Greatland Gold: dissecting the deal
Good evening MINING AIM.
It feels like this couldn't wait until morning, so I decided to enjoy a few glasses of whisky and analyse in detail the deal that Greatland Gold has just got over the line.
Is CEO Shaun Day a madman who has destroyed shareholder value by diluting at a huge discount? Is he a business genius who has assembled the mining equivalent of the OG Avengers in order to deliver the next gold major?
The answer, in my humble view, is the latter.
Now before we dive in (and those of you who have already taken part in the placing, may the odds be ever in your favour), the only thing I can promise you is that tomorrow morning, Greatland shares are going to bounce up and down like an R-rated Tigger on crack cocaine.
Beyond this, simply be aware that there is risk as the stock settles into whatever its new valuation might be, and further, that I am not going to cover the Greatland Gold asset technicals in great depth as I have done this before already.
GGP resumes trading tomorrow morning.
To the acquisition, which GGP has hailed as ‘transformational.’ I will note at this juncture that transformational is a neutral word.
The first point I want to make is that the assets and debt repayment are for a total consideration of $475 million. I’m going to copy and paste a big chunk of my Greatland Gold Edit from October 2023 now because it’s important to reconsider how to value the assets. Please read this as it informs just how good the deal really is:
This 6p share price level is important because at 6p the entire company has a market capitalisation of circa £300 million. And an independent review of Havieron in August 2022 set the asset value at $1.2 billion (several times more than a couple of years prior). This valuation was done to set a value for 5% of Havieron ($60 million) as Newcrest had the option at the time to acquire this additional bite.
But as Newcrest chose not to exercise this option, Greatland retains its 30% ownership of Havieron — which is equivalent to $360 million — or £293 million. Accordingly, and I have made this simplified argument before, anything at or just below the 6p mark is essentially a floor on the company’s true value, and that excludes the vast tenures elsewhere.
However, this valuation is almost certainly a gross underestimate. As a reminder, this is simply my opinion and I am making some assumptions, so any investor who feels they have additional useful information — I welcome any feedback.
But in essence:
The valuation was made using confidential terms and conditions. This almost always favours the major rather than the junior partner.
Data used to value Havieron for this estimate had to come from before 15 December 2021.
Commodity prices (gold and copper) used at the valuation were ‘very conservative.’
The valuation could have been arrived at via several valuation methods (consider the Valim Code), and likely the method which gave the lowest valuation possible given Newcrest’s position at the table.
At the time, Day noted that it set:
‘a price not a value for the asset, the joint venture agreement doesn’t represent true market value in the opinion of the board and this very much is anchored off the back of that mechanism…it’s a highly prescriptive process and particularly the binary nature of the outcome, if you were appointing an independent valuer and one party puts the lowest bid and one party puts in the highest bid they can imagine, that independent person can come out with a compromise based on their value and anyone who’s had their house valued as opposed to a real estate opinion on it probably understands that’s inherently a conservative approach.’
So to conclude, Havieron is based one this valuation worth £293 million — at the lowest conservative estimate, when gold prices were much lower than they are today, and using data which excludes the past two years of drilling — drilling that three of Australia’s largest banks, Fortescue’s founder, and half the old Fortescue management team are happy to get behind.
Of course, you can’t talk about Havieron without Telfer. The Telfer mine — including the Telfer processing plant — is owned and operated by Newcrest, and Telfer and Havieron are located less than 30 miles from each other. The generic idea is that ore from Havieron will be processed at the undercapacity Telfer plant — massively reducing capex costs for Havieron and increasing Telfer’s LOM feasibility.
‘The question is this: what to do about Havieron and Telfer? Fortunately, the Grant Samuel assessment is out as part of the wider Newmont-Newcrest merger scheme booklet. I scanned through all 774 pages of the report and came to page 278/774 on the PDF, where the independent assessor makes the case that:
‘Grant Samuel has valued Telfer in the range $500-600 million. The valuation incorporates the value of the existing operating mine at Telfer and the value of the Havieron Project (at Newcrest’s 70% interest).’
