Still Too Early For Greatland Gold

Hummingbird Resources – Don’t Take Profits Yet

HUM’s 2022 full year results recently published were greeted with a shrug by the market, showing as they did what we all knew – a dire 2022 performance compared with 2021, a very high cost per gold ounce produced, and December 2022 net debt of nearly $110m against a market value (today) of £107m.

But of course 2022 is now very distant history, while the company is reporting that so far everything is on track for the 2023 transformation I described in my March ’23 article, when its new Kourossa mine just completing starts to produce the income that will repay that debt.

In fact, after some time keeping out of the limelight due to the poor performance of its then core asset – the initially highly profitable Yanfolila mine which only in the latest quarters has resolved production problems – HUM now feels confident enough to publish a new and encouraging presentation.

I usually take such presentations with a pinch of salt – produced as they are by PR persons who cherry pick particular statistics (out of many others possibly more relevant) which always show – surprise surprise – how said company is among the best of its peers. In HUM’s present case however it shows the case for a transformation to a longer life, more profitable, and larger gold producer quite well. My reservation as ever is that the ‘NPV’ figures HUM gives ($775m) through totting up those for each of its three main projects (all of which are based on lower gold prices than now) and which it points out (far more honestly than most miners would) don’t allow for the company’s own costs and borrowings, are always an exaggerated guide to the company’s market value. In reality that will depend on the annual cash flowing in which is only distantly related to an ‘NPV’, and to how much is paid out in dividends.

As ever however, projecting this year’s results in any detail in such turn-around cases is fairly impossible, because in addition to Yanfolila swinging back into a decent profit but at an unpredictable rate, will be Kouroussa’s contribution (swinging from consuming cash to build, to building cash). Its first trial gold pour has just been achieved and full production looks like coming soon

Some observers might still be unconvinced the sort of problems (weather and subcontractors) that plagued 2021-22 won’t recur, but (assuming, as ever, that Murphy has suspended his law) the shares still have a considerable way to go.

Hope You Haven’t Sold Solgenics

Don’t Sell was also the advice I would have given in relation to Solgenics (SGN) formerly Ncondezi Energy (NCCL) delisting from AIM – now a fait accompli.

Notwithstanding it is going to be more difficult to sell or trade the shares, they will still have the value I thought they would in my last full review of the company in December last year which it should be possible in one way or another for shareholders to eventually monetise. My review came after the company announced encouraging progress on its Tete solar power project – and for the first time enabled calculations about value potential for shareholders – which in a few years time I thought would be considerably more than the company’s then $5.5m market cap.

The hope then was that value would show through in the share price. But with no quoting or selling mechanism while delisted, an alternative is that the company will be acquired when (if for cash) shareholders would be bought out.

Given the company’s openness only a few months before, it came as a shock for it to delist soon afterwards when the reason given is that its value on AIM remains too low for it to raise whatever funds it will need for its share of the project (which I argued in December would not be much) against the better deals it has apparently been offered by other funding sources (we don’t know what or who) to keep progressing it.

In all this, private investor and entrepreneur Scott Fletcher has risen to be a key player now with over 30% of the shares (perhaps one reason to delist, otherwise he would have been required to make a take-over offer to other shareholders) and it seems he is now fully driving the company. He, of course, has sunk considerably more into Solgenics than the value of his shareholding now, and he will want as much as other shareholders to realise a value eventually. As close to the company as he is, his reasons to delist must therefore be assumed to be in all shareholders’ interests.

No further news has come from the delisting General Meeting last week, nor from the company about its medium term intentions. It has apparently dismissed the idea that it should move to a trading and news platform for unlisted shares such as JP Jenkins, on the similar grounds that it would still leave the shares undervalued. So it is always possible it might do so in the future, or publicly list again once its projects are fully funded and up and running.

Greatland Gold – Not Time To Buy Back In Yet

GGP – last three years

I said last time that I’d revisit Greatland Gold as the planned start to its (30% owned) Australian Havieron Gold project – which promises to be one of the more profitable and significant recent gold discoveries – draws closer. But much has changed; the planned start this year has been pushed back; and might be impacted by the recent take-over of Havieron’s 70% owner Newcrest by giant Newmont, who might have its own ideas about Havieron’s future.

On top, is the large mining cost increases being seen world-wide which will have affected Havieron’s economics – where the latest, 2021, PFS and valuation has been rendered well out of date not only by higher costs not matched by a higher gold price, but also by changes in the original mine design. So all are waiting for a revised feasibility study to be published, hopefully, before the end of this year. Only then, it seems, will a ‘decision to mine’ be made, although might also be a ‘decision to keep or divest’ by the new owner.

That means GGP’s shares would in any case have been in the doldrums, with the cautious preferring to hold off while the hopefuls point to continuing drill results which are expected to produce a substantial increase in Havieron’s last published mining reserves, and enable plans to more than double the originally planned gold output.

All that however will increase the capital cost, which the hopefuls had expected would be met by production expansion down the line, but, with so many inputs changed, it is impossible to predict what the new feasibility study will show. A question is whether GGP will need to increase the provision it has made (to be met by promised bank loans) to pay for its 30% share of costs, and alongside that, whether – if or when GGP completes its planned listing on the ASX this Autumn – it is accompanied by a cash raise and resulting share dilution.

