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Why I think the Greatland Gold share price is undervalued

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View of a gold mine from above
Image source: Getty Images.

The performance of the Greatland Gold (LSE: GGP) share price has been pretty mixed over the past 12 months. After rising to a high of around 37p last December, the stock dropped to 16p in August.

Over the past 12 months, it’s returned nearly 7% and is currently changing hands at 18.5p. This gives the company a market capitalisation of £730m. However, I think this significantly undervalued the enterprise. 

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Greatland Gold share price potential

One of the most straightforward ways to value a mining business is to look at the total worth of the resources it owns. 

As of last December, Greatland’s joint venture partner at its flagship Havieron prospect, Newcrest Mining, announced that the project could contain 3.4Moz of gold and 160kt of copper. 

Another Australian mining group, Evolution Mining, owns a project of a similar size. This mine has the potential to produce around A$770m (£411m) of cash a year. 

These two projects aren’t strictly comparable, but I believe they illustrate Havieron’s potential.

Unfortunately, under the terms of the joint venture, Greatland’s only entitled to part of the revenues from the project. Under the terms of the agreement, Newcrest can earn a 70% interest by spending $65m and completing a series of exploration and development milestones. Its overall joint venture interest currently stands at 60%.

Still, even when Newcrest meets all of its agreed milestones, Greatland will have 30% of the project. Based on the example, the scheme would leave the company with around £123m in cash every year.

This means the Greatland Gold share price is currently trading at a prospective price-to-cash-flow ratio of 6. This appears cheap, in my eyes. 

Risks and challenges 

That said, this is just a back-of-the-envelope calculation on my part. There’s no guarantee at this state the mining prospect will ever reach production. Even if it does, there’s also no guarantee cash flows will match those generated at Evolution’s project. I think it’s improbable they will. 

Nevertheless, I believe the figures above show the company’s potential. At this point, there’s not much else investors can go on. The joint venture partners are still pushing ahead with exploration activities.

At the same time, they’re developing the groundwork for production. In the company’s latest trading update, management noted that the power station is operational, and the refuelling station is nearing completion. 

The company should provide further information on Havieron’s development over the next few months. When additional information is available, I’ll be able to put together a more reliable valuation framework for the Greatland Gold share price. 

However, based on all of the above and based on what we know so far, it looks to me as if the stock is undervalued. As such, I’d buy a small, speculative position for my portfolio today. 

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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.

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