The Greatland Gold (LSE:GGP) share price exploded in 2020, rising by nearly 1,900%! But so far this year, its performance has not been as impressive. In fact, the stock is down by 45% since January. Although, it is still up by 150% over the last 12 months. Why has the company started moving in a downward trajectory? And is this an opportunity to add it to my portfolio at a discount?
The rising GGP share price
Greatland Gold is an early-stage exploration business with various projects across Western Australia. And as the name suggests, it primarily focuses on extracting gold from ground. Last year’s explosive performance was mainly caused by a series of positive results surrounding its Havieron project.
This project commenced back in 2018. And looking at the latest set of drilling results could contain a deposit of 4.2 mega-ounces of gold and equivalents. That’s around £4.45bn worth of material to dig up based on today’s prices. Needless to say, it’s a massive opportunity for the business. So, seeing the GGP share price surge last year is not that surprising to me.
Given the potential growth opportunity this project presents, why is the stock now falling? Since the start of 2021, the price of gold has been declining. As a result, the estimated value of Havieron has consequently suffered, leading to a sell-off by investors.Â
However, governments worldwide have begun issuing stimulus packages to accelerate the Covid-19 recovery of their economies. As a consequence, inflation is now expected to rise. But gold is often used as a hedging tool against the devaluation of money, so I think its price has the potential to start climbing again, taking the value of Havieron with it.
There are some considerable risks
The GGP share price clearly reflects the tremendous progress made in 2020. And based on a recent operational report, the early-stage development process of Havieron has begun. But while this is a step in the right direction, the site may take up to three years before commercial production can commence.
As it stands, Greatland Gold does not have any active mining operations in its portfolio. In other words, it currently has no source of revenue and thus is dependent on raising outside funding to keep the lights on.
At the end of 2020, the firm had around £5.9m cash on its balance sheet, providing some notable liquidity. But developing a fully operational mining site is an expensive endeavour. And so, to raise enough capital for Havieron, it sold a 70% royalty claim to Newcrest Mining. Consequently, its potential earnings from the project have been significantly limited.
The bottom line
Establishing large royalty partnerships is not uncommon among young mining companies. And a 30% claim still represents a £1.34bn potential return.
But as it stands, I think it’s too soon to invest in this business. A lot of things can go wrong in three years. And given that the GGP share price currently places a valuation of around £790m on a pre-revenue business with non-producing core assets, the level of investor expectations is exceptionally high. Therefore I won’t be adding this stock to my portfolio today.