SolGold's copper-bottomed opportunity

At the end of last month SolGold's shares dropped on news of a potential referendum on mining in the province its project is located in, and the price remains over a fifth below the 40.7p the shares changed hands at in mid-May. However, management is confident of a positive outcome and seems to have justification. In SolGold’s favour is the improvement in permitting in the country since Kinross Gold gave up on the Fruta del Norte gold project in 2014 because it could not find common ground with the government. The project, sold to Lundin Gold at a bargain price, is expected to produce its first gold by the end of 2019.  

Chief executive Nick Mather also points to SolGold's efforts with community engagement and the decades-long plan for the mine, which should help win support from the government of Ecuador. “It's very important that we show to the Ecuadorian government that it is our intention to develop this resource with a view to maximising the resource extraction so that Ecuador gets its fair cut out of the project in its entirety," says Mr Mather. "We want to build a copper mining industry in Ecuador and base that on a good relationship with the government, and you don't do that by ripping the high-grade heart out of ore bodies.” 

The long-term approach outlined by SolGold may have been a factor behind a lukewarm market response to last month's PEA. 

The high-grade ‘core’ area is the most important part of Alpala. For JPMorgan analysts, it was the whole project: a report released in January imagined a 17-year mine life that focused on the 420m-tonne, 1.47 per cent copper section of the porphyry deposit.

But when SolGold released the PEA last month, it went far beyond that zone. The study outlined four options for throughput, ranging from 40m tonnes a year (Mtpa) to 60Mtpa. This is the amount of ore mined and put through the processing plant, and the 40Mtpa level would see operations last for 66 years, while the higher rate would mean a 49-year mine life. JPMorgan had said 25Mtpa was likely, showing the difference in scale. Helpfully, SolGold has told investors what it hopes to produce annually in the first 25 years. Just over 200,000 tonnes of copper, 438,000 ounces of gold and 1.4m ounces of silver. 

Talk about how many decades of production Alpala is capable of remains academic without raising significant cash, however. The project will cost between $2.4bn and $2.8bn, with an expected internal rate of return of 24.8 per cent to 26.5 per cent, calculated with copper at an average of $3.30 per pound and gold at $1,300 an ounce. Management is confident on securing financing based on the payback offered by the project. Using an 8 per cent discount rate, the company puts a net present value of between $4.1bn and $4.5bn (£3.2bn – £3.6bn) on the project – well in excess of the current enterprise value.