I first heard about Greatland Gold (LSE:GGP) shares about a year ago. At the time, I didn’t think much about them. I saw this as another AIM-listed commodity stock with no real future that was getting pumped higher by speculative buyers. I’m always happy to be proved wrong! So although Greatland Gold hasn’t yet turned a profit, I do think things look promising for the company. Here’s why.
The value of the mines
The rough story over the past year is that there’s the potential for finding gold in some of the projects that the business is involved in, located in Australia. News and venture updates around this have caused Greatland Gold shares to shoot up from 4.5p this time last year to 22.5p today. This represents a one-year return of around 400%.
I’m positive on the stock for several reasons. Firstly, take one of the projects, the Havieron Gold project. This is a joint venture with Newcrest Mining. It covers 135km in north western Australia, and is only 40km away from an existing successful gold mine. The odds of a profitable find here should be high, and it doesn’t look like Greatland Gold shares are completely pricing this in.
For example, one technique to value this is discounted cash flow (DCF). Essentially, based on the potential gold to be mined, and the selling price of that gold, I can work out the cash flow value to Greatland. Given no gold is being mined right now, I have to discount the value of the cash flows in future years back to today. I’ve read articles from financial analysts commenting that the DCF is higher than expected. In this case, the value of the project is greater and more profitable. If this is realised, then Greatland Gold shares should rally further.
Pinning a value on Greatland Gold shares
The second reason I think Greatland Gold shares could go higher is the value of the new projects that are coming. Only last week the CEO came out with more details about the second joint venture with Newcrest that was initially announced last November. Following the results of technical surveys, several more sites have been identified that have potential.
I’m not an expert in this field, but I can appreciate that the more sites that are looking promising is a positive. All of this acts as a pipeline of future revenue. Not all will be successful (such is the nature of mining). But the more sites there are in the mix, the better the probability.
One huge, glaring risk I must state for Greatland Gold shares is the risk of drawing a blank. If this is the case, the current fundamental value of the business is nowhere near the market valuation of £871m. In fact, I’d struggle to put a fair price on Greatland Gold shares, as it’s currently a loss-making business. Until the company quite literally strikes gold, the share price is a lot of speculation.
Overall, I do think the positive news on existing and new sites should push the share price higher. I would buy GGP shares for my own portfolio. However, I’d be very cautious with investing any more than I could afford to lose.
jonathansmith1 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.