Great disparities at Greatland Gold

11 mins. to read
Great disparities at Greatland Gold

When I first started writing in MI seven years ago, I said much of my coverage would include tutorials about the realities of investing in complicated mining shares – ie the numbers that count in the end – against the sentiment and spin that doesn’t. – and there’s been a lot of the latter recently around Greatland Gold (GGP).

GGP is one of the few miners showing signs of groping its way out of the current bloodbath. Another is Emmerson (EML) – buoyed by the prospects for its very profitable looking Khemisset potash project, but still awaiting support from a funding market which is said to have dried up.

I can’t say if or when EML’s funding will arrive. But I can say what I think about GGP – which I discussed 18 months ago when 35p, and suggested holders should redeploy the large profit they will have made after its seven-fold run up in only a year.

I pointed out the unjustified 24 times Solgold’s then value per gold resource that GGP’s mostly private investors had rushed it up to from when it was a fledging minnow. It plummeting to only 10p 18 months later and now might, or might not, have started a recovery.

But will it be sustained ? Is it still too expensive ? Has it benefited only temporarily from a recent flurry of news and promotion by its management ? Should investors stay with one of the more reliable looking early stage miners around, collaborating with Australia’s experienced Newcrest Mining (NCM) to develop the Havieron gold deposit which Greatland found only a few years ago – and which seems on track for first, substantial, gold (and a bit of copper) production in only three years time.

Then, the mine will be producing around 300,000 gold equivalent ounces a year, which will put it well up among the world’s medium to larger producers. With Havieron’s resulting c $500m annual revenue, Greatland itself (now valued @12p at £480) ought to be among them – oughtn’t it ?

Except that GGP doesn’t, now, own Havieron – but only 30% of it and, potentially only 25%. That fact alone means major investors – as always for a company that does not have full control of its business – won’t accord it even a proportionate share of whatever is its real value. In charge, now, is Newcrest, who have 70% in exchange for putting up the exploration and mine development capital that minnow GGP couldn’t lay its hands on.

Nevertheless, plenty of investors seem to think GGP’s shares should continue upwards because, while a stage-one Pre- Feasibility Study published last October showed only a c$500m NPV for Havieron as a whole (justifying a GGP share price of only 8p) it was based on only what was known in March 2021, and much drilling and planning subsequently has demonstrated scope to considerably expand the whole project and therefore those figures.

So investors are looking forward to a more thorough, updated, feasibility study to be published before the year end.

Greatland Gold – last three years

What might it show ? Estimates by the four ‘retained’ (ie paid fees by GGP) brokers who now follow it, not only cover the present plan for mining which was the basis for the October pre-feasibility study, (stated to produce 2.1m ounces of gold equivalent ounces over a nine year life) but have also published their speculations about a much bigger scale of operation that the larger resource still being discovered could lead to.

According to those speculations, not only could the present plan (for conventional mining through horizontal (stoping) of what resource is known to be there) be expanded to produce an increase to 3m oz over a 11 year life, but the additional resources now being found in almost every direction around the high grade deposit delineated so far could lead to a new phase of mining of the deeper, more extensive, but lower grade material there.

This will by a different method though – block caving, initially more expensive but cheaper in the long run – to extract the slightly lower grade ore – and can only start from nearly 10 years time to last for another 18-20 years.

This scenario, as I say, is speculation by the brokers’ analysts (most seemingly with geology or mining qualifications but not necessarily mining experience), but have not been commented on by Newcrest, who will actually determine what will, or won’t, happen so far ahead.

So what ‘value’ do these analysts put on the whole Havieron project and GGP’s share of it ?

The latest news from GGP was of the price to be negotiated for Newcrest to buy another 5% of Havieron from GGP if it wishes, to take its share to 75%.

That has turned out to be $60m – a little less than many had hoped for and, as GGP complained, was based on a limited, prescribed, method used by an independent arbitrator, who ‘valued’ the whole of Havieron at $1.2bn, with GGP’s current share therefore $360m compared with its £480 market cap.

The complaint is that $1.2bn is based on what was known of the mining resource at December 2021 as well as commodity prices ‘well below current’, and is therefore less than it would be in the future. Unfortunately of course, NCM is now in charge, and will impose whatever it thinks is the value to it, bearing in mind Havieron’s ore will be processed at its own facilities nearby.