As a caveat, this is not based on the expected updated MRE, and also based on a series of assumptions ranging from a best case to a worst case scenario. Interestingly, it’s worth noting that investors were relatively annoyed with the $1.2 billion former valuation for Havieron — and now a new assessment places the value of both Telfer and Havieron at 50% less than this figure.
There is one key thing to digest here:
Valuing assets gets wildly different numbers based on the methodology used.
It’s not really worth getting into the scenarios that Samuel Grant has come up with. I’ve helped to edit several similar research notes (surprisingly, they’re not one-man jobs) and they all come with masses of caveats and assumptions.
But it is important to note that on page 31 (PDF), the report says that ‘the joint venture agreement includes tolling principles reflecting the intention of the parties that, subject to the feasibility study and a positive decision to mine, Havieron mineralised material will be processed at Telfer.’
The meat of the text as it relates to GGP investors comes a little later on, on page 280 (PDF) onwards.
SG notes that Greatland first made an offer to acquire another 5% interest in Havieron from Newcrest for $85 million, which was not progressed — and (as noted above), in August 2022, Newcrest also declined to purchase a 5% interest for $60 million.
SG suggest that these two valuations imply both that Havieron is worth more that $1.7 billion and less than $1.2 billion. However, it can also be just as easily explained that Newcrest was consistently happy with its 70% ownership of Havieron.
For context, SG does note that progress over the past two years could significantly increase the value of Havieron, but also suggests that ‘upfront capital expenditure estimates are expected to increase materially due to the expanded scope and increased geotechnical and hydrogeological understanding of the deposit.’
SG also uses share price and capital raisings undertaken by Greatland to attempt to value the assets — stating that Havieron comprises ‘most, if not all, of the company’s value.’ This is an overreaching statement given the tenures being explored.
But regardless, based on GGP’s share price — underpinned by Wyloo’s capital raising in September 2022 — SG concedes on one metric that 100% of Havieron is worth circa $1.4 billion.
Completely coincidentally, this is somewhere in the middle of the $1.2 billion and $1.7 billion prior valuations, but nevertheless, SG concludes that because of the emerging picture of materially higher development costs subsequent to this investment, its $500-600 million valuation of both Telfer and 70% of Havieron is a ‘reasonable balancing of these issues.’
I’ll translate: They don’t really know an exact figure. Because of course they don’t — they don’t have the DFS or the updated MRE.
The report goes on to cross check this valuation through Telfer, and admits that:
Implied EBITDA multiples for Telfer are low as open pit operations are only scheduled to last to FY26
Significant capital will be needed to develop Havieron
There is a lack of clarity surrounding Havieron DFS and Telfer underground mine expansions
There are challenging economics at Telfer’s existing operations
Again with the assumptions — but paradoxically, this new valuation could be good news for GGP shareholders.
Using August 2022 numbers where Havieron is worth $1.2 billion, Greatland would have had to find 70% of $1.2 billion ($840 million) to buy Newcrest’s share — and then more for Telfer as the processing plant is needed to make the investment case — both to process Telfer and Havieron ore, but to include spare capacity as well.
Newcrest invested $181.4 million in Telfer in 2021 to continue production until the end of 2023. It then invested a further $214 million to extend mine life to 2026 late last year. Telfer hosts the largest gold processing facility in Paterson province, and the project produced 407,550 ounces of gold in 2021-22. It still holds significant value, despite its age, and that processing facility could be put to better use.
Previously you were looking at least $1 billion for the two assets to be bought out in full — and now there is a $500-600 million figure — half of what was previously assumed. Hilariously, this would leave GGP’s 30% interest in Havieron at roughly the same value as the $220 million that three banking titans are prepared to lend it in debt.
It’s also worth noting that Barrenjoey analyst Dan Morgan has consistently argued that Telfer and Havieron do not make sense in the wider conglomerate’s portfolio as it is processing below capacity, and the combined Newmont-Newcrest monster will likely want to sell the assets.
