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Date : 21/10/2021

Geopacific Resources

ASX :

GPR

Market Cap : $171.35 Million

Buy

52 Week Range : $0.28 - $0.625

Share Price : $0.33

Well funded, low cost miner. We recommend a "Buy".

Company Analysis

We recommended Geopacific a few months ago, in July, while it was priced 34.5 cents per share. As of the time of writing, Geopacific is trading at 32 cents, and we believe it is an opportunity to increase your position or to add to your portfolio while it is still relatively undervalued. Here is why:

Geopacific Resources (ASX: GPR) is one of the rare gold projects that are fully funded and that may be a huge opportunity to not miss, it is low-cost and presents a low-risk profile as mineral resources are closed to the surface according to studies. The company wholly owned its subsidiary Woodlark Mining Ltd (WML) which is developing the high potential Woodlark Gold Project located on Woodlark Island which is about 600 Km east from Port Moresby in Papua New Guinea. Geopacific holds a 100% interest in the Mining Lease. The company published a Definitive Feasibility Study (DFS) that dates back in November 2018 which was absolutely promising. Since then, the company has progressed well on the project and worked tremendously on its execution planning and the completion of work to address any outstanding project risks.

In June last year, Geopacific appointed an independent technical advisor to consolidate all the work that had been undertaken in the intervening period as well as facilitate a review of all aspects of the Project. Based on the findings, a detailed work plan was initiated, and the project moved to a higher level of execution readiness by year-end 2020. During the first half of CY21, many positive things happened for Geopacific and the Woodlark project. The company started to prepare the project for construction and operations, including detailed work on the project execution plan resulting in specific changes and advances to the execution strategy. Geopacific also started detailed contractual negotiations with all major contractors, equipment suppliers and service providers which have offered a very high level of certainty over capital and operational costs. Geopacific is now all set and the construction of the mining site, and its infrastructure is now in progress with the objective to the first gold production by the end of December 2022 quarter.

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Source: Tradingview

A promising high margin gold project that reached a key milestone to begin production shortly

The cornerstone of Geopacific is the Woodlark Project. It is a high margin gold project with significant exploration upside located in Papua New Guinea. The Company undertook a successful $140 million placement which was finalised in February this year. The placement was strongly supported by existing institutional shareholders and was complemented by significant demand from new major domestic and international investors. The placement was initiated by two of Geopacific’s substantial shareholders, Tembo and DELPHI, and several leading domestic and international institutions. In addition, there was strong support from Sprott and its affiliates, along with members of the Geopacific board and management. This transformational capital raising provides the equity funding component of the development capital required for the Company’s Woodlark Gold Project. In June 2021 Geopacific agreed on binding terms and achieved financial close with Sprott for $134 million in project funding to develop the Woodlark Gold Project.  The $134 million in financing was in the form of an US$85 million Project Finance Facility with funds available under staged drawdowns scheduled to occur with project development milestones and US$15 million via a Callable Gold Stream which was available immediately. Following the financial close of the Sprott facilities, the Woodlark Gold Project achieved fully funded status and the company made a Final Investment Decision to progress with development.

During the second half of FY21, the Company progressed the early works program on-site to ensure that the Woodlark Gold Project remains on track to achieve targeted first gold pour in the Q4 CY22, in line with the November 2020 Project Execution Update. So far, 46% of the construction of the community relocation buildings had been completed with 95 houses finalised, a further 45 under construction and the new school approximately 50% complete. Furthermore, the erection of the temporary construction camp was approximately 70% complete. Geopacific has completed during the period its plant site and camp with levelling near completion. The design of the wharf was completed which led to the construction of the wharf access road, progressing rapidly. Finally, the early phase works continued for the Woodlark Gold Project including:

  • Agreement signed with Contract Power Australia (CPA) for the procurement of long-lead time items associated with the development of the Woodlark Gold Project power station.
  • A Letter of Intent (LOI) was issued to support the placement of an order for the first phase of mining equipment
  • and an order was placed by GRES for the procurement of the semi‐autogenous and ball mills.

In addition, the Company has been working to finalise the material project contracts and advance the order of critical long-lead items to maintain the project schedule.

