Are there 8.4m reasons why the Greatland Gold (GGP) share price is 62% undervalued?

The Greatland Gold share price has risen 24% since the start of May. I think it could be argued that the stock is undervalued. But would I buy today?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young Caucasian man making doubtful face at camera

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Since the start of May 2024, the share price of Greatland Gold (LSE:GGP), the mining exploration company, has been the fourth best performer on the AIM 100.

The grant of two new licences and a positive update for its flagship gold and copper project, Havieron, in Western Australia, appear to be the catalysts for the increase.

However, the company has yet to sell any metals. Indeed, it remains silent as to when it might start generating revenue. And at 31 December 2023, it had racked up losses of £62.3m.

Looking ahead

But it’s all about the future for Greatland Gold which probably explains why its current market cap is nearly eight times’ greater than its book value.

The company says it has a letter of support from a syndicate of banks that will provide it with A$220m of debt funding to help commercialise its operations.

And it claims that Havieron contains 8.4Moz AuEq (million ounces of gold equivalent). At current market prices (£1,834 an ounce), this equates to potential income of £15.4bn.

But getting precious metals out of the ground is expensive.

Endeavour Mining says it has an “industry-leading” all-in sustaining cost of production of $967 (£760) an ounce.

If this is deducted from the estimated revenue, the mineral resources at Havieron are currently worth approximately £9bn.

Not what it seems

But this figure needs to be treated with caution.

That’s because Greatland Gold owns only 30% of the mine. Although it does have the right to match a third-party offer should its partner, Newmont Corporation, decide to sell its interest.

Secondly, the 8.4Moz figure includes gold that is estimated with a low level of confidence. If we exclude this — which Newmont estimates to be 24.7% — we are left with approximately 6.3Moz AuEq.

Greatland Gold’s share of this is 1.89Moz. This means the potential lifetime cash flows from the mine are £2.03bn.

Assuming this is realised evenly over a period of 20 years — and discounting the annual figure by 8% to reflect the fact that money today is worth more than it will be in the future — the net present value of the future cash flows is £997m.

This implies that Greatland Gold’s shares are currently 62% undervalued.

Of course, the figures I’ve used in my ‘back of the envelope’ calculation could vary significantly. The resource estimate might move in either direction. And commodity prices are notoriously volatile — the gold price has fluctuated between $1,400 and $2,400 an ounce since June 2014.

The company may also need to raise more money (debt or equity) before Havieron becomes fully operational.

However, on the positive side, the company has other early-stage mining interests. And its biggest shareholder, Wyloo Metals, remains supportive.

My verdict

I already own shares in the company. But I have to admit that I didn’t do this kind of analysis before deciding to buy.

I got caught up with the hype surrounding the company and have lost approximately 75% of my initial investment.

If I was looking at the company for the first time, I don’t think I would invest.

In my opinion, Greatland Gold faces many hurdles before it becomes commercially viable. And this casts significant doubt on the accuracy of my calculation above.

Instead, I’d rather put my money into mining companies that are already earning revenue and profitable.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Greatland Gold Plc. 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.

More on Investing Articles

CEO Mark Zuckerberg at F8 2019 event
Investing Articles

Meta’s putting ads in WhatsApp! Should I buy the stock for my ISA?

This writer can see a handful of excellent reasons to consider adding Meta Platforms (NASDAQ:META) stock to his portfolio today.

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 top UK stocks I still wouldn’t touch with a barge pole

Harvey Jones has his barge pole out and is using it to keep these risky UK stocks away from his…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Growth Shares

The Rolls-Royce share price could hit £10 if these 2 things happen

Jon Smith points out two key factors that will likely dictate if the Rolls-Royce share price can continue to push…

Read more »

Investing Articles

Will the stock market crash as war fears grow?

Harvey Jones says hanging around for a stock market crash is no way to pick FTSE 100 shares. What matters…

Read more »

Two business people sitting at cafe working on new project using laptop. Young businesswoman taking notes and businessman working on laptop computer.
Investing Articles

Here’s one of the FTSE 250’s greatest bargain shares to consider!

This FTSE 250 share's risen 10% since the start of the year. Royston Wild gives the lowdown on why this…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

Should I sell Legal & General Group and buy even more Phoenix shares instead?

Harvey Jones is thrilled he bought Phoenix shares as the FTSE 100 insurer has done better than he hoped. He…

Read more »

Photo of a man going through financial problems
Investing Articles

This FTSE 250 stock has a stunning 10.8% yield! Time to consider buying?

Harvey Jones is dazzled by the amount of income on offer from this FTSE 250 stock, but not too dazzled…

Read more »

Young female hand showing five fingers.
Investing Articles

£10,000 invested in these 5 FTSE 100 shares in June 2020 would now be worth…

Our writer considers the best-performing shares on the FTSE 100 since the summer of 2020, and takes a closer look…

Read more »