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SolGold squabbles complicate development task

The copper-gold prospector is developing a mine and a growing list of frustrated counterparties
November 3, 2020

A football match quickly gets confusing if one team’s players can’t decide which side they are on. This is not dissimilar to the recent experience of SolGold (SOLG) investors, watching on as purported collaborators work against each other. 

The company is at odds with Cornerstone Capital Resources (Can:CGP), a 15 per cent owner of the Alpala deposit and an 8 per cent shareholder  of SolGold itself, over how the high-value Ecuadorian copper and gold project should be developed. 

Further protest has come from another sizeable shareholder, Newcrest Mining (Au:NCM), over the company’s decision to sell off 1 per cent of future production for $100m. Institutional holders’ unhappiness over governance has pushed the company to expand the independence and breadth of its board. 

The Cornerstone relationship is the rockiest, however, given the Canadian company’s push for a sale of Alpala and SolGold’s insistence it can build the multi-billion-dollar mine itself. Last month, a SolGold takeover bid for Cornerstone expired.

“If they wanted our co-operation, the all-share, failed hostile bid was not the way to do it,” Cornerstone chief executive Brooke Macdonald told Investors Chronicle. The group’s push for a sale comes from the practicalities of being a cash-light equity partner in Alpala – the latter of which means finding hundreds of millions of dollars to fund its share of development costs.

In fact, feasibility work on the project has left it progressively more indebted to SolGold, which is lending Cornerstone its share of funding ahead of giving the final green light for the mine. At present, this is expected to be paid off from eventual project revenues, although Mr Macdonald also remains sceptical that SolGold will be able to fund construction of Alpala. 

“[SolGold talks] about creating the next BHP in Ecuador with a pipeline of other projects. All of that is very interesting, but there are cases where junior companies got into trouble trying to build a project of this size,” he said. “We suspect that at the end of the day the capital cost will be quite a bit larger than what is estimated in the preliminary economic assessment, and that it is just too much heavy a lift for a junior mining company.”

An updated cost estimate for Alpala – from the $2.4bn-$2.8bn (£1.9bn-£2.2bn) released last year – was expected at the end of September, but Covid-19 restrictions have delayed the pre-feasibility study. Managing director Nicholas Mather told us the project had a “perfect storm” of factors that attracted financiers, including the “high-grade core” of the deposit and current gold and copper price strength, and said the company was already being approached with funding offers. 

 

Sol what  

This funding discussion becomes moot if a buyer turns up. The most obvious candidate is Australian giant BHP (BHP), which both owns 13.6 per cent of SolGold and recently underlined its interest in copper. A restriction on BHP buying more shares in SolGold ended in mid-October, meaning speculation could soon hot up again. Newcrest – which also holds a 13.6 per cent stake – could also move on SolGold, despite its objection to the royalty sale. 

Last year’s preliminary economic assessment put Alpala’s net present value at $3.6bn-$3.9bn (post-tax, with a 9 per cent discount). This was done with a copper price forecast of over $7,000 a tonne and a $1,300-an-ounce (oz) gold price, compared with their current prices of around $6,700 a tonne and $1,900 an oz, respectively. SolGold itself has a market capitalisation of £686m – a run at the end of September helping it rise to 40p a share – and recent mining deals have seen 20-30 per cent premiums for cash offers. Of course, any buyer would be committing itself to spending billions on building the mine, which is one of only a few major copper discoveries of recent years. 

Even with the existing major miners involved, Cornerstone thinks third-parties are still paying attention. “It's possible that a third-party coming in with an aggressive bid could create enough tension to force people to get into a bidding war,” Mr Macdonald told us. “There are just so few deposits of this size available.”

Mr Mather’s argument against selling off Alpala is SolGold’s potential to turn into a major player itself. “The blueprint that we created at Alpala is replicable, and applicable to all 14 of our other projects throughout Ecuador,” he said. “BHP doesn't have [these exploration prospects], Newcrest doesn't have them, we have them.” 

Given the apparent potential of these other wholly-owned targets, would Mr Mather rather not sell Alpala and focus on those without the Cornerstone angle? The SolGold boss said it wasn’t something he was considering. Even if SolGold pushes this project through to production successfully, it will still be partly reliant on exploration prospects for share price improvement, given the years of construction needed. In any case, it’s hard to see a constructive relationship suddenly blooming between SolGold and Cornerstone. 

An ideal world for SolGold would see Cornerstone giving up and selling its Alpala stake, which SolGold has first dibs on. But Mr Macdonald and co seem just as determined as Mr Mather to get their way and find a buyer.

Given mining’s cyclical nature, the difficulty of building major new operations and SolGold’s ability to annoy its partners, that might be the best option for everyone.