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Source: GPR

GPR appointed key stakeholders to accelerate its construction phase to meet CY22 gold production debut

During the period, the Company continued to build the high-quality team needed during the construction phase and into the operations phase of the Woodlark Gold Project.  This included the appointment of Mr Graeme Rapley in January 2021 as Project Director.  Graeme is a civil engineer and highly qualified project execution specialist having delivered projects in the Caucasus, West Africa, Southeast Asia and Papua New Guinea. The Company also appointed Mr Mike Meintjes during the reporting period as Company Secretary. Mike Meintjes is an experienced governance specialist having first qualified as a Chartered Accountant and worked for over thirty years with a Big Four accounting firm.  During this period, he spent three and a half years with Ernst & Young in Papua New Guinea.

Geopacific streamlines its portfolio of assets to fully focus on the Woodlark Gold Project

We believe that Geopacific’s delivery of the Woodlark Gold Project into production will generate the greatest return for shareholders. Therefore, we are convinced that the approach of the Company to remain focused on the development of the Woodlark Gold Project makes a lot of sense. Moreover, Geopacific has demonstrated its intention to review its non‐core assets.

  • Kou Sa Copper-Gold Project, Cambodia: The Company is in negotiation with the vendors of the Kou Sa Project to dispose of its interest in the project.
  • Fijian Gold Projects, Fiji: All licences have been relinquished.

Company Updates

Geopacific, the next gold play

Earlier in June this year, Geopacific had achieved its financial close of project financing with Sprott for US$100 million ($134 million) necessary to complete the Woodlark Project. The firm has made the final investment decision for the development of the project, as combined with the company’s $143 million of cash, the construction is fully funded and even includes a $3 million budget for exploration activities. What makes Geopacific interesting and different from many gold projects is its high margin profile which is estimated at an average All-in Sustaining Costs (AISC) of $1,239 per Oz (US$904/oz) considering the current gold price at $2,415/oz (US$1,800/oz), which is quite a decent profit margin. The development of the project is also relatively low-cost and is estimated with a rapid payback time frame of fewer than two years. The quantity of mineral resources is also consequent and is more than a one-million-ounce mine plan which according to the current Ore Reserve provides an initial thirteen years of Mine Life. Woodlark Island is also very accommodative and offers easy access to mineral resources and for the implementation of the infrastructure with roads for export. What we also like about the project is that the location of the site is not far from Australia, just about an estimated two hours travel distance.

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Source: GPR

A fully funded golden opportunity ready for the first gold production by the first half of FY23

Geopacific’s Woodlark project is just about a little more than a year before its expected first gold production for the first half of FY23. At the current pace of development, the company is well ahead of its schedule. Also, the project is fully funded for construction. Geopacific has estimated the remaining development costs to reach $222 million with financing costs and exploration to be $26 million and $3 million, respectively. What we like about the Woodlark project is that the project has been fully funded with $143 million available immediately in cash for the completion of the mining site, plant and infrastructure which provide us confidence as we recognise it as a low technical risk project. Geopacific has already started the work with the commencement of construction activities on the processing plant and the community infrastructure which has been completed as of today with 80 buildings.

Recently, Geopacific also did a review and an update of its financial model which has revealed elevated project economics with improvements across all the key metrics. One of the impressive estimates is the Life of Mine (LOM) revenue projected to be $2.2 billion which will contribute to a LOM net cash flow of about $575 million post-tax and capital repayment. The projected net present value is now appreciated at an 8% discount characterised by a project internal rate of return (IRR) of 34%.

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Source: GPR

Industry Analysis

If we look at a very long-term point of view on gold, we can see that the change in central banks’ attitude towards the yellow metal was precipitated by the 2008 global financial crisis. Hence, the crisis exposed vulnerabilities in the global financial system and raised concerns over the extent to which the global economic boom was built on debt. Adding to the woes, the Eurozone debt crisis and the downgrade of the US’ credit rating also rattled investor confidence in the sovereign debt market. Furthermore, the introduction of large-scale quantitative easing and the resulting low-rate environment brought to the fore the argument for greater diversification from traditional reserve assets and currencies. In addition, growing geopolitical tensions prompted some countries to consider alternatives to the US dollar, even adopting policies to reduce their dependence on the US dollar.

Although emerging markets and developing economies have dominated gold buying since 2010, the profile of central bank purchasers has evolved over time. Regular gold buyers such as Russia, Turkey, and Kazakhstan underpinned overall buying for many years after the global financial crisis of 2008. By the end of the decade, buying had become far more diverse, with 18 individual central banks buying over one tonne of gold in 2019. It is important to note that countries that had been absent from the gold market for many years became notable buyers of gold. Even central banks in the European Union re-emerged as net buyers due to substantial purchases from Poland and Hungary in 2018 and 2019. Furthermore, several central banks began to accumulate gold from domestic sources, taking advantage of being able to purchase a reserve asset with local currency.

