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?

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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.

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