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SolGold takeover looks likely

A massive upgrade to its resource estimates, and a growing list of suitors, have increased the chance that the copper-gold explorer will be acquired
December 13, 2018

Long-term investors in SolGold (SOLG) can look back on 2018 with some satisfaction. Despite initial doubts around the ‘tier one’ status of the company’s Alpala discovery in Ecuador, the mineral resource has now doubled, and the copper-gold explorer now counts BlackRock and BHP Billiton (BLT) as major shareholders. All the while, the cash pile has remained topped up as shareholders have continued to buy new equity, and mining majors’ hunt for the next copper-gold project has only grown in intensity. As such, we think there’s a reasonable chance SolGold will be snapped up in the next year.

IC TIP: Buy at 37.6p
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points

Majors’ interest

Long-term copper demand

Project scale

Additional projects

Bear points

Cash burn and dilution

Project uncertainty

This doesn’t mean a sale is guaranteed. Last month, six days after telling investors that Ecuador copper exploration was among its highest return (albeit highest risk) capital options, BHP informed the market of the potential discovery of a new iron oxide, copper, and gold mineralised system 65km south-east of its Olympic Dam mine in South Australia. Such a revelation doesn’t negate BHP’s interest in SolGold’s Cascabel porphyry project, which the commodities giant has described as “high quality” and in a “highly prospective location”. And clearly BHP would not have spent £72m on SolGold stock – including October’s £45m placing at a premium of 45p a share – if it didn’t have some faith. So it’s worth remembering that SolGold could be transacting with a well-capitalised £90bn company.

BHP has also bought itself some time, as the £45m fundraising came with anti-dilution rights, which will keep its holding at or above 10 per cent for the next two years. At present, it owns 11.2 per cent of SolGold, and can increase its stake to match that of potential rival bidder Newcrest Mining (Au:NCM), which has 13.6 per cent.

Both shareholders will have cheered recent events. On 20 November, SolGold published its updated resource estimate for Alpala, which has increased by 67 per cent to 12.3m tonnes of contained copper equivalent in under a year. That’s based on a 0.3 per cent copper-equivalent cut-off, and less impressive than the doubling of high-grade metal inventory to 6m tonnes at a 0.9 per cent cut-off. All of this looks set to grow in 2019, as SolGold expands the drilling programme while mapping out 11 other drill-ready ‘priority projects’ across Ecuador.

For broker Liberum, which sees most of Alpala’s value in a high-grade block cave, the update confirmed the project’s “place as a top 10 global greenfield copper project by size and top 4 by grade”. Assuming long-term prices of $3 (£2.38) per pound of copper and $1,200 an ounce of gold, and a buyer’s desired 15 per cent internal rate of return, the brokerage puts Alpala’s net present value at $3.75bn.

SOLGOLD (SOLG)   
ORD PRICE:37.6pMARKET VALUE:£696m
TOUCH:37.5-37.7p12-MONTH HIGH:46pLOW: 20p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:N/A
NET ASSET VALUE:12.7¢†NET DEBT:A$54.4m^
Year to 30 JunTurnover (A$m)Pre-tax profit (A$m)Earnings per share (¢)Dividend per share (¢)
2017nil-8.3-0.7nil
2018nil-15.3-1.2nil
2019*nil-3.0-0.2nil
2020*nil-10.7-0.6nil
% change----
NMS:20,000   
BETA:3.96   

£1=A$1.76. †Includes intangible assets of A$169m, or 9.1¢ a share.
^As of 30 Sep, and so doesn't include the £45m share placing with BHP. *Hannam & Partners forecasts.