There is some speculation here: Newmont/Newcrest want to offload the assets and would welcome a smaller valuation to get rid of them. Greatland is the obvious buyer but needs a low valuation. And who advised Fortescue for years? Grant Samuel.’
The key point is that you can value 70% of Havieron and all of Telfer using half a dozen different methods, and Greatland has acquired the assets for tens of millions of dollars less than the lowest possible valuation, provided by Samuel Grant.
It’s a fucking steal.
Genuinely, I’m not sure how you can read through the various ways to value the assets and agree than NEM has done well by their own shareholders.
The deal comprises:
$207.5 million cash, including US$155.1 million Acquisition consideration (subject to certain adjustments) and a US$52.4 million repayment of the outstanding Havieron joint venture loan
$167.5 million in the form of 2,669,182,291 new Greatland shares to be issued to Newmont at the Issue Price
up to $100 million in deferred cash consideration
GGP will enjoy Newmont as up to a 20.4% shareholder in GGP (I suspect because of the takeover rules, it will definitely end up with less than 20%), and a minimum of 10.2% should the placing be enlarged. These shares will be subject to a 12 month lock-in and then a further 12 month orderly market arrangement — and one hopes Newmont will keep hold of them as they start to rise (but perhaps not — they want capital to develop their priorities).
There is a clue in that new investors are also being given the opportunity to buy in at 4.8p — there is definitely enough LTHs to meet demand, and as excess will be used to chip away at NEM’s holding, it’s possible GGP is attempting to reduce the number of shares going to Newmont by as much as possible.
$100 million deferred until Havieron commences commercial production in addition to a gold price hurdle is also very good news — so if NEM will wait for this cash and is getting only GGP shares now (other than $207.5million in cash) — the cards have been stacked in GGP’s favour.
For context, Wyloo (read Twiggy) is throwing in $100 million — with the remaining $225 million of the institutional placing underwritten by Canaccord Genuity. GGP will also seek an ASX listing within the next six months — I would expect another capital raising may come then, though it is arguably fully funded by this raise already:
GGP has also executed a Bank Debt Letter of Support for AU$750 million in proposed banking facilities for the development of Havieron, with Tier-1 lenders ANZ, HSBC and ING Bank.
Combined with working capital from the Equity Raising and expected cash flow generation from Telfer, ‘the Company considers there is a clear and non-dilutive pathway to the Havieron development being fully funded.’
Worth noting this letter is non-binding at this juncture though.
So this is all great news.
But.
And there’s always a BUT.
Long-term holders may be a little concerned that raising circa £250 million at 4.8p per share (a 30% discount) when GGP suspended with a circa £350 million market cap is a bad idea (I’m ignoring the retail pennies, though it is good practice to offer!).
This 30% discount though, is a really much larger when you consider the 11p+ of less than a year ago.
Good news though that directors are throwing $400,000 of their own money — skin in the game is always a good sign. And as I recall, director options are at 11p.
The capital will: ‘be used to finance the US$155.1 million cash component of the Acquisition consideration, repayment of the US$52.4 million outstanding Havieron joint venture loan to Newmont, repayment of the outstanding balance of approximately A$7.1 million under the Wyloo working capital facility, the stamp duty payable by the Company on the Acquisition, the payment of transaction costs and expenses in connection with the Acquisition and the Equity Raising, and working capital requirements.’
Okay, this is serious dilution at a steep discount. However, at the bottom line, the acquisition is costing $475 million or £363 million — if the market cap is circa £350 million, then the maths is simple enough that a child can understand it.
GGP currently holds 30% of Havieron and 0% of Telfer and is ‘worth’ £350 million.
This would make just 60% of Havieron ‘worth’ £700 million.
GGP is buying 70% of Havieron and 100% of Telfer for £363 million, but is paying much of this in shares in itself, and then cash at some later date.
Make it make sense.
Of course, Newmont haven’t exactly been fantastic JV partners over recent months; and for me, the basic point is that if owning 30% of an asset as a junior partner was enough to see the share price move to highs of 11p+ late last year, and 27p+ in late 2020, the ENLARGED SIZE OF THE ASSET BASE should be sufficient to see moves several steps higher — especially as Newmont aren’t actually leaving and may given their likely new shareholding be switching roles with GGP.
