John’s Mining Journal: Solgold – the next two weeks should be interesting

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John’s Mining Journal: Solgold – the next two weeks should be interesting

After a long hiatus for its shares, the crunch-point for Solgold is rapidly approaching, writes veteran mining analyst John Cornford. 

Since my last comment, two weeks ago, Wheaton Precious Metals (NYSE:WPM) has announced that it will list in London, to extend its reach to investors beyond those in North America who know it well. So, although I suggested taking some recent profits, the new investors it will attract here might help buoy the shares, if only because WPM will be the only representative in London of the most profitable and relatively safe sector of mining as it is possible to imagine. And if its expansion from concentrating on silver into gold continues, it will not only be one of the most attractive gold related shares on the London market, but the cash it is probably intending to raise will find its way to funding early stage gold miners over here and so boost the whole London gold market. That doesn’t change my suggestion to take at least some of the available profit, to await a possible new fund-raising and the addition of WPM to UK brokers’ buy lists.

After a long hiatus for its shares, crunch-point for Solgold (LON:SOLG, TSE:SOLG) is rapidly approaching, when at least some of the pinch-points snagging what investors think is its progress to a proper valuation ought to be cleared. But as to what happens then, nobody seems willing to speculate, because the complexities surrounding the company have assumed the proportions of mind-bending Byzantine politics.

For context, Solgold’s 85%-owned Alpala copper-gold project in Ecuador is rated a potential ‘tier one’ and has a Net Present Value around $4.5bn compared with Solg’s £533m market value. That is only 2/3rds the value the market is according to Greatland Gold (LON:GGP), which looks like ending up with only 25% of the promising looking Havieron prospect whose farm-in drilling by Newcrest has been spurring Greatland’s shares, but which hasn’t yet published any measure of its resource in the ground.

Those figures of course give far from a true picture, because getting Havieron into production looks like being quicker and cheaper than Alpala. But GGP’s shares at over 20p have already well exceeded at least one research house’s target, so chasing them before the expected resource statement this quarter might not be a good idea.

Agaist that, Alpala is claimed to be the only tier one copper discovery this decade, which is why industry majors Newcrest and BHP (both of whom have stated their aims to expand their copper interests) have acquired stakes now totalling some 27%.

Whether or not one of them might bid for Solgold, or for just its Alpala project, is the short-term focus of attention. But the over-riding question is how and when and at what cost to its shareholders Alpala can be developed. All other snags are subsidiary to that.

First unsnagging of these will be of BHP’s freedom to add to its 13.6% shareholding after October 15th, but a second, related one, will have to wait for an extraordinary general meeting of SOLG shareholders which another, 7.6%, shareholder, Toronto listed Cornerstone Capital Resources (TSX:CGP), is threatening to call.

CGP wants to try to replace Solgold’s Board, whom they accuse of diminishing Alpala’s value (of which CGP has a 15% direct share and – along with its SOLG holding – has an effective 21.4%) through the streaming deal with Franco Nevada that Solgold recently completed.

This has given SOLG $100m with which to progress Alpala to a Definitive Feasibility Study, which is necessary to raise the full $2.7bn Alpala build cost (4 times more than SOLG’s current market value).

But its price, which CGP (and Newcrest) complain of, is the handing over to FNV for all time, of 1% of Alpala’s revenue. The true cost of that to Alpala’s shareholders, assuming profits at 50% of revenue, will actually be nearly 2.5% of its NPV.

Meanwhile, SOLG is working to head off criticism on a number of fronts, and has struck back by re-stating its all-share bid for the whole of Cornerstone (current market cap almost one quarter that of Solgold) which, if accepted before the October 14th deadline, would solve a lot of the Byzantine set of inter-related issues now ensnaring Solgold. Except that Cornerstone has roundly rejected the bid, and no one seems to believe it can succeed. That the deadline is the same as when BHP is free to add to its stake in SOLG is another factor for observers to ponder.

Solgold’s second response is the promise to publish soon an update to the Preliminary Economic Analysis for Alpala which produced the $4.5bn NPV that everyone has been working to. Solgold is hinting that it will show a much better result, although that might stem from assuming higher gold and copper prices than before, and using a lower discount rate.

But unless that update shows more metal in the ground (unlikely to be significant) and a much cheaper build cost, a re-stated NPV won’t impress either BHP, Newcrest, or Cornerstone, who will be going by their own assumptions and estimates of the solid underlying reality of Alpala, namely its detailed production profile year by year and the true costs at every stage. This shows that practically all of Alpala’s ‘value’ (at current gold and copper prices) is actually generated in the first 15 years of its life, making it more valuable than would appear from the NPV alone.

Solgold’s third response has been to start drilling (after Covid-related delays) at two of its other most promising targets in Ecuador, with the obvious hope that early results will convince all those milling around it that it is even more valuable than its Alpala stake alone, and so influence whatever strategy potential bidders might be considering.

Weighing up the alternatives stemming from these facts is further complicated by Cornerstone’s urging BHP and Newcrest to throw in their combined holdings with the former to force some sort of resolution at its still-to-be requisitioned EGM. If investor BlackRock threw in its 5.2%, they could together muster a credible 40% of the votes.

My own estimate is that a bid for Alpala alone is unlikely, and in any case would not be far above its value to a buyer, who has to add its bid cost to Alpala’s $2.7b build cost in order to gain Alpla’s $7.2bn or so gross NPV.  That would, in my view, place a $1.5bn ceiling on an Alpala only bid, worth less than that to SOLG shareholders after the Ecuadorian capital gains tax that would be payable. In other words, worth perhaps no more than 50p per Solgold share.

Even so, my view a year ago was that the best long-term strategy for Solgold’s shareholders would be for it to sell off its projects once at Alpala’s stage, in order to fund exploration of its follow-on prospects.

That strategy is opposed by Nick Mather, Solgold’s guiding boss, who wants to secure the whole of Alpala’s value, even though it would take much longer. But his hand might be forced if a bid (concocted between those 40% holders and others) is made for the whole of Solgold, at a price perhaps 50% above its recent levels and before there is any evidence of the potential of its other Ecuadorian concessions.

Although that would be a long-term bargain for buyers, Solgold looks vulnerable to them. So the next two weeks could get interesting.

To put the situation into perspective for investors new to miners, the current market value of Aplala’s most recently reported resource ‘in the ground’ is just over $100bn.

But last year’s Preliminary Economic Analysis reports its value as an NPV which is only a fraction of that, because it will take 55 years to mine only about 60% of the resource, and will need at least $2.7bn up-front to build.

And to judge whether a strategy to explore and sell off projects once proven is worthwhile, consider that Solgold has spent a total of $178m on Alpala so far, and will spend perhaps another $100m to get to a bankable feasibility study, when it might (if not stymied beforehand) be able to sell Alpala for up to $2bn.

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