The COVID-19 pandemic added fresh considerations for central bank reserve managers to consider. Crisis management returned to the forefront of central bank investment criteria, driving the focus to gold’s financial behaviour during crisis events. Indeed, the results of the 2021 Central Bank Gold Reserves Survey showed that central banks now rate gold’s “performance during times of crisis” as the top reason to hold gold.

Whilst central bank demand for gold weakened in 2020 amid the pandemic, demand has returned in 2021. Thailand has emerged to become the largest buyer of gold during the first half of CY21 with the addition of 90.2 tonnes of gold to its reserves. Furthermore, in March 2021, Hungary tripled its gold reserves. The decision by the National Bank of Hungary to increase its gold reserves to 94.5 tonnes, a historic high, follows a ten-fold increase in Hungary’s gold holdings in the last quarter of 2018. Both increases were made for strategic reasons and were driven by Hungary’s long-term policy objectives to strengthen the stability of the country’s financial system during times of geopolitical uncertainty and structural changes in the international financial system. The role of gold as a safe haven and “a major line of defence under extreme market conditions” also factored in the purchase decision.

Gold prices to remain flat in the near term, but demand is expected to rise

In short, strong consumer demand recovery with the second quarter of CY21 gold ETF inflows was not enough to offset the heavy first quarter’s outflows. Gold demand for Q2 was virtually in line with Q2 2020 at 955.1t, slightly down by 1%. That took the 1HCY21 demand to 1,833.1t, down 10% year-on-year. In Q2, jewellery demand which is reported to be 390.7 tonnes continued to rebound from 2020’s COVID-hit weakness, although remained well below typical pre-pandemic levels, partly due to weaker Indian demand growth. Demand for the first half of the year, at 873.7t, was 17% below the 2015-2019 average.

Bar and coin investment saw a fourth consecutive quarter of strong year-on-year gains: Q2 demand of 243.8 tonnes resulted in the first half of the year total of 594 tonnes, the strongest since 2013. However, modest Q2 inflows into gold-backed ETFs only partly offset the heavy outflows from Q1. Consequently, ETFs saw the first half of the year net outflows of 129.3 tonnes for the first time since 2014. On the other hand, the central bank’s buying continued in Q2. Global gold reserves grew by 199.9 tonnes, which took the first half of the year net buying to 333.2 tonnes, which is 39% higher than the H1CY21 average, and 29% above the “ten-year first half” average.

Gold used in technology continued to recover from the 2020 lows: Q2 demand was 18% higher year-on-year at 80 tonnes. This is in line with the average Q2 demand from 2015-2019 of 81.8 tonnes. H1CY21 demand of 161 tonnes was fractionally above that of the first half of 2019.

In our view, we remain optimistic about the gold market. We think that gold demand will continue to be high. And this is particularly the case during periods of crisis. The current situation of uncertainty is likely to stay for a while. Hence, the global gold market is projected to grow by 1.3 thousand tonnes by 2025. That is a steady compounded growth of 3.9%. Gold demand is mainly coming from investment by 46.6% followed by the jewellery sector, central banks, and the technology sector with 36.8%, 8.5% and 7.9%, respectively. Central banks and investments in gold reveal the potential to expand at over 4.1% by 2025. In the developed world, the U.S. demand for gold is likely to progress by 3%. Germany is expected to add over 47.7 tonnes over the next five years while the rest of European demand will reach over 37.8 tonnes. In the rest of the world, China will be the game changer with a potential acceleration in gold demand by 6.2% over the next few years to attain a massive 368 tonnes.

In our long-term view, as we expect the economy to return to normal, we believe that it will boost the jewellery market which is the second largest contributor in gold demand. With gold demand poised for growth onward 2022, we expect it to reach a global market size of $636 billion by 2025. At this rate, the sector is likely to expand at a CAGR of 8.1% over the next five years, fuelled by an increase in disposable income and a shift in consumer shopping preferences, particularly in the emerging economies. However, in the near term, we believe the gold price will remain capped and will probably continue to drift slightly lower to the February price level, trending towards US$1,700 an ounce. We expect the upside to be somewhat limited in the near term as gold remains under pressure given an improving economic climate and the low-interest-rate environment that is here to stay for some time. The main catalyst is the uncertainty regarding the inflation with large scale stimulus that could propel inflation higher increasing the appeal for the yellow metal, hence, we see only limited upside to gold until the next rate hike.

