18. September 2020 | 09:00 CET
BHP Group, Newcrest Mining, SolGold: Getting bogged down or putting all your eggs in one basket
When it comes to investing in commodity companies, the BHP Group is a household name. The British company is active worldwide, mining coal, iron ore, copper and other commodities and has long been considered a solid dividend earner. But recently the company has disappointed: Special effects put pressure on profits, unrest in Chile made life difficult for BHP and the Corona pandemic also left its mark: the bottom line at the end of the financial year at the end of June was a profit of no less than EUR 6.75 billion. While the mood among investors was not particularly good, BHP cut its dividend by around ten percent, thus spoiling shareholders’ sentiment even further. On a year-on-year basis, the share price fell by around 1.4%. In view of the good performance of copper following the outbreak of the pandemic, this is too little for many investors.
time to read: 3 minutes by Nico Popp
"[...] We quickly learned that the tailings are high-grade, often as high as 20 grams of gold per tonne; because they are produced by artisanal miners, local miners who use outdated technology for gold production. [...]" Ryan Jackson, CEO, Newlox Gold Ventures Corp.
Is the BHP Group buying into price fantasies?
Nevertheless, there are also positive things to report about BHP. The company already successfully implemented cost-cutting measures during the past fiscal year and thus became even more profitable. It can also be assumed that the recent positive development of many raw material prices will not be felt until the current fiscal year. Even though BHP itself has a cautiously positive outlook for the future and expects economic activity to vary greatly from region to region, investors see no potential for surprises in the share price. It is possible that, as in the past, acquisitions will help BHP to get off to a good start.
Newcrest profits from the gold bull market only to a limited extent
When it comes to mergers and acquisitions, the name Newcrest Mining is always mentioned in the resource industry. The company is Australia's largest gold producer and increased its profits to USD 647 million in the past fiscal year. In recent months, it has been repeatedly rumoured that the company is on the radar of North American resource companies as a potential takeover target. Around 85% of Newcrest Mining’s production is gold, with copper being another important raw material. Although the dividend at Newcrest is traditionally lower than at BHP, the Australian company recently increased its dividend by 14%.
Despite this positive signal to the market, the share price remains at a low level - on a twelve-month horizon, the share price even lost 4.6%. Tragic detail: Newcrest has sold forward parts of the production of its Telfer mine in Australia until 2022/23 and is not benefiting from rising gold prices there.
SolGold: Net asset value of flagship project significantly exceeds market value
In contrast, the SolGold share has profited from the development since March. The share has a price yield of more than twenty percent on a one-year horizon. In this context, it is interesting to note that both BHP Group and Newcrest Mining are involved in SolGold. The former company holds 13.5% and the latter 9.9%. The company is focused on the exploration for gold and copper in the Ecuadorian Andean Belt. SolGold has been active in this region since 2012 and has secured numerous mining concessions in recent years. The idea behind SolGold's strategy is that the geological characteristics are similar to those in Chile, where many international resource companies are already active.
SolGold pursues a very concentrated strategy in Ecuador: While other companies focus on different locations, SolGold prefers to use the known characteristics of a region to its advantage and to develop projects quickly. In addition to the flagship Alpala project, for which a feasibility study is scheduled to be completed by mid 2021, the company has 13 other projects that are being explored with high priority. As Nick Mather, CEO of SolGold recently stated in an interview, the net present value of Alpala already amounts to USD 4.4 billion and clearly exceeds the market capitalization of SolGold - the company is currently valued at market cap at around EUR 600 million. Initial studies on the flagship project, which were prepared before the gold boom, envisage a possible mine life of more than fifty years and a payback period of four years.
Investors have the choice: stability or growth
Although SolGold is an exploration company and therefore speculative, the extensive portfolio in Ecuador offers promising opportunities for investors. The company regularly reports drilling results and keeps investors informed about new developments. The existing holdings of large companies in the industry, such as Newcrest or the BHP Group, also speak for themselves. Although the shares of the established companies offer stability and indirectly also a participation in the success of SolGold, speculative investors may well be interested in the emerging company.