Newmont has finally made a decision. The time has come for Greatland to make theirs.
In ‘The Lord of the Rings: The Two Towers,’ (spoiler warning), King Theoden of Rohan, played to perfection by Bernard Hill (the extended trilogy is the best cinema ever made, watch it if you haven’t, dozens of awards, incredible screenplay, music, battles, acting…)
I digress.
Theoden must make a difficult choice and central character Gandalf asks:
‘What is the King’s decision?’
Watching this film in the cinema, it felt as if time had been suspended for years, as the audience waited with bated breath to see where the climactic battle of the sequel would take place.
But the length of time it took Newmont to make a decision on Telfer and Havieron was far longer, both in reality and in temporal subjectivity.
The good news is that the King of Gold has finally made its decision. Newmont plans to divest itself of both Telfer and its 70% share of Havieron.
However, before we get started there are a few points to consider:
- The Greatland Gold Edit covers much of the investment case here. If you want a refresher or are new to the stock, it’s a good start.
- Since that piece, Greatland released a JORC update to its MRE which saw the mineral resource increased by 1.9 million oz AuEq — to 8.4 million oz AuEq. NEM’s own assessment broadly reflects this update.
- There are significant risks associated with junior resource sector stocks. These risks are higher, for example, than those associated with large caps in defensive sectors.
- Some will talk about technical details, the aquifer, decline and similar. These are not controlling the share price at present.
Perhaps the most important caveat is that Greatland Gold is going to be a rollercoaster ride, and likely even more so than in the past. Tellingly after today’s decision, the share price has barely moved — because investors in Greatland have simply swapped one major decision out of their hands for a plethora of options in the company’s control, each with their own advantages and drawbacks.
Let’s dive in.
Understanding the mindset
Before we consider the choices, it’s important to note that even after the MRE increase, Havieron simply does not meet the objective criteria Newmont set out for retention. This does not mean the assets are poor, but that the now largest gold miner in the world only wants to deal in Tier 1 assets using criteria it has created itself.
I suspect they may regret this decision, especially given the jurisdiction and geography — but it is what it is. Havieron remains an excellent asset.
I think it’s worth ruling out one option completely to start with.
Any end result has to end with at least one party with a financial interest in both Telfer and Havieron. If, for example, GGP bought the rest of Havieron but was left with no ties to Telfer this would be a disaster. This is very unlikely; Telfer is coming close to becoming a financial liability as native assets come close to exhaustion and closure costs loom.
Any buyer will only buy with the intention of acquiring both assets.
The other consideration is how Newmont’s ownership of Telfer and 70% of Havieron is valued. I have gone into this in detail in the Edit, but the most recent valuation from Grant Samuel puts the price at between $500 million and $600 million. I even speculated at the time that this might be a deliberate down valuation to give GGP the chance to buyout the assets and make life easier for all involved.
So, what are the choices?
Here are the options as they stand; I am not going to say which I prefer today as more information will start to trickle out in the coming sessions — but this is what could possibly happen.
1. CEO Shaun Day chooses to put GGP’s 30% up for sale for pennies on the dollar. After years of waiting (for some), this would almost certainly end French Revolution-style, with the man being launched into a volcano.
2. Let’s assume Shaun chooses life and channels the spirit of a more ethical Duff Charleywood (before the run-in with a jackal). Greatland Gold buys the remaining 70% of Havieron and Telfer from Newmont. How will this work? Some combination of cash, equity, and debt — remember that the banking syndicate is already on board, the ASX listing is to come and Wyloo lent the company an additional AU$50 million not so long ago. I went into detail on this option in the edit.
3. Rio Tinto becomes a Cornerstone investor in Greatland via the ASX listing, and puts together a deal with various entities along similar lines to that which Greatland might try to attempt by itself. This would be delicious.
4. Newmont markets the assets, and like a home seller in denial about the new monetary reality, decides it will only sell at a price beyond what either Greatland or an external company is prepared to pay. Nobody bites, so instead it commits to developing the assets. This is not an impossible scenario.
5. Rio Tinto purchases Newmont’s 70% of Havieron and Telfer and negotiates a colossal Joint Venture with Greatland Gold. Rio also makes a bid for Antipa, in which Newmont owns a near 10% shareholding — to create a footprint spanning prime exploratory tenure in the region. Rio Tinto is already engaged in an exploratory JV with Greatland.
5. Newmont sells Telfer to one buyer, and its majority share of Havieron to another. This would be a nightmare scenario as GGP needs to use Telfer to process the Havieron ore. Of course, this is very unlikely given the asset synergy, and any owner of Telfer would allow Havieron ore to be processed at the plant for a fee. I did note above this would not happen, but it still needs to be on the list.
6. Somebody comes along wanting to buy Telfer and 100% of Havieron. They offer Greatland a whacking great premium for their 30% and Shaun accepts. Perhaps a royalty to fund future exploration is a condition of sale. It is likely any unconnected potential buyer of Newmont’s assets would make an offer for Greatland’s portion — and the only question is what price would be acceptable. One would imagine management would use a higher valuation than Grant Samuel used.
7. Newmont sells its stake to a royalty company. This is not a likely outcome, but in a scenario where Greatland cannot get the funding together to buy Newmont out, this could form part of an overall funding package. I did say every option.
8. Newmont sells to a private equity firm. Any guesses? Andrew Forrest is by some measures the wealthiest person in Australia. Wyloo is already heavily involved. Could Wyloo even try to buy out Greatland and Newmont simultaneously?
9. Newmont sells to a state-owned entity. This is again an unlikely scenario for many reasons, but the main priority of the Australian federal and state governments will be job preservation. This is important to remember during the sales process.
The bottom line
This gold will be dug out of the ground eventually and GGP will financially benefit. The fundamentals have changed slightly, but I retain my view that anything below 6p is a steal — this was arguably the value of GGP’s segment of Havieron before the MRE update and does not include the exploratory tenure.
The company’s board will have planned for this scenario. It’s not as if Shaun’s plan is to walk into Commonwealth Bank tomorrow in a new suit and tie with a winning smile (one hopes). Speaking of the board, it’s comprised of executives from some of the most important mining companies in Australia, including growth stocks and blue-chip titans, that you can find on the market today. They did not join Greatland to control 30% of an undeveloped asset.
It’s hard to overstate this; UK investors do not understand that mining executives are famous in Australia in their own right — much like tech leaders in the US.
Greatland has the backing of a giant banking syndicate, Wyloo and the billionaire behind it by association, a board of the finest mining pedigree — and 8.4 million reasons to stay in.
Anecdotally, last September the CEO noted ‘we know we can afford it.’ I cannot verify this statement, but others have.
Newmont has made its decision. Over to you Shaun.
Where next?
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.