Geopacific Resources
BUY
Date of inclusion: 12 April 2021
Share price on inclusion in Marc & Stuart’s Top Picks: $0.38
52-week range: A$0.205 / A$0.745
Risk Level: High
A company-making gold mine in Papua New Guinea
Since 2016, Geopacific Resources was been working on the 1.6 million ounce Woodlark Gold Project in Papua New Guinea, for which a Definitive Feasibility Study was completed in late 2018. The proposed mine is located on Woodlark Island in PNG’s Milne Bay Province, about 600 kilometres east of Port Moresby. In December 2020 the company raised $140m in equity at 42 cents per share to develop Woodlark. The debt financing is currently being completed. Construction is expected to commence in the second half of calendar 2021.
A valuable project
A ‘Project Execution Update’ published in November 2020 put a post-tax valuation on Woodlark of A$347m at an 8% discount rate, using a A$2,200 per ounce gold price assumption. Under the new plan, A$255m in capital costs brings into production a 13-year mine producing 980,000 ounces of gold at an All-In Sustaining Cost of A$1,239 an ounce. The proposed flow sheet for Woodlark involves just a conventional carbon-in-leach plant and the ore is free milling, meaning the operators don’t have to use lots of chemicals to process it. Woodlark presents certain challenges because of its remoteness, but that didn’t hinder the development of Lihir mine of Newcrest (ASX: NCM) and the Simberi mine of St Barbara (ASX: SBM). We believe there is substantial exploration upside beyond the initial resource.
A fully permitted and shovel-ready mine
Recently PNG has experienced an increase in Covid-19 cases, but Geopacific believes that it can still commence construction of the mine in the second half of 2021 and, potentially, pour the first gold before the year is out. Equipment has been ordered and pre-construction activities are continuing on Woodlark Island.
Key risks:
- Covid-19 outbreaks in PNG slowing construction progress
- Gold price resuming the downward trend set in mid-2020
Geopacific Resources (ASX: GPR) made an important announcement yesterday causing a substantial share price move.
UPDATE
11 November 2021
Reason for update: Woodlark Gold Project delays
Geopacific Resources (ASX: GPR) issued a Project Development Update yesterday for the forthcoming Woodlark Gold Mine in Papua New Guinea. The market didn’t like the update, marking GPR stock down 25%, to 24 cents. The key issue is that the cost of the wharf on Woodlark Island that would support the mine has come in higher than expected on the original design, and Geopacific is now working to reduce it, but obviously this means amendments to the funding arrangements. Geopacific stressed that the Project Lender remains supportive.
Heavy rains on the island and the ongoing Covid-19 Pandemic in PNG have also caused delays in the initial construction work. We believe the time lost is in months, not in years, while these issues are being addressed, but it pushes the first gold pour out to early 2023, from late 2022 previously. In the meantime we think the fundamentals of Woodlark are sound.
GPR is substantially undervalued, even under conservative gold price assumption
We believe, as we have said previously, that the GPR share price is markedly undervaluing the Woodlark upside. On GPR’s feasibility work the project has a post-tax NPV of A$347m at a discount rate of 8% and an internal rate of return of 34%. The gold price to model this valuation is only A$2,200 per ounce, which is US$1,609. Gold is currently over US$1,850 an ounce and is, we believe, headed higher.
The Woodlark resource is likely to grow larger over time
Geopacific Resources has previously flagged the initiation of another 20,000 metres of drilling that will initially do grade control for the initial mine, but move on to exploration drilling. That programme will not be impacted by the delays announced this morning. We see potential for this drilling to increase the resource base beyond the current 1.57 million ounces. There’s a number of reasons why the noted Canadian financier Eric Sprott got involved in this project, and this potential for more gold is likely one of them.
UPDATE
16 February 2022
Reason for update: Exploration success on Woodlark Island
Geopacific Resources has been doing 20,000 metres of grade control and near pit extension drilling on Woodland Island and has slated another 40,000 metres of drilling for calendar 2022. The 40,000 metres has potential to extend the resource on Woodland Island beyond the current 1.57 million ounces. On 16 February 2022, the company reported good grades in both programmes. There’s a number of reasons why the noted Canadian financier Eric Sprott got involved in this project and this potential for more gold is likely one of them.
Geopacific Resources is currently doing a Strategic Review at Woodlark after finding that some of its costings for the project were incorrect and could be optimised. One issue is that the cost of the wharf on Woodlark Island that would support the mine has come in higher than expected on the original design. Geopacific is now working to reduce it, but obviously this means amendments to the funding arrangements. Geopacific has stressed that the Project Lender remains supportive.
Earlier, the company reported that heavy rains on the island and the ongoing Covid-19 Pandemic in PNG have also caused delays in the initial construction work. We believe the overall time lost will be in months, not in years, but it pushes the first gold pour out to 2023, from late 2022 previously.
GPR has considerable upside, even under conservative gold price assumption
On GPR’s feasibility work the project has a post-tax NPV of A$347m at a discount rate of 8% and an internal rate of return of 34%. The gold price to model this valuation is only A$2,200 per ounce, which is US$1,609. Gold is currently trading around US$1,850 an ounce and is, we believe, headed higher.
Check out our latest interview with CEO Tim Richards!
Read the most recent article on GPR here