts are expected in due course. The margin earned on this operation is not stunning but it is a profitable operation which generates additional cashflow. And Hambledon now states that it has been approached by other mine owners seeking to conclude similar agreements.

The real upside for Hambledon lies in the development of an underground mine at Sekisovskoye and at is recent AGM the company stated categorically that it should be able to self fund the opening up of an underground mine to augment the open pit operation at Sekisovskoye which will drive annual output from the 40,000 ounces which the open pit can produce to an eventual 100,000 ounces per annum while driving the cash cost of production per ounce down from $664 to around $500. On 8^th July it stated that the underground shaft is now at a 345 metre level with a further 25 metres set to be completed this month. An underground drilling programme will start in August and a second diamond drill rig will arrive on site late in that month. Contracts for a fleet of equipment to allow Hambledon to undertake the stoping operations are being finalised and the equipment should be on site by early 2011.

If Hambledon can deliver on these production targets, we believe that when the mine is at full capacity, it will be generating pre-tax profits of in excess of £50 million per annum and that this could be achievable – on the assumption of a $1200 gold price – by 2013.

Hambledon currently has net cash of £1.5 million as well as a $2 million credit facility and we believe that it is now generating operational cashflows of around $1 million per month. Hence the capital cost of opening an underground mine (we estimate at $12 million) can be funded if gold prices and output rates continue at current levels which we believe to be likely. With a JORC resource of c2 million ounces at a cut off grade of 2.7g/t of gold plus associated silver the mine life will be at least 15 years and with the mill capable of processing 850,000 tonnes of rock per annum there are no capacity constraints – indeed, at last, Hambledon would be able to start to run its operations at optimal capacity. We therefore forecast that output will increase to 80,000 ounces in 2012 before reaching peak production at 100,000 ounces the year after.

The ramp up in profitability in 2010 is a result of increased output and a sharp rise in the gold price with an added contribution made by the third party ore processing agreement. We assume in our forecasts that gold will remain at $1200 oz for the next three years although the house view is that risks on that front are on the upside. Our forecasts assume a cash cost of production of $664 oz in 2010, falling to $620 in 2011 as output increases and to $500 oz in 2012 as the higher grade underground operations and increased volumes come on-stream. The assumption is of a $/£ exchange rate of 1.3:1. The huge ramp up in cashflows and profitability makes Hambledon shares look extremely undervalued – this we attribute to poor investor sentiment caused by past disappointments. But this sentiment is changing as the stream of announcements showing clear operational delivery continues and this will drive a material re-rating. That process is underway but, we believe, has a lot further to go. A detailed note is imminent but at 6.875p, valued at just £35.5 million, our stance remains buy and an initial price target of 16.8p.