Greatland Gold PLC (LON: GGP) shares are worth watching for the reaction to the updated results of the drilling programme at Havieron. Those results show gold levels to a level of certainty which supports but does not yet prove an upgrade of the prospects from an Inferred Resource to an Indicated Resource.
The valuation of a junior – or exploration – mining stock depends upon a three-stage process. Put very simply, is there something there, can it be extracted profitably and can the company finance doing so?
More formally, the first stage is to prove the existence of a resource. Is there actually some amount of the target material in the deposit being looked at? That resource comes in flavours, an Inferred Resource being that logically, looking at the surrounding geology and simple test results, we would expect there to be something there. A stage up in proof is an Indicated Resource – enough testing has been done to know that there really is that target material in the mineralisation.
The announcement this morning at Greatland Gold is that testing at Havieron, the Australian gold prospect, supports but does not yet prove that the deposit might be upgraded from inferred to indicated.
The next stage is to continue in the drilling and testing programme and show that the deposit can be mined at a profit. That would upgrade from a resource to a reserve.
The third stage of the valuation is the financing of the company itself. Does it have the funds to perform the necessary stages already outlined? Greatland Gold has just completed a fund raising. One that went well and was in fact oversubscribed and so upgraded from the initial $10 million ask to $16 million. This was done at 14.5 pence which is slightly above this morning’s price of 13.30 p.
The general view of the market was therefore that the company was worth investing in at a higher price than today. It’s possible that the results of the drilling programme will move the price further.
There are other influences on a miner’s share valuation of course. There needs to be that proof that there’s something there, that it can be extracted profitably. But once that’s done attention turns to the value of the mineral or metal being extracted. Here it’s the macroeconomic background – as is usual with gold miners – that matters.
Gold mining shares are leveraged to the gold price. Extraction costs don’t change as the gold price does. But obviously, revenues do change with that gold price. So, changes in the global gold price flow directly through to the profits of a gold miner. Worries about inflation being more than temporary often lead to a booming gold price – it’s a traditional safe haven to protect against an inflationary environment.
As consideration of the drilling news filters through we might expect volatility in the Greatland share price. This could be magnified by inflation worries and the traditional use of gold as a safe haven investment to protect from it. Don’t forget, movements in stock prices are the necessary precondition of being able to have a trading strategy.
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