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.
