Description

Summary:

SolGold is a copper-gold corporation owning a substantial portfolio of assets and concessions in under-explored Ecuador, which includes the PFS-stage Cascabel project. With sources of ~16Mt of contained copper equivalents, the Cascabel undertaking is one of few large-scale copper initiatives in the world, which we argue makes SolGold an unique idea in a market that has started to see an uptick in M&A over the last 12 months.

There have been various events over the last 12 months that have happened. The PFS addendum for Cascabel estimated was published. A strategic investor with Jiangxi was introduced in November 2022. As such there are now three strategic investors involved in SolGold. One is Jiangxi as mentioned Chinese largest copper producer, then you have mining behemoths BHP and Newcrest. All this together with the ongoing strategic review sets up SolGold well for a bidding war for the Cascabel asset or a full sale. We view our base case upside at 50p or ~180% upside. Especially thinking about the heightened M&A undertaking in the commodity quarter (Oz Mineral - BHP, TRQ - RIO, Noront - Wyloo).

Background:

In April 2022, SolGold published the results of its PFS for the Cascabel project, outlining a direction to manufacturing for its flagship asset. With a DFS scheduled for 2023, building should start in 2024, with predicted first manufacturing in 2029. Due to its size, the Cascabel assignment is one of few independently owned acquisition objectives that has the strength to go the needle for a foremost miner. BHP tried to snap up a majority stake in the asset in 2016, however SolGold defended its controlling interest. With considerably extra work achieved in exploration and engineering seeing that then, we assume the task appears as compelling as ever and would assume activity from different miners to upward jab as SolGold continues to work in the direction of construction. The assignment makes up the lion’s share of our valuation.

Besides Cascabel, SolGold has a massive increase portfolio of exploration pursuits and assets at a range of tiers in Ecuador. The Porvenir venture is the most developed amongst them, with a described measured and indicated aid containing 1.75Mt of copper equivalent. In total, SolGold holds seventy six concessions throughout Ecuador, and in addition to the Cascabel and Porvenir projects, the organisation has recognized eleven different precedence tasks in that concession base. With time, we assume SolGold should end up a most important participant in the rising copper area of Ecuador.

The Cascabel mission has caught the interest of generic organizations due to its useful resource dimension and excessive grades with mining heavyweight BHP and Newcrest over time turning into SolGold’s two greatest shareholders. We argue that the participation of the majors is a clear vote of confidence and speaks to the satisfactory nature of the underlying asset of the Cascabel project. The venture is additionally an apparent acquisition target as it is one of few independently owned sources that has the size to move the needle for giant mining company such as BHP. The size of the asset can be as large as Olympic Dam which is BHP number on asset! BHP tried to purchase a controlling stake in the Cascabel project in 2016, however SolGold defended the overture. We believe something similar will happen here again but in a more competitive environment. Which we believe will lead to a enormous upside in the stock. Currently BHP owns 13.55% of the corporation and Newcrest 13.48%. This will be diluted post the merger with Cornerstone (more on this later).

Why Solgold and why now?:

We see SolGold as a desirable and unique opportunity as it offers access to an undeveloped massive scale, amazing asset that is managed by a junior mining player. We anticipate the market to understand the substantial value of the company’s flagship Cascabel asset as it progresses with its PFS Addendum and DFS. The company has started out a "strategic review", which we trust will result in the full sale of the business. Management has sorted the temporary capital issues, as the commercial enterprise had round $11m left in the bank. It has raised $50m via a royalty with Osisko. This implies a share value of round 70p for the stock.

Our valuation is primarily based on a sum of the parts exercise, with the PFS-stage Cascabel venture with the aid of a ways making up the lion’s share of our goal price. Cascabel is priced primarily based on an EV/resource (CuEq) of 4.6₵/lb on the Alpala and Tandayama-America deposits, which is comparable to what was once considered in Lundin Mining’s acquisition of the Josemaria challenge in Argentina.

