SPROTT ANALYSIS / RECOMMENDATION $1.9507 October 2020Ticker: GPR...

SPROTT ANALYSIS / RECOMMENDATION $1.95

07 October 2020
Ticker: GPR AU Cash: A$31m Project: Woodlark Island
Market cap: A$112m Price: A$0.64/sh Country: Papua New Guinea
RECOMMENDATION (unc):BUY TARGET PRICE(unc):C$1.95/sh RISK RATING: HIGH
This week’s news of debt funding is a tremendous step forward for Geopacific in our view. Even on our
conservative assumptions (lifting mining and processing cost and higher capital cost vs DFS), our project
NPV5%-1850 stands at A$524m. That this is a vanilla open-pit CIL, has a new CEO with five years GM
experience at neighbouring Simberi, and Chair with a raft of PNG experience, further reinforces our positive
view on the name. However, Geopacific spent CY2020 in ‘overhaul’ mode as the management was bulked
out and DFS revalidated, meaning the stock missed the gold-price rally being up 12% YTD vs. 32% for the
GDXJ, and hence the current A$112m market cap. Although this is the opportunity for investors, it also
implies a very expensive 45% cost of equity. As such, this weeks A$140m funding package not only
dissipates funding risk, but the with gearing of 70% to DFS PP&E now reduces the equity requirement, with
the added benefit coming at a fraction of the cost of equity. Modelling conservatively as noted above with
a FD 274m share count, we estimate 1xNAV5%-1850 stands at A$2.20/sh at first-pour. As such, we adopt a
one-year forward 1xNAV5%-1850 valuation not to reflect the value today, but potential ‘exit valuation’
approaching production as noted above. Consequently we maintain our BUY rating and A$1.95/sh PT.
While the trajectory between now and production may have twists and turns, we feel our unit cost and FD
share count are conservative, and hence underpin our core investment thesis, that Geopacific could be a
‘multi-bagger’ for equity investors.
New CEO and debt lender selected as momentum builds toward year end revalidated DFS
New CEO Tim Richards has formally commenced his role as CEO this week. Alongside this the company
has selected Sprott Resource Lending as exclusive partner for US$100m finance facility comprising
US$85m of project finance and US$15m callable gold stream. The US$85m project finance bears a coupon
of LIBOR +6.25-7.25% with price participation agreement over 100koz (7.5koz pq) with the lender paid
the delta between US$1,475/oz and spot. The US$15m callable gold stream is paid in exchange for 70%
payment on 3.4% of production to 30koz and 1.7% on remaining production, callable for original outlay
at maturity of the PF facility. The debt follows existing technical due diligence, with key CPs for final
drawdown being equity, permits, and construction contracts. Ahead of finalisation, the company aims to
release a revalidated DFS toward year end.
Our view
As a ~A$100m market cap company ahead of this news, with a project-valuation of A$524m, the key
upcoming milestone for Geopacific was funding. With the stock at ~0.2xNAV (ungeared), the 45% cost of
equity implied by the current share price (discount rate where NPV equals market cap) is clearly high. This
weeks debt deal equates to ~70% gearing on DFS capital costs, an excellent result because not only does
it cornerstone the mine build with technical sign-off from ‘second set of eyes’, but more simply it reduces
the equity requirement, and at a fraction of the cost of equity. With see parallels with West African
Resources, where high-gearing from Taurus lowered the equity requirements; that stock is up from 25c
at that time to 115c in under 24M since, albeit supported by the gold price of course.
Outside project funding itself, today’s news completes an ‘overhaul’ for Geopacific which we think the
market has missed and/or the share price hasn’t yet reflected. In the last year the company has (1)
considerably improved its corporate governance (and ability to negotiate PNG) under PNG veteran Chair
Ian Clyne alongside other senior appointments; (2) appointed a new experienced mine-operator in Tim
Richards, fresh from a six year stint as GM at neighbouring Simberi mine (Allied / St Barbara) prior to
central roles; and now (3) a framework for lending has now been established, de-risking that process.