That price for 5% was not based on (but is being compared to) what is thought to be Havieron’s economics – ie its NPV, known at the moment to be only what was calculated (by GGP – less by NCM) back in October 2021 as $500m. So $1.2bn looks generous compared with that, although benefits from better knowledge meanwhile of the larger resource.

So at the moment, GGP investors’ solid basis for valuing its shares is only $360m (before all the other balance sheet adjustments needed – such as $50m debt to be repaid to NCM, and another $100m or so as its (30%) necessary contribution to Havieron mine development before any gold is produced).

All the rest is speculation about future expansion which at the moment doesn’t look likely to start delivering for another 10 years at least.

My more experienced and longer term readers might guess where I am going with this. I remind them that (ahem) I was the only commentator or analyst that I know of to urgently (in Master Investor) get investors out of Sirius Minerals only a day before its stomach churning crash in 2016 from 45p to 18p.

That was when I had pointed out the absurdity of the then brokers for Sirius trying to get fund managers to pay a price for the shares needed to be issued to fund its potash mine, which was based on an NPV that took in projected income up to 55 years ahead.

As I have said in the past ad nauseam. No sensible investor would pay ‘upfront’ (which is what paying an NPV is) for assumed income that far ahead. Ten years seems to be the maximum that is reflected in a share price for any company in any sector, mining or not. That can be seen by comparing what the NPV’s would be, calculated in the same way as for miners, for those other types of companies – who have unlimited lives and are always rated in the market on a PER or a yield basis.

NPV’s are of course touted by mining analysts because a normal dividend yield or PER basis doesn’t make sense for a limited life, fluctuating income stream. So a NPV is the only way to arrive at an extremely approximate idea of the value of a limited life, fluctuating, income. But it is extremely approximate (explained next), can be manipulated, and in practice in my experience always produces a far high value than the market accords in practice. Why, is explained next.

Sirius was an extreme case, desperate to raise funds much larger than its then market cap in order to stay alive, so the failure to raise funds was terminal. GGP is in a much healthier position, but its brokers are currently trying the same sort of trick – and seemingly getting away with it among some investors.

As mentioned, supporting GGP’s current share price is only its 30%, $360m ‘share’ of Havieron – or what income it will get from it over the next ten years – or possibly whatever extra ‘value’ a buyer might pay for that share if it thinks it can extract extra value arising from further exploration.

But all four of those the company’s brokers are now stating ‘target prices’ for GGP’s shares based on ‘NPV’s which depend on taking in speculative income for their speculative ideas for substantially expanding production for a very long way ahead.

Their speculations are that the present plan for 2.1m gold ounces to be produced over 9 years is expanded to 3.1m over 11 years, and that a block cave operation will then be bolted on which will produce a further 14m ounces over the following 19 years.

They are therefore taking in ‘projections’ for more than 30 years from now. So its not surprising that the resulting NPV’s they arrive at, and therefore their ‘target’ GGP share price, is fantastically higher that the present one based on what is planned for only ten years ahead.

So you can believe those ‘target’ prices (between 17p and 25p) if you like. But what no sensible investor should believe is that any professional investor or fund manager will drive up GGP’s share price to anywhere near them.

As I say, I have never been able to find any share in any sector which will reflect any ‘value’ for income arising more than about ten years into the future, no matter how reliable.

That can be shown quite easily (Sorry, my first illustration involves slightly complicated maths, but the next one is simpler) by calculating what a share’s PER would be, for example with income growing at 10% a year, that is based on the price thrown up by calculating an NPV taking in income progressively further and further int the future.

If that share today has a price giving a ‘normal’ PER of about 13 times (about the market average) where the NPV (using the same discount rate as those GGP brokers) also produces a 13 times PER on income up to ten years time, then adding another ten years would take the PER to 30 times. In other words it would be nonsense. The same logic applies when adding those 18 years to Havieron’s present 11 year mining plan.

The excess price caused by those NPVs can be shown in another way. Even the 25p ‘target’ broker has missed that his own published projections for the cash flow over 30 years which produced his NPV, isn’t nearly enough to warrant the share price ‘target’ year by year that it leads to. The most share of that cash flow that GGP would get on average from the 3m ounce 11 year scenario is about $80m per annum. If the shares were then his 25p ‘target’, GGP’s market cap would be over £1,200m – which would be an unprecedented 17 times that cash flow on the current $/£ exchange rate, where 5 times would be generous.