Which might make for interesting chat at the water cooler — 'if you think it’s so easy Shaun, have a go yourself!'
One interesting factor is the timing — clearly GGP was pushed by the leak — but announcing the deal on the day Centamin was also taken out (dominating the headlines), not only assures you that you are NOT the talk of the town at a higher level, but also that fewer people are going to look too closely at the valuation.
For context, those offered the placing were in many cases given less than two hours at no notice to make a decision — and while my speed reading is pretty good, there’s 573 pages to wade through.
Let’s consider the technicals:
This is a ‘highly accretive acquisition: 1.4x accretion on an attributable Mineral Resources per share of the enlarged Greatland group.’
Havieron with its 8.4 Moz resource is estimated to sustain a:
‘2.8Mtpa mining operation with average annual production of 258koz gold equivalent at a lowest quartile all-in sustaining cost (AISC) globally of US$818/oz in steady state (first 15 years), with a 20-year total mine life.’
AISC of $818 and a gold price of $2,500+ and rising is some profit margin. Let’s say for safety, you’re making $1,500 an ounce in profit and generating 258,000 ounces a year.
Anyone got a calculator?
That’s $387,000,000 a year.
I’m happy to correct that figure if wrong — I am a few glasses deep by now.
And as a feasibility study should be out within 12 months, it’s likely that further cost savings will be made shortly, including potential mining throughput expansion utilising a bulk ore handling solution. And I have also been informed that critical KPI oz per vertical metre is a world-leading 7,900-8,000.
The base case is to operate a steady state mining throughput rate of 2.8 Mtpa and an average grade processed of 2.74g/t gold and 0.32% copper. First ore production is planned for H2 2026 and first gold in H2 2027.
The same chaps who put together the Havieron details also put together the base case for Telfer; this includes a high confidence 15-month initial Telfer mine plan:
‘total estimated production of 426koz gold equivalent at an estimated AISC of US$1,454/oz from the restart of processing operations at Telfer (expected to occur in late September or October), which has the potential to generate significant near-term cash flow for the Company from Acquisition Completion.’
Let’s say you’re walking away with $1,000 per oz (yes taxes, royalties, blah blah). 426,000 x 1000 = $426,000,000/15 months = $28,400,000 per month of profit — and we all know Havieron is the real prize.
All this means is that further dilution is not going to happen though for clarity, 60% of initial sales from Telfer are subject to hedging to ensure the capital to get Havieron into production is there.
There’s also a decent chance of getting additional ore sources which have already been drilled to extend the plant’s life. There’s exploration potential given the 3,800 square kilometre exploration portfolio within 60km of Telfer. And then there’s the 'hub & spoke' strategy (it’s the only operating mill in the region) alongside general synergies — but the feasibility study will show these in detail when it comes.
For context, the base case is to process Havieron ore using a single train — the Telfer Tain 1 circuit at 750 tph, which means only 50% utilisation.
Before we start talking about GGP like the bastard lovechild of Fortescue and Northern Star, one further note on the financials; the base case notes that $533.9 million of capex will be needed to complete Havieron development — as we know, $498.7 million is available in bank debt finance, leaving circa $30 million to go from working capital and Telfer income.
Again, this debt finance is NOT signed off officially yet, and it may well be expensive.
That’s okay, GGP can afford it. As I understand it, hundreds of thousands of ounces of gold may already be stockpiled.
I am a cautious investor and have not taken the placing; it took me time to understand the investment case — this may dip tomorrow but one hopes the dip will not last long.
Just hope Shaun Day gets this over the line quickly, because Newmont investors are going to have questions.
- Charles Archer 10/9/2024
P.S. First gold from Havieron is three years away, and there will be the standard Laffer curve activity. If you missed the boat, and it rockets tomorrow, be aware there will almost certainly be dips along the way.
And Shaun, if you're reading this?
CONGRATULATIONS - starting today, you are the one who knocks.
Don't fuck it up.