We have assumed that the corporation will want about $300m of capital to get to the stage of a completed DFS, and have conservatively modelled that to be raised. This is solely applicable if the "strategic review" does no longer result in the full sale of the company, which we believe with is highly highly unlikely. $50m of the $300m has been already raised. The ultimate $250m can be raised through the sale of shares held by means of Cornerstone, which is merging with Solgold. The sale of round 7% of the Solgold shares, owned by Cornerstone, is anticipated to raise round $30-35m with an extra $30-35m to come from a tag along share sale to a strategic investor (more on this later).

Solgold owns 85% of the Cascabel project. The remaining 15% are owned by Cornerstone. Cornerstone and Solgold have announced a merger to align equity value and the asset value of Cascabel, which we consider is a precursor for a full takeout. The merger is now finalised. Cornerstone has already appointed two board participants on the board of Solgold as such we expect that the deal will happen. Around 47% of the Cornerstone shareholder base has already entered into vote agreement / support.

Cornerstone has additionally a direct possession in Solgold of 7%. Management of Solgold has publicly announced that they are searching for a strategic investor to place these shares plus extra shares to supply to them to get to around 10% as a counterweight to BHP and Newcrest, which would create a) money for the business however b) more importantly would create tension between the parties. It would additionally supply the new strategic shareholder a route to full control as Cornerstone will own round 20% of the PF entity post the merger. The founder of Solgold controls round 15% post the merger. This would result in the new strategic investor to own 45% of the share capital and a clear route to control. This we are convinced creates the urgency for BHP and Newcrest to counterbid or a pass as they absolutely desire this asset and see it as important and have been invested in this company for nearly a decade and have participated in each capital raise.

Copper:

Copper is used in a huge vary of industries due to its exquisite conductivity, chemical balance and ductility. Its electrical conductivity is an in particular vital feature, and 70% of copper is used in the potential of transferring electricity. Uses consist of cables in the electrical grid, copper foil in batteries and wires in purchaser electronics. Copper is for this reason a imperative fabric in the inexperienced shift closer to low carbon emission future. Another points of copper is its thermal conductivity, which is utilized in refrigeration units, warmth exchangers and radiators. The metal’s chemical balance and resistance to corrosion additionally makes it relevant to tubes in plumbing and as fabric used in building and roofing. Copper is the fundamental output of SolGold, with a top manufacturing of about 210ktpa according to the cutting-edge PFS of the Cascabel project.

New and environmentally friendly technological know-how depends closely on electrification, and copper is a quintessential metallic for the conduction of electricity. These applied sciences in demand for the inexperienced transition are extra copper intensive than most of their traditional peers. For instance, electrical motors (EVs) have three to 4 instances the copper depth of a automobile with an inside combustion engine, and offshore wind demands round seven instances the copper of coal or gasoline plants. In addition to the direct copper consumption pushed via new technologies, good sized improvements and expansions of electrical energy networks will be wanted to enforce these technologies. This is additionally possibly to current extra demand for copper in the coming years, in our view. Our copper demand mannequin assumes a gradual extend in incremental demand from “green” technology, illustrating a structural shift in demand dynamics. This comes on top of the ‘regular’ GDP-linked copper demand estimate and contributes to a envisioned deficit from 2024.


Ecuador:

While Chile and Peru have been massive copper producers for a lengthy time, Ecuador has remained underexplored. Since 2017 there’s been a significant extend in exploration spending in Ecuador, with quite a few majors displaying previously in the region, which include BHP, Fortescue, Anglo American and Codelco. Being an early mover ought to be really helpful as you get to choose up promising potentialities. In much less explored land, the danger of making highgrade discoveries ought to additionally be higher.

For decades, the petroleum companies have been Ecuador’s monetary engine, however Guillermo Lasso, elected as President in 2021, has sought to diversify the financial system with the aid of growing emphasis on the mining industry. Lasso has been supportive of home mining when you consider that the starting of his campaign, which we agree with bodes properly for businesses looking for to make the most the country's enough copper-gold resources. Ecuador has been consequently overlooked out on capitalizing on its untapped assets due to stringent policies and protesting neighbourhood communities. The latest upward push in funding and exploration might also serve to in part to reverse this historic trend, however it can also additionally exacerbate tensions already current between neighbourhood communities and companies. Furthermore, Ecuador’s particularly modest journey with mining projects, blended with the country’s violence and monetary problems, could lead to negative events, probably inflicting manufacturing delays.