Ample profit margin ahead for Geopacific

We are not too concerned about gold prices fluctuation as Geopacific had an estimated All-in Sustaining Cost (AISC) of US$900 per ounce which represents an ample margin of 89% as per our target price for FY22 onwards of US$ 1,700 per ounce.

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Source: Tradingview spot gold price

Investment Thesis

FY21 onward outlook: Complete construction of process plant and infrastructure to meet the 2022 target

Geopacific has well advanced the Woodlark project since the second quarter of this year and has even started drilling recently at the mine site. The firm also received its last chunk of the capital of $130 million from Sprott that contributed to cover the entire construction and development cost which made Woodlark a relatively low-risk project. Construction activities are underway and are scheduled to be completed by the end of the fourth quarter of CY22. So far, Geopacific has shown exemplary execution capabilities as demonstrated by its quality and experienced management team which brought the project ahead of its schedule. However, we should not forget about the main external risk which is COVID-19. Despite the pandemic situation in Papua New Guinea, we remain confident that the project will be delivered on time and on budget. We have seen construction activities on the project site continuing as per the plan. The firm is also taking strong measures to maintain operation at the construction site and is prudently managing risks arising from the health crisis. The main condition to Geopacific’s share price appreciation is the ability of the company to deliver its project construction milestones on time and on budget. During Q1-2021, Geopacific took a step ahead by ordering a range of mining equipment, including ball grinding mills, foundation bolts, heat exchanger plates, condition monitoring systems, which maintain the project schedule’s integrity as the grinding circuit is one of the critical paths for the completion of the plant construction. At this pace, we are convinced that Geopacific will be able to achieve its first gold production by the end of December 2022.

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Source: Geopacific

Exploration and growth upside

On top of the three pits that are planned for operation by the end of December 2022, Geopacific has a strong potential for growth and is already starting to plan its reserves and inventory expansion to the current mine plan. All drill-defined resources remain open along strike down-dip and at depth. The next stage after the initial construction and exploitation of the first gold production will be to develop further the available mill footprint to increase ore feed and the company is intended to proceed in three phases:

  1. Pit extension exploration
  2. Mineral lease exploration
  3. And regional exploration

What is good about Geopacific is that the exploration budget for the expansion phase will be covered by the available cash flow derived from the first gold production.

Drilling commences at the Woodlark Gold Project

Drilling contractor, QED Exploration Drilling, is on-site at the Woodlark Gold Project in Papua New Guinea and has commenced drilling. The first phase of the programme will see a combination of over 20,000m of grade control and near pit extension drilling executed by the end of CY21 and represents the first RC drilling campaign undertaken on Woodlark since 2018. Initially, the drilling is centred around the Kulumadau pit and will be undertaken in advance of first ore mining to further delineate and refine the resource. Post the completion of the grade control drilling, the RC drill rig will move into exploration drilling with an anticipated 40,000m of exploration drilling budgeted on a phased basis through until the first half of FY23. Exploration drilling will be focused on the significant near pit opportunities now available with the completion of the relocation of all community households in the immediate proximity of the mine. All three planned pits at the Project are open at depth and laterally.

The longer-term exploration activities will focus on the broader Mining Lease potential and is scheduled to commence once existing pit limits are fully defined. There are numerous high-grade prospective targets identified within the Mining Lease with visible gold at the surface. The construction and development activities are continuing at the Project with the engineering and construction contractor GR Engineering Services, which has been mobilised to the site with contract finalisation anticipated shortly.

Diagram Description automatically generated

Source: GPR

The beginning of a wide drilling campaign will provide enhanced grade control for the initial mining plans for the high margin Woodlark Gold Project. There remains considerable exploration capacity at the project and the exploration drilling will focus principally on defining near pit potential as well as defining other targets in Geopacific’s mining license area.

Expected positive cash flow from the first year of gold production

In our view, Geopacific is unquestionably one of the terrific gold plays. The company is expected to develop one of the most profitable gold projects, a high margin gold production facility which is projected to output 980 Koz over a Mine-Life of thirteen years. Furthermore, the project is very near its first gold production, planned for December 2022. The first half of CY21 is where everything accelerated. The company started the first phase of the Woodlark project and is advancing rapidly the construction of the plant and infrastructure. Moreover, Geopacific secured its last financing of $130 million necessary to cover all the construction costs. That said, we recognise the project to be a relatively low-risk venture particularly with a payback period of 1.8 years. According to our analysis, if the project is completed on time and on budget, we can expect a positive cash flow after the initial year of production. The Woodlark has a strong upfront grade profile, lower strip ratio and low AISC operating metrics which could potentially deliver an average post-tax cash flow of $100 million per annum over the first five years of exploitation.

