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Date : 14/07/2021

Geopacific Resources

ASX :

GPR

Market Cap : $181.38 Million

Buy

52 Week Range : $0.28 - $0.74

Share Price : $0.345

A low cost gold miner well positioned to be profitable within the first year of production. A "Speculative-Buy" from us.

Company Analysis

Geopacific Resources (ASX: GPR) is one of the rare gold projects that is fully funded and offers a huge opportunity to investors. It is low-cost and presents a low-risk profile as mineral resources are close to the surface according to studies. The company’s wholly owned subsidiary Woodlark Mining Ltd (WML) 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 to 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.com

Considering Geopacific as the next gold play?

On June 28, 2021, Geopacific achieved its financial close of project financing with Sprott for US$100 million ($130 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 actually 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: Geopacific

A fully funded golden opportunity ready for first gold production By December 2022

Geopacific’s Woodlark project is a little more than a year before its expected first gold production in December 2022. 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.

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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%.

Source: Geopacific

Company Updates

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. 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 particular, 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.

Industry Analysis

Gold is in high demand. Especially during a period of crisis as you know. 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 still 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.

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Source: Tradingview. Spot gold price in US$ per ounce

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

Investment Thesis

Expected positive cash flow from the first year of gold production

In our view, Geopacific is unquestionably a terrific gold play. 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: Geopacific

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 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%.

Source: Geopacific

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: Geopacific

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 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 fairly 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 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. We believe this level may provide strong support as attested by the RSI indicator which is pointing above its 50-level threshold, which is mostly bullish. 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.

Volume and momentum

Volume tremendously increases since the last 200-day with the 20-day volume average up by 132%. The price action remains neutral in the near term, evolving in a range between 22.5 cents and 42 cents per share.

Trade consideration

  • Market participants might be interested to enter at a key support level: 32 cents and 22.5 cents.
  • Primary target price above 75 cents per share
  • Secondary target price at $1.0 per share
  • Consider reducing exposure below 19 cents per share
  • It is recommended exiting the trade below 15 cents per share

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Recommendation

With the recent positive prospect that was exhibited by Geopacific, we are confident that the company is a huge gold opportunity. Geopacific has demonstrated great skills in managing the project and the budget so far and the company is 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 revealed additional 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). Therefore, we recommend a “Speculative Buy”.

 

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