Merrill buy note10 Sep 2020 11:44
Merrill comments
Buy SolGold for geared copper optionality
We launch coverage of SolGold Plc with a Buy recommendation & price objective of GBp83. We view SolGold as a London listed copper/gold exploration & development company. SolGold has no producing assets and its main development project, Alpala, is several years away from production. That said, we think that the group’s multiple prospects and first mover advantage in Ecuador are compelling in a world that is short “copper optionality”. Shares trade on just 0.2x our DCF derived NPV. Our price objective (83p) is set at a large discount to our NPV (0.5x) reflecting financing, execution & dilution risks but still provides >200% potential upside. Note, we assign no value to the group’s many other prospects in Ecuador – an industry bidder might not be so conservative…
SolGold sees itself as an “emerging copper major”…
The Alpala project seems quite “bankable” with infrastructure including power, roads & port already in place. Alpala is just a few hours’ drive along paved roads from Ecuador’s capital, Quito. Low cost (USc5-8/kWh) power is readily available. A rail / road corridor passes close by the site giving access to a sea port. Ecuador has had some challenging government policies in recent decades but of late, the investment climate seems to have turned more positive. SolGold presents to the market as if it plans to build the $2.7 bn Alpala project itself and then proceed with several other projects in Ecuador.
… but will it actually build any mines?
That said, for a c. $700 mn company, raising $2.7 bn in capital to fund Alpala without additional equity seems challenging to us. We do note that BHP & Newcrest each own c. 13.6% of SolGold. BHP’s (relatively) new CEO, Mike Henry, has clearly indicated his desire to add optionality in “future facing commodities” including copper, nickel & potash. BHP is subject to a standstill agreement until October this year. That said, interestingly, SolGold recently announced a $100 mn fund raising by selling a 1% royalty on Alpala to Franco Nevada. The group is exploring other non-equity financing options.
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