Over the past year, the Greatland Gold (LSE:GGP) share price has been in steady decline. It’s now 40% lower than it was 12 months ago. But this week the stock rose by more than 15%. Interestingly, the reason behind this spike has nothing to do with the company itself.
Greatland Gold owns 30% of Havieron, a gold and copper mine in Western Australia. The remaining 70% is held by Newcrest Mining, Australia’s largest gold producer. After some encouraging test drilling results, the joint-venture partners are now seeking to commercially develop the mine.
Regular updates on progress are issued. The most recent one, in January, revealed that drilling had advanced nearly a mile. On the day of the announcement, the company’s shares closed nearly 5% lower.
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A gold rush?
However, earlier this week the world’s largest gold producer, Newmont Corporation, announced a $16.9bn takeover bid for Newcrest. If the deal is approved by shareholders, the new group would produce twice as much gold each year as its nearest rival.
The news led to frenzied excitement on the bulletin boards. Some investors have speculated that it could lead to a takeover bid for Greatland. Others predicted that it would enable the company to buy the 70% of Havieron that it doesn’t currently own. One correspondent forecast that the share price could hit £5, which, if correct, would value the company at £25bn — nearly 60 times its current market cap!
In addition to Havieron, the company is involved with other early-stage projects. These appear to be progressing as planned, with test drilling underway.
Recently, the company strengthened its management team. A Chief Development Officer and a Chief Operating Officer have now been appointed.
Fool’s gold?
But the company is very much in its infancy. Its current stock market valuation of over £400m is based on future potential rather than its existing performance. To date, the company has yet to generate any revenue. And it has racked up losses of £35.7m.
Extracting precious metals from deep underground is a difficult and dangerous business. Commodity prices also fluctuate greatly. This means it’s difficult to forecast future cash flows with any certainty. Valuing shares in mining companies is therefore a tricky business.
However, an independent assessment has been made as to the value of Havieron.
As part of the joint-venture agreement, Newcrest has an option to acquire a further 5% in the mine. During recent discussions, the two parties couldn’t agree on a valuation, which meant an independent expert was appointed to come up with a figure. The mine was subsequently valued at $1.2bn. Greatland’s 30% stake is therefore worth $360m.
The company has argued strongly that this doesn’t reflect the true potential of the mine. But the directors of Newcrest — who know more about mining than I do — decided not to exercise their company’s option. Perhaps they didn’t feel they were getting value for money? For this reason, I think Greatland’s share price is also currently overvalued.
As an existing shareholder in the company, this is difficult for me to accept. Even with the share price under 10p — well below the level when I made my investment — I don’t plan to add to my existing holding right now.
