Following post was placed on 'uk.advfn.com' London discussion...

Following post was placed on 'uk.advfn.com' London discussion form by poster Mirabeanu at 18:15 on 23/2/24. Well worth a read imho:

Cornford at MI

I haven’t mentioned Solgold – market cap £204m @ 6.8p – for some time. But its experience also provides a lesson right now for Greatland Gold, which is why it’s timely to update.

Although SOLG is in that dangerous category of miner with project not yet built, it has just published an up-to-date economic study for a drastically revised mining plan at its flagship Cascabel copper/gold project in Ecuador (which we can assume takes account of that frightening cost inflation) which looks so much more easily handled than previous ones, that investors are starting to take more interest. Especially because, as a result of a long recent history of disappointments and problems, Solgold’s valuation has sunk to a level that would have seemed unbelievable only 18 months ago.

Now, at 1/5th its then share price, Solgold’s £204m market cap compares with £117bn worth of gold and copper measured and indicated resources ‘in the ground’ at Cascabel alone – regardless of other promising exploration prospects. That is a value only 0.2% % of high quality resources, when in healthier mining markets valuations for most mining projects would be in the 1-2-3% ranges.

I first recommended Solgold here in March 2016 at around 3p, and made a healthy packet as I hope readers did – that was at first when the size of its find at Cascabel made it seem destined to be one of the largest in the decade. But then, despite BHP and Newcrest taking key stakes, things started to go pear-shaped – essentially because management did as well.

By about 2019, fears Cascabel would be too expensive to develop were confirmed by the first of a series of feasibility studies, which showed an initial cost of $2.5bn, and would be followed by $6.7m of discounted cash profit over an enormously long 55 year mine life subsequently (although most would have been earned in the first 15 years).

And although that would have delivered an annual rate of return of 25-26%, it was considered a bit too marginal for such a risky project in a risky-looking Ecuador, quite apart from the cost being too hefty for a small company like Solgold to manage.

Allied with that, a key issue was – as I started warning here – that then CEO and founder Nick Mather was following the wrong strategy to monetise his fast growing portfolio of other attractive looking finds. He wanted to create a monster mining conglomerate – whereby all would be kept within one financial group, whatever each project’s different needs and timetables would be for development funding. That meant that coming to shareholders to fund each project as it developed would produce a share price below what the furthest advanced would have attracted on its own.

It was that basic strategic mistake stemming from Mather’s ambition that has been playing out up to now, with a series of management clear-outs including Mather, and a share price too low to maintain spending on the 10-12 other exploration projects he was pursuing, and, more seriously, even to maintain development on Cascabel

Now, following a long needed merger with key Cascabel shareholder Cornerstone, the latter’s management has taken over, although hadn’t yet been able to lighten the gloom.

Since the 2019 feasibility study, Solg has been bending to shareholder demands for a more easily funded plan, if not for a sale of its various projects, so now it has come up with a new Cascabel study for a cut-down plan showing an initial capital cost of only $1.6bn, still (at a higher $1,750/oz gold price) showing a 24% rate of return, but over a mine life half the much-too-long 55 years of the previous plan. At what are fairly conservative copper and gold price assumptions, and with scope to expand production from other nearby resources, Cascabel looks a much more feasible proposition, with a far better chance that some bidder or funder will come along.

But the shares are still depressed – not only through uncertainty how any funding will affect value for shareholders, but also because Solg has spent most of its remaining cash on the new study, so that investors worry about another fund raise (which the company has said might have to be) to keep the company running.

What happens next I don’t know. But maybe things can’t go on like this? Even if funded now, it will take ten years before Cascabel is making the $450m annual cash profit the feasibility study estimates for the first 5 years in production, before doubling over the next five – at the conservative $1,750/oz gold price it assumes, and $3.85/lb for copper. The current $2,000 gold price would add nearly 20% to those economic returns.

But meanwhile could be the sale of one or more of the other projects (to help fund Cascabel – a step Mather was refusing to take) among which Porvenir in southern Equador has already found over 7Moz of gold equivalent (mostly in copper) – a substantial find in its own right

So what lesson for Greatland Gold and its 30% owned Havieron project? It has now been confirmed by Newmont that it will be divesting its 70% Havieron stake, which – with substantial cost to develop (that Newmont seemingly thinks not worthwhile) looks to be much too big a mouthful for GGP to swallow on its own. It means, like Cascabel’s effect on Solgold’s shares, that investors will worry about the effect on GGP’s share price of whatever large new partners might demand to come aboard and help fund Newmont’s 70% Havieron stake. Its why it’s still wise to stand back and watch GGP -instead of assuming that its large project means a large profit for its small shareholders.

end