After rising in value by nearly 10 times between the beginning of last year and January of this year, the GGP (LSE: GGP) share price has fallen back. Since the beginning of 2021, shares in the early-stage gold miner have fallen by 44%.
From an entirely objective perspective, this decline seems to make sense. At the beginning of the year, Greatland’s market capitalisation had reached £1bn. This seemed to be excessive for a company with no revenues.
That’s not to say that the company is not worthy of a £1bn value. It may be one day, just not yet. But with the business progressing with the development of its flagship Havieron Gold project, which it now holds in a joint venture with Newcrest Mining, I think the outlook for the business is improving every day.
GGP share price pullback
Alongside the fact that the company’s valuation appeared high at the beginning of the year, 2021 is also turning into a bad year for investors in the gold mining sector in general.
The price of yellow metal has declined by around 11% since the beginning of the year. This has dragged down the share prices of mining companies, including Greatland’s joint venture partner Newcrest. The Australia-based mining group has seen the value of its stock fall 8% in 2021.
This is one of the most significant risks facing investors of gold mining corporations. The price of gold can be incredibly volatile, but costs are generally relatively inflexible. This means miners have limited control over profit margins. If the price of gold falls, but costs remain high, a company’s profit margin will come under pressure, potentially reducing profits and leading to a lower share price.
As Greatland is not yet producing any gold, the falling price of the metal won’t impact profit margins. However, it will affect the value of the Havieron project. A lower gold price will mean a lower lifetime value of the project. This explains, to some extent, why the GGP share price slumped over the past few months.
I think this is a very short-sighted mentality. Yes, figures may show Havieron’s output may be worth less today than it was at the beginning of 2021, but this project could have a 25-year lifespan.
What’s more, over the past 20 years, the price of gold has returned around 7% per annum. Of course, this does not guarantee the price of gold will continue to increase at this rate for the foreseeable future.
Still, I think it illustrates the long-term potential of gold as an asset.
As such, I would use the recent decline in the GGP share price to buy a handful of shares in the company to hold as part of a diversified portfolio. I think the recent pullback fails to acknowledge the long-term potential of its world-class gold mine.
I should point out that investing in early-stage gold miners is incredibly risky. Therefore, this opportunity may not be suitable for all investors. The most considerable risk it faces is running out of money before production begins.
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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.