The hopefuls however dismiss worries, pointing to what they see as the outstanding value GGP surely has in 30% of a mine that they hope could grow eventually to encompass over 20Moz of gold resource and over 10Moz of reserves.

But meanwhile, and despite hopes that recent drilling will increase Havieron’s stated up-to-date reserves to perhaps 6Moz soon, GGP still looks expensive, with its current £314m market cap valuing its share of a hoped for 6Moz mineable gold reserve at Havieron at $174 per ounce – higher than most gold miners on ASX.

That is just one illustration that on the measures they use, it is institutional investors rather than the private investors who dominate GGP’s share register, who have decided that GGP is still too expensive (the relentless and steady slide in the shares is saying so)

Private investors seldom do the sums. I have compared Havieron with the price Newmont is paying for Newcrest whose details (from its latest published report and accounts) are much too voluminous to state here, and have to be adjusted for its new or recently acquired projects (like Red Chris, Bruce Jack, and Wafi-Golpu) whose large extra contribution (some 20%) doesn’t feature yet in Newcrest’s accounts, even though will have been taken into account in the price Newmont is paying.

Neglecting ‘future growth’ (which has its own caveats as I will describe later) those comparisons – on all the measures that professional investors use – between GGP and for instance the price Newmont is paying for Newcrest – show GGP to be still substantially overvalued. So, unless the company comes up with much more than is currently in the public domain to make for a persuasive forecast of its medium term future, it is difficult to see an ASX listing improving GGP’s share price.

As for that Newcrest comparison, Newmont’s US$19m final price is 39% higher than was Newcrest’s market value before the bid – as is always the case when an acquirer values another company for what it adds to its life and its employee’s jobs, more than market investors value it. So the real comparison is between Newcrest’s $13.7bn pre-bid market value and GGP’s current $390m – which shows a 35 times disparity. Yet on the most important measure for a miner, Newcrest’s 90Moz gold equivalent reserves (including copper) compared with GGP’s 30% share of an ‘asssumed’ 6Moz gold at Havieron, the disparity is 50 times – ie GGP, on that measure, is 43% too expensive or, alternatively the market is already factoring in reserve growthwell beyond that. But all other comparisons still show GGP to be overvalued.

One, more important than mineral reserves, is that investors wouldn’t be buying just GGP’s share of Havieron, but also the company’s balance sheet, its borrowings and exploration costs, and other company costs, let alone probable extra costs to develop Havieron.

Without taking up too much space, some of those other comparisons are:

NCM’s net asset value is $11.6bn vs GGP’s $80m, and NCM has borrowings of only $1.8bn – ie a mere 15.5% of its net assets. But when GGP draws its loans to fund its share of the original Havieron stage one costs its net borrowings will be about $160m – ie 2x its net assets. On the assets basis alone therefore, GGP’s value based on NCM would be only $135m, or £100m GBP (2p per share). On the more usual ‘Enterprise Value’ (EV which includes borrowings) compared with assets and mineral reserves, GGP’s equity shares would look even more overvalued. Market value comparisons with some other large Australian gold producers and, eg, their NPV’s (no room to give here) show similar.

The hopefuls ignore all that, pointing to the substantial cash inflows from GGP’s share of Havieron once it starts production. Before the revised Feasibility Study we can’t know what that will be, but on the original plan, about half what was expected would have been swallowed up for 7 years by the $42m annual repayments of the bank loans to fund GGP’s share of the initial build costs. That is probably why GGP’s CEO has recently downplayed the hopeful’s expectations of a juicy GGP dividend.

So that is why the shares have steadily declined. A share price chart like the one attached is telling us something. The market obviously isn’t looking forward to any ‘future growth’ – but should it ? The hopefuls can’t give any reasoned figures – while professionals don’t pay a premium for ‘hopes’. They only pay for solid projections (and not for what the company’s brokers pretend are ‘solid’ NPV based ‘targets’).

As for that hoped for ‘growth’. It revolves around GGP’s exploration finding more deposits like Havieron, or corporate developments and deals facilitated by the heavy hitting mining financiers GGP has recruited to its board, reinforced by the claimed record of CEO Shaun Day in driving Aussie miner Northern Star Resources (ASX:NST) from a A$1 share price in early 2014 to a peak $15 in 2020 (It is now $13).

Shaun Day was Chief Financial Officer of NST only for four years from October 2014, so it is difficult to judge how influential he was in that growth, and in any case 2013 and 2014 were exceptionally depressed times in mining. Northern Star had been able to snap up cheaply some large projects in Western Australia being sold off by then owners (who included Newmont and Barrick) whose own shares and balance sheets, at a time of depressed gold prices, were in trouble. NST was subsequently able to find new resources and increase gold production six-fold in two years to 2016 ,and then to benefit from a 35% increase in the gold price over the next two. So hopes that GGP’s new backers will help replicate that performance depend on those 2014-2018 extreme conditions returning.

So there is a great amount of uncertainty about that GGP future potential. While it might well expand, no one can predict at what cost to shareholders. Expansion (and even ‘buying back’ the 70% of Havieron from Newmont) will involve corporate deals, borrowings, share issues, or whatever, which is why the ‘big hitters’ have been attracted for the corporate commissions. But whether they will treat the share price as a priority is unknown.

I don’t think investors will have the solid information to even roughly value the shares before the end of this year at least. Meanwhile drift looks likely to continue.