It’s Complicated

Newcrest’s plans for its 14.5% equity interest in SolGold may now be more complicated given BHP Billiton (BHP, Accumulate) has purchased a 6.1% equity investment in the London Stock Exchange-listed miner, which owns the highly prospective Cascabel copper-gold project in Ecuador.


BHP’s US$35m equity stake will be purchased from Toronto Stock Exchange-listed Guyana Goldfields and amounts to 103.1m shares at a purchase price of £0.26592 per share. This represents a 20% premium to the 20-day volume-weighted average price and is 3.5x higher than Guyana’s initial buy-in price.


SolGold’s Cascabel project, which is centred on the Alpala deposit, has delivered some of the highest copper-gold intersections in recent history. SolGold believes the scale and grade continuity of Alpala should lend itself to block-caving mining methods, which require significant capital and long lead times but can deliver strong long-term returns. For this reason, the development of Cascabel would likely require involvement from a global major with the capital and expertise to deliver what could be a tier-1, long-life asset. SolGold continues to drill out the Alpala project and plans to update the resource – currently more than 12Moz of gold and 5Mt of copper – by the end of this year.


Newcrest views its SolGold stake as a key investment, although the presence of BHP on the register may make it more difficult for Newcrest to follow through any plans it has for SolGold. Management noted the key Alpala part of the Cascabel project remains under-defined and more drilling needs to be undertaken, but the potential for the deposit to grow remains and Newcrest believes it is the right partner for this style of project.


To this end, Newcrest said its block-caving expertise provides it with a competitive advantage, it can offer its experienced personnel to provide technical supervision for smaller companies, and it has shown a willingness to increase exploration investment for the right opportunity. We support this view, and we maintain our Accumulate recommendation on Newcrest with a $23.00 target price.

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