Strategic Review Outcomes:

SolGold as operator: SolGold could move forward as operator of the project, getting cost advantages from a “lean and mean” overhead structure compared to large caps, while on the flipside likely not getting access to as cheap capital as a major would. In such a case we’d expect to see a range of various funding mechanisms including ECA deals, infrastructure partnerships and asset sell-downs in addition to traditional debt and equity raises. Probability 0%.

Partnership: SolGold could partner up with a large cap to leverage from their lower cost of capital and experience with large mines. That way, the project would be derisked both in terms of financing, construction and operations, while SolGold would maintain a stake that could finance development of its substantial exploration portfolio. A major would likely want a majority stake. Probability 5%.

Asset sale or full acquisition: BHP and Newcrest have shown explicit interest in the SolGold, and other miners might also be looking at the company. The size of the Cascabel project also makes it a standalone target and for the right price the company could sell it and focus on its other projects. There are rumours also that Mitsui and other Japanese conglomerates looking at Cascabel to invest on an asset level which we believe would lead to a full sale. Probability 95%.


History:

2012: SolGold enters binding letter of intent to earn an 85% interest in Cascabel.

2016: BHP bids $30m for 10% interest in SolGold and $275m for a 70% stake in Cascabel. SolGold’s stock skyrockets in the period revolving the bid. Offer rejected as SolGold wants control of the project. Newcrest obtains 10% share in SolGold, increases stake to 14.5% later the same year subject to the condition that Newcrest cannot acquire shares in Cornerstone before Oct 17, 2019.

2017: Cornerstone acquires ~11% of SolGold and achieves ~25% economic interest (directly and indirectly) in Cascabel. SolGold approaches Cornerstone to start negotiations of a business combination; happens again in 2018. The parties are unable to agree on a solution.

2018: BHP acquires ~6% of SolGold; increases share to ~11% in the same year. Newcrest counters with increasing stake to 15.2%.

2019: BHP becomes SolGold’s largest shareholder, increasing its stake again to ~ 14.7% at a ~13% premium. Also receives options for ~19m shares exercisable until Nov 2024. SolGold bids for Cornerstone willing to pay a ~20% premium. Cornerstone rejects the offer arguing that it undervalues the company. Cornerstone claims that auctioning the entire Cascabel project to acquirers such as BHP would maximize shareholder value.

2020: SolGold announces a $100m royalty agreement with upscale to $150m with Franco-Nevada. BHP, Newcrest, and Cornerstone all react negatively to the decision. None of the firms participate in SolGold’s equity raise later the same year. SolGold bids for Cornerstone again, this time willing to pay a ~22% premium. Cornerstone rejects offer for the second time in 18 months.

2022: Release of Pre-Feasibility Study. Announcement of merger with Solgold and Cornerstone. Announcement of the Strategic Review. Solgold announced $50m royalty agreement with Osisko Mining. BHP, Newcrest, and Cornerstone all again react negatively to the decision. As majors dislike royalty agreements.


Valuation:

The SOTP is routed on an EV/Resource estimate based totally on the contained CuEq of assets in our peer group pricing Cascabel at a comparable multiple observed for Lundin Mining’s acquisition of Josemaria Resources. We’ve additionally made a targeted DCF to see what assumptions may want to be used to get to the identical value. Cascabel is valued at 43p and the remaining portfolio at round 7p to get to 50p for the base case. If as in the case of Noront a biding war breaks out the valuation can go up to 100p or 1x NAV.



Addendum:

https://www.afr.com/companies/mining/how-bhp-newcrest-may-lose-their-copper-prize-to-a-scrappy-crew-of-minnows-20221114-p5bxxy

Catalyst

Catalysts:

- Full sale of business

- Strategic review completes