The SolGold (LSE: SOLG) share price fell in early deals this morning as the market reacted to the company’s latest update on its Alpala project.
The project, which is on the Cascabel concession in northern Ecuador, is the firm’s flagship asset. It’s ranked as the ninth-largest undeveloped gold deposit in the world. I think this shows the company’s potential. But it also highlights the risks. Developing large mining prospects can be hugely expensive and time-consuming. The projects can become money pits and bankrupt their backers.
Why is the SolGold share price falling?
The challenges of bringing a large mining prospect to the market are displayed in SolGold’s latest trading update. The company’s pre-feasibility study for the Alpala project will now not be complete until “late 2021.“
Management said the company needs the extra time to address “a number of mine development and metallurgical alternatives and potential upsides, including the resource potential on other targets within the Cascabel concession.“
The press release went on to add the firm’s project committee has “noted that it would be advisable to consider adjusting the current draft mine development plan and the draft mine production plan to de-risk the project.“
It seems to me that the SolGold share price has fallen on this news because it’s now going to take longer for the company to develop its Alpala project and take advantage of high gold prices. I think this is both a benefit and a drawback. Delays to mining projects are never good.
However, jumping into a project without first understanding the capital requirements and potential rewards would be even worse. Therefore, while the delay is disappointing, in my opinion, management has made the right decision.
Trying to reduce initial capital requirements and optimising output in the early stages could significantly increase initial profitability, although it’s not guaranteed.
Buy, sell or hold
Even though the company owns one of the world’s largest undeveloped gold mines, I believe the SolGold share price is a risky proposition. Developing large mines is very challenging, and there’s no guarantee the project will live up to initial expectations. Investors will only really find out if the mine is as good as promised when shovels are in the ground. Up until that point, there’s no guarantee the corporation will ever find anything.
Still, pre-feasibility studies will de-risk projects if they’re executed correctly. So, it seems to me as if management is doing everything possible to reduce the challenges facing the business.
As such, I’d consider using today’s decline to acquire a small position in the group for my portfolio. It’s clear to me the SolGold share price is a speculative investment. But it also has terrific potential.
I’m comfortable with that level of risk with a small position in my diversified portfolio.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.