In other words, an institutional investor who knows his maths would regard those broker ‘targets’ as unattainable fantasies, about 3 times more expensive than he would pay, even if he believed that those speculative broker scenarios for substantial expansion will come about.

But private investors don’t tend to ‘do’ numbers. They see the ‘story’, which is of what looks a fairly valued mining share now, with tremendous potential to grow, and an upcoming, revised, feasibility study which will almost certainly show a much better result than is currently known.

On top, with a probable long life, Havieron could be attractive to other majors who need such mines to ensure their own. So maybe one of them (or even Newcrest) might try to buy GGP’s remaining 30% (or 25% if GGP takes the $60m on offer for 5%)

And, lastly, GGP has other exploration possibilities which might even contain another Havieron.

So what investor, not knowing the ‘numbers’, would pass by an opportunity to buy the shares, especially now that ‘chart’ bounce looks so enticing ?

Well, I wouldn’t, because I have no idea when reality might kick in. Plenty of investors have been selling the shares in recent months, and why would Newcrest – already with enough to manage and control it – buy any more of Havieron ?. For anyone else that 25% stake won’t be much use either, so why pay more than it is worth to GGP through retaining it.

As for GGP’s other prospects, they are surely in the lap of the Gods. If They deliver, GGP would be up initially for the cost of developing them, from the $80m per year cash flow share it might get from Havieron, – at least half of which some pi’s are hoping will be a dividend for them.

It all doesn’t quite add up. But maybe momentum on what is one of the few mining ‘stories’ around will take the shares up closer to those fantasy targets before the year end revised feasibility study ‘numbers’ is published. Be careful.

Going for gold webinar

Comments (1)

  • DS says:

    Some comments:
    – EML has funding arranged and just awaiting an Environmental Permit apparently according to an acquaintance invested in them ?
    – First production ore pegged for early 2024 and decline has been redesigned and experiencing better ground and may well exceed that in future updates.
    – (now valued @12p at £480) should read £480m
    – independent valuer NOT arbitrator and they were appointed to select either NCM or GGP’s valuation, not value the 5% themselves either using their own metrics or even the prescriptive metrics that included very conservative price decks in the JVA, so it was a binary process, not an independent value created by a 3rd party
    – In the article John mentions ‘if GGP takes the $60m on offer for 5%’, highly inaccurate on top of the above as GGP has no say in this now the price determination exercise has ended, NCM have the option from July 20th for 30 business days towards end of August to choose whether they will purchase this 5% or not, GGP can NOT refuse the transaction.
    – Some would argue that NCM may be very likely to pay $60m for the 5% despite John’s opinion that they would consider it too expensive as it is worth more than the 5%’s value to GGP, he can’t possibly know NCM’s mind set around the decision but fair enough, everyone has their own opinions of values but I would argue that the valuation NCM also submitted using teh same prescriptive metrics contained in JVA may not be what they truly value the deposit at
    – Perhaps investigating and articulating why the MD Shaun Day is adamant that the prescriptive nature of the option exercise was detrimental to actually calculating FMV would have been apt and mention made of the PFS based on a fraction of the high-grade SE Crescent, itself a fraction of the ore body and the increasing propensity for a high grade corridor linking up the different zones of the ore body, presence of nickel now made public by GGP and of course the eastern breccia also delivering some of the best high grade drill hits within the ore body, very similar to the SE Crescent and how it may well turn out to also be/contain another high grade zone
    – Seems hesitant to reference GGP’s own JORC compliant MRE update from Feb 2022 utilising drill data up to 05/12/21 despite the vast increases in resource/reserves (53% and 50% respectively) to the conservative Newcrest estimates and the CAGR since the Dec 2020 Maiden MRE of 43%
    – Other notable exclusions are of the low forecast AISC placing GGP as the 2nd lowest cost gold company on the planet and with Polyus being Russian, probably making GGP the most investable gold company when adding geopolitical factors into the mix.
    – He also suggests 10 years before bulk mining factors into Havieron, while for instance Hannam and Partners block cave valuation assumes block caving commencing in 2028 in their Feb 2021 update, so a much shorter period of time than he envisages.

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