Greatland Gold (LSE: GGP) has been one of the best-performing stocks on the London market over the past few months.
Investor sentiment towards the small-cap mining company has exploded following a series of positive updates from the business. A renewed interest in gold among investors has also lead to improving sentiment towards Greatland Gold.
Could be just the start of a much broader rally for the stock as the company continues to push ahead with the development of its flagship mining prospect?
Is Greatland Gold undervalued?
Greatland Gold owns a handful of mining projects across Australia. The most promising of these appears to be the Patterson Project. This is made up of the Havieron, Black Hills, and Paterson Range East exploration licences in Western Australia.
Here, Greatland Gold has partnered with the Australian gold mining giant Newcrest Mining. The $25bn corporation is one of the largest and most experienced gold mining companies in the world. In the first quarter of this year alone, the group produced 519,000 ounces of gold.
Newcrest has a farm-in agreement with Greatland Gold at Havieron. It has agreed to help explore and develop the prospect and, in return, a 70% interest in the blocks by spending $65m.
So far, the company’s initial exploration activities have been extremely positive. Earlier this week, Greatland Gold published the eighth consecutive set of “truly spectacular” results from Newcrest’s drilling campaign.
This string of positive updates puts the mining partnership on track to deliver its first output from the prospect in the second half of 2020. Full production is targeted within two to three years.
City analysts have estimated there could be as much as 5.5m ounces of gold at Havieron.
Plenty of work to do
While it looks as if Greatland Gold is making all the right noises, there’s still a lot of work to be done between now and first production. What’s more, small-cap gold miners are notorious for running out of money before they start producing. There’s always going to be a risk in the background that Greatland could succumb to this fate.
However, the fact the company has such a large, experienced and deep-pocketed backer is highly encouraging. It removes a lot of the risks involved with investing here.
Indeed, considering the quality of the Havieron asset, if Greatland Gold does begin to struggle, Newcrest might decide to buy the whole company.
The stock could also have tremendous upside potential if it manages to progress to production. If there are 5.5m ounces of gold at Havieron, this could mean the business is sitting on £7.7bn gold, based on current prices. By comparison, the company’s market capitalisation is only £500m.
While there’s no guarantee it will ever be able to generate this kind of income, these ballpark figures suggest the risk-reward ratio of investing in Greatland Gold, as part of a diversified portfolio, seems attractive.
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.