A £600 investment in Greatland Gold (LSE: GGP) shares two years ago, excluding broker’s fees and stamp duty, would now be worth £288, a fall of 52%. The share price peaked in December 2020, since when it has fallen by over 75%. Unfortunately, I invested exactly £600 in the company, and now have significant paper losses. But I’ve learnt an important lesson.
What does it do?
Greatland Gold is a mining exploration company. Its primary activity is the development of the Havieron gold and copper deposit in Western Australia.
It owns 30% of the project, joint venture partner Newcrest Mining (one of the largest gold producers globally) holding the rest.
A feasibility study is due to be published before year end. A decision will then be made as to whether to mine Havieron. So far, the signs are encouraging and the company estimates the value of the deposits at $1.2bn.
Greatland Gold’s 30% share is worth $360m, less than the company’s market cap of $475m. This implies it’s over-valued, but it does have five other mining interests, and there’s always the possibility of more precious metals being discovered at Havieron.
The current stock market valuation therefore reflects the company’s future earnings potential, rather than the fact that, by the end of 2021, it had seen losses of £28m. So far, it has yet to generate any revenue.
Option
Under the terms of the JV, Newcrest can acquire an extra 5% of Havieron at fair market value.
Once the option is exercised, the proceeds would be used to repay the outstanding balance on a loan facility Greatland has with Newcrest. The junior partner therefore gains nothing, other than to reduce its debt and its share of Havieron.
If this happens, it’s likely that the share price would fall further.
Funding
In August, $34m was raised by Greatland Gold in an over-subscribed rights issue. The bad news for existing shareholders was that the shares were issued at a 15.5% discount.
And in September, the company announced it had secured the necessary funding to develop its share of Havieron. Bank debt of $140m was agreed, along with an equity investment of up to $75m from Wyloo Metals, a privately-owned exploration company.
Interest on the debt will be based on the rate set by the Reserve Bank of Australia. As in most countries, interest rates down under are on the rise. However, they’re not forecast to increase as steeply as in other parts of the world. The company’s interest bill should therefore not increase too much.
If the investment from Wyloo is approved by shareholders, it would be at an average price of just over 9p per share. Wyloo would then own 14.6% of Greatland Gold.
What should I do?
I knew that investing in Greatland Gold would be a punt. But despite being down on the deal, I’m not going to sell.
However, if I’m honest, I don’t think the share price will recover any time soon. The future discounted cash flows from Havieron, and the other less advanced projects, already appear to be factored into the share price.
So I’ve learnt one very valuable lesson — I should have dug deeper with my research before investing in this particular mining company.