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.
Majors’ interest
Long-term copper demand
Project scale
Additional projects
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: | 37.6p | MARKET VALUE: | £696m | |
TOUCH: | 37.5-37.7p | 12-MONTH HIGH: | 46p | LOW: 20p |
FORWARD DIVIDEND YIELD: | NIL | FORWARD PE RATIO: | N/A | |
NET ASSET VALUE: | 12.7¢† | NET DEBT: | A$54.4m^ |
Year to 30 Jun | Turnover (A$m) | Pre-tax profit (A$m) | Earnings per share (¢) | Dividend per share (¢) |
2017 | nil | -8.3 | -0.7 | nil |
2018 | nil | -15.3 | -1.2 | nil |
2019* | nil | -3.0 | -0.2 | nil |
2020* | nil | -10.7 | -0.6 | nil |
% change | - | - | - | - |
NMS: | 20,000 | |||
BETA: | 3.96 | |||
£1=A$1.76. †Includes intangible assets of A$169m, or 9.1¢ a share. |