The Battle for Sol Gold in Ecuador (Cascabel)

The Battle for Sol Gold in Ecuador (Cascabel)

Normal Disclaimer, I have a Long Position in Sol Gold (SOLG), however I am under no illusion that what I write here will make a jot of difference to the share price. This is a big £400-500m MCap company. Many column inches have been written in the national press and associated mining expert publications.

So why write this?

There is a lack of discussion in my opinion as to why BHP have invested and why now. SOLG’s current situation also interests me with its machinations and relative complexity.

Almost every resource company, be they on AIM, ASX or TSX have a number of people saying that the big players are interested, our projects are fantastic, they are Tier 1, our grades are exceptional. 

They might even have a large discounted NPV which can be used to justify those comments. 95% of the time such utterances are at worse disingenuous and out right lies, but mostly pipe dreams, wishful thinking that never materialises.

SOLG is rather different. It has attracted massive investment, it has attracted ten’s of millions from world leading companies (Newcrest and BHP), it has moved into a much higher MCAP bracket than almost any non producing resource company.

Over the last year the share price has struggled due to lack of clarity on the Cornerstone bid, the mining cycle and external copper factors and last and but not least the country risk associated with Ecuador. They now find themselves on the verge of another MRE, with a PFS to be released in the next 3-4 months, likely to be the largest maiden Copper PFS of 2020 in the world.

Moving on to the machinations! A nice place to start here is with the Cornerstone response to the proposed bid by SOLG. One of the key points of defence is that SOLG has some unhealthy relationships with Nick Mather and DGR. (They are for all intent and purpose, one unit for voting and strategy). I understand why they are miffed by this as this is 15% of the company, as of today and is more than the 9% owned by Cornerstone. It gives the CEO (Nick Mather), considerable, none normal control of the company that most CEO’s could only dream of.

The point of DGR is that their holding is a strategy.

Other key investors are Newcrest at 15%, Cornerstone at just under 10% and until recently BHP at 11%.

There has always been some concerns within SOLG that Cornerstone and Newcrest are a little too friendly. There have also been concerns that a low ball offer will come in (25-30p) backed by Newcrest and Cornerstone. With 25% to Nick and BHP against the 25% to Cornerstone and Newcrest that would have been a tight contest, probably won by Nick and BHP, but corporate business at this level can be unpredictable and nasty.

The share price looks to have had a hand pushing the price down over the last 3-4 months, probably to support the low ball bid and make it more appealing.

The key news trigger for the low ball offer would have been the release of the new MRE, but certainly prior the release of the PFS.

Let’s move forward to this week’s announcement that BHP are raising their stake to 15%.

BHP wanted more in the placing, however SOLG had one reason and one reason only for the share issue and that was to increase DGR/Nick’s holding and BHP’s holding to 30%, therefore giving a clear block to any potential low ball bid. The share options were added as a nicety  at a much higher price. The news that BHP will help not just with Cascabel, but also be a technical partner for SOLG confirms their support to the SOLG management.

Nick has the added incentive to keep BHP honest with the Cornerstone/Newcrest partnership, who would certainly block any BHP low ball offer.

To cement the requirement for SOLG to be involved they have developed extensive environmental and ecology credentials with the local community and Ecuadorean government, above and beyond what either BHP or Newcrest could achieve given past history.

That leaves Nick/SOLG to progress their main strategic objective to sell off the majority and operatorship of Cascabel, without any party having the option to just buy the company outright.  SOLG will look to maintain maybe 30-35% of the project, giving them sufficient exposure without the headache of crippling Capex debt. The ownership of Cornerstone would have given them more jam to play with, but is not vital.

SOLG will be looking to get 200-500m for 50% and operatorship of Cascabel. This would pay to get two of the near production gold projects going in their portfolio over the next 18 months, providing the 30-35% capex requirements for Cascabel and pushing the company into the mid tier.

For SOLG the key trigger to sell Cascabel will be the creation of the PFS. I don’t believe SOLG want the costs or concerns of creating the final Bankable Feasibility Study.

So to recap:

The BHP deal has allowed SOLG to safely fulfil its ambition of a meaningful and speedy monitisation of Cascabel. This will allow SOLG to maintain a sizeable exposure to one of the most important copper projects of the 2020’s.

SOLG will have the capital to quickly progress some of its other potential Tier 1 assets.

There are a number of important share price power ups. The BHP deal is one. The MRE will be another, the PFS a third. Regional developments will be a forth and a partial sale of Cascabel the final, crowning glory. 

All in the next six months.