CORRECTION: An earlier version of this article incorrectly stated that the total value of the project was £1.02bn, rather than £5.26bn.
2020 was a tough year for many mining companies as the pandemic brought most operations to a halt. And yet, the share price of Greatland Gold (LSE:GGP) surged from 1.8p to 36.9p. That’s a massive 1,950% increase in the space of 12 months!
But since the start of 2021, the GGP share price has been on a downward trajectory and has halved to 18.9p. Why did the stock price explode in the first place? Why is it falling now? And is this a buying opportunity for my portfolio? Let’s take a look.
The rising GGP share price
Covid-19 has had virtually no impact on GGP’s business. Why? Because the mining company isn’t actually mining anything yet. It is still firmly within its exploratory phase of development and does not have any active sites. So what caused the share price to surge?
The GGP share price began its climb in early 2020 following the release of preliminary drilling results for its Havieron project. It confirmed the discovery of a massive gold and copper deposit starting from a relatively shallow depth of 600 meters. By comparison, the average mining depth is around 1,000 metres, indicating a potentially cheaper operation once the site becomes active.
Following four sets of drilling tests, each with increasingly positive results, the company confirmed that an estimated 3.4Moz of gold and 160 kilotons of copper are available for extraction. Based on today’s market value of these metals, this represents a gross value of £5.26bn. So I’m not surprised that the GGP share price exploded on the news.
Some risks to consider
When the GGP share price was trading at its highest point in December last year, the market capitalisation stood at just over £1bn. Today it’s closer to £740m. Why did it fall? This appears to be linked to both copper and gold’s contracting prices since the start of the year. Let’s not forget that mining companies have no pricing power. And so, if the market value of these metals declines, then profit margins get squeezed.
The reduced price does look enticing. However, to fund the mining operation that has yet to begin, GGP formed a joint partnership with Newcrest Mining. It will provide a one-off payment of $65m to help get things started. In exchange, Newcrest is entitled to 70% of all extracted resources from the Havieron project. That means GGP will only receive an estimated £1.58bn of the potential £5.26bn. That’s still more than double the current market capitalisation of the firm. But constructing the mining site and extracting these resources is a multi-year process during which the value of these metals may decline, taking the GGP share price with it.
The bottom line
The Havieron project is undoubtedly a fantastic opportunity for GGP and will likely enable the firm to thrive in the future. But there is still a long road ahead, and I think investors may have been a bit over-excited.
The average profit margin of a developed gold mining company is around 35%. This would indicate a rough estimate of £552m net income from the Havieron project over its multi-year lifespan. GGP does have other projects in its portfolio that could provide additional income. However, just like Havieron, none have yet begun any mining, so the firm currently has no revenue.
All things considered, I’m waiting to see how the company performs once it begins its mining operations. And so I’m not adding GGP to my portfolio today. But I will be watching it closely.
Zaven Boyrazian does not own shares in Greatland Gold. 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.