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Source: GPR

Woodlark, a low-cost profile project

Compared to the current gold price at $2,415 per ounce, Geopacific’s Woodlark project provides ample margin for growth and profitability with its highly competitive AISC of $1,239 per ounce. That is so far, a margin of 89%.

What makes the project so competitive and low-cost is the particularities of the site with its near-surface mineralisation and low strip ratio of four times. The extraction also requires a simple conventional carbon in a leach processing plant. Furthermore, the mineral resources and metallurgical features are also favourable for low power requirements and low consumable and reagent consumption. That said, mining will represent roughly 36% of the total costs and processing 42%.

Graphical user interface Description automatically generated

Source: GPR

A high potential low-risk mine plan

The Woodlark mine is expected to deliver an initial estimation of 980 Koz throughout its lifetime. What we also like about this project is the possibility to have a 12-month pre-strip before plant commissioning. The site is also accommodative with its multi-staged pits which allow for targeting of the highest-grade ore early in the mining schedule which could enhance the cash flow generation that will contribute to financing further regional exploration.

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Source: GPR

Well-funded and ample liquidity to achieve the first production output by the first half of FY23

When we look at historically how Geopacific did throughout the last few years, we can see that the firm is doing quite well in managing its cash burn despite not having produced any revenue since then. From FY17 to FY20, the company has improved its net working capital by a CAGR of 45.2% which is somewhat exceptional, and we believe it is likely to continue onwards. The company is also well-received by the community of investors which led to massive funding, recently with $140 million in December last year and $130 million at the end of last month. The Woodlark project development and construction is now entirely funded, and we think that further capital raising may not be necessary at least until the first gold production is achieved by the end of the first half of FY23.

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Technical Analysis

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Trend

Since the huge spike initiated by the first series of funding in March 2019 that led GPR to flirt with the one dollar per share, we can say that GPR has been volatile moving down to 22.5 cents at the peak of the pandemic crisis before recovering back to 75 cents and finally heading to its current support level at 32 cents per share slightly above its current equilibrium price of 22.5 cents per share. We have estimated the GPR equilibrium price to be 22.5 cents according to the average issue price of each of the share placements of the last few years. The 22.5 cents level is also a strong multi-period support level which has been very supportive during the peak of the market sell-off in early April last year.

Key price levels

Since the second quarter of this year, Geopacific shares have been consolidated in a tight range above the 78.6% Fibonacci retracement from the last swing high that took place from April 2020 to the end of July 2020. This level has been proved to be strong support as attested by the RSI indicator on the daily chart which is pointing above its 50-level threshold. We also think that underneath the 78.6% Fibonacci level which sits around 32 cents, the price equilibrium at 22.5 cents will ultimately attract market participants which are on the quest to grab some shares at a fair value. More importantly, we have seen an increase in the volume of inflows during the last week with 5.5 million shares exchanged. This is a positive signal as investors and traders are building up their positions in anticipation of a possible near-term rebound.

Volume and momentum

Volume increases since the last 200-day with the 20-day volume average up by 36%. The price action remains neutral in the near term, evolving in a range between 30 cents and 42 cents per share.

Trade consideration

  • Market participants might be interested to enter at a key support level of 30 cents.
  • Primary target price above 62 cents per share
  • Secondary target price at 75 cents per share
  • Consider reducing exposure below 20 cents
  • It is recommended exiting the trade below 18 cents

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Recommendation

As Geopacific’s Woodlark project is approaching its completion. We are strongly confident that the company might be one of the huge golden opportunities. Geopacific has demonstrated great skills in managing the project and the budget so far and the company remains slightly ahead of its schedule for its first gold production expected 2022 year-end. What we like also about the project is that it is entirely funded for its first phase, from construction to the first production output. Woodland also reveals more mineral resources that could be exploited further alongside the initial thirteen years of mine life. With an estimated average All-in Sustaining Costs (AISC) of $1,239 per Oz (US$904/oz) Geopacific’s project is a high-margin profile vis-à-vis the current gold spot price of $2,415/oz (US$1,800/oz).

Additionally, since last month, Geopacific began a wide drilling campaign that will provide enhanced grade control for the initial mining plans for the high margin Woodlark Gold Project. There remains considerable exploration capacity at the project and the exploration drilling will focus principally on defining near pit potential as well as defining other targets in Geopacific’s mining license area. All things considered; we are reiterating our recommendation to “Speculatively Buy” GPR.

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