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Stepping back, because the company was in ‘overhaul mode’ during the 1H20 gold rally, its share price
has lagged being +12% YTD ahead of this news against the GDXJ at +32%. As a large medium-grade preproduction project, we would argue that the benefit of the +26% YTD gain in gold price is doubly leveraged
for a name this like, presenting a compelling equity investment case in our view on an overlooked name.
Valuation
Ahead of the company releasing a revalidated DFS (i.e. no change to mill design / mine plan) around year
end, we make no changes to our DCF model. We have already modelled capex of A$229m, and an
additional A$5m of central G&A and finance costs during the build. Operationally we model per mine plan,
but have conservatively already lifted mining and processing from US$1.88/t and US$10.33/t to US$2.49/t
and US$14.20/t, respectively. Even with these conservative inputs, our 1xNAV5%-1850 stands at A$524m on
an asset-only (ungeared basis), which is the core foundation of our investment thesis.
We leave our modelled funding requirement of A$233m unchanged, comprising A$199m DFS capex,
A$17m of increased SCP contingency to reflect the two years since the 4Q18 DFS, A$5m of G&A and cash
finance costs (75% of these are non-cash capitalised) to first pour, and A$13m of additional working capital
for flexibility on exploration. The latter is particularly important as the phased RAP allows access to nearmine areas not previously accessible to drill. We model the project finance on terms published. We would
expect to fine tune this once the DFS figures are revalidated toward year end.
We previously modelled A$129m of debt at 13% lender IRR, so today’s ~A$140m is ahead of that and
reduces the equity requirement. With single-digit coupon plus the gold participation agreement the
project finance is broadly in line with our forecast, with falling cost if the gold price drops to US$1,750/oz,
and equity upside from a rising gold price outstripping any cost of the gold participation agreement. On
the stream, we model 967koz of production, hence 889koz production falls under the 3.37% stream for
30koz streamed, with a residual 78koz falling under the 1.69% stream. This takes LOM stream to 31koz,
with 22koz payable or 2% of total production. The callable feature (at maturity of the PFF) lowers this
cost; at PF maturity we estimate a NPV5%-1850 for the residual stream of A$25m vs. A$21m repayment,
hence repayment at that time would appear logical given reserve growth is likely, and is how we have
modelled this, put stream costs on par with the PF.
Maintain BUY rating and A$1.95/sh PT
We model Woodlark on a DCF basis, net of finance costs and G&A. We fully-dilute our price target for
future mine-build equity. This is difficult to forecast at this stage given multiple upcoming positive
catalysts in the coming 6M, so we conservatively model 274m FD share count. We adopt a one-year
forward 1xNAV5%-1850 valuation not to reflect the value today, but potential ‘exit valuation’ once
approaching production. Based on our 4Q21 NAV of A$537m we maintain our BUY rating and A$1.95/sh
PT, noting 1xNAV fully funded, fully diluted sits at A$2.20/sh at the time of first gold in 2022. While the
trajectory between now and first pour may well have many twists and turns, that the value, net of all
finance costs and G&A, fully diluted to 274m shares, stands at over A$2/sh underpins our entire
investment thesis, and strong positive view on the name.
Why we Geopacific Resources
1. Vanilla CIL project with good logistics on PNG island
2. CEO Tim Richards prior GM of neighbouring mine Simberi
3. Exploration upside between pits and regionally once RAP complete / site cleared
4. Shovel ready pending funding
5. Materially undervalued to spot NAV
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Catalysts
 4Q20: RAP continues
 4Q20: revalidated DFS
 1Q21: project financing and build start
 2H22: first pour
Brock Salier
Partner, Sprott Capital Partners
M: +44.7400.666.913
[email protected]
Justin Chan
Director, Sprott Capital Partners
M: +44.7930.719.019
[email protected]
Chris Tonkin
Research Associate, Sprott Cap