Analysts at Bell Potter are throwing up the possibility of Gold Road Resources selling its $500m stake in De Grey Mining to fund a $1bn-plus acquisition in Canada.
The Australian-listed gold miner has confirmed that it is looking at a 40 per cent stake in the Greenstone gold project in Ontario as part of a sale process run by owner Orion Finance.
Gold Road Resources is run by Duncan Gibbs.
Its main asset is a 50 per cent interest in the Gruyere gold mine in Western Australia that it owns in conjunction with the mine’s operator, Gold Fields.
Analysts say that Greenstone is similar to its Gruyere project, with a 10 million tonnes per annum processing plant, from which 400,000 ounces of gold per annum are planned to be produced over a 14-year mine life.
The analysts say that Gold Road could use the De Grey 19.9 per cent stake (currently worth $500m) to fund the transaction and it already has about $300m of liquidity which could also be used.
This offers a funding solution that would be an alternative to an equity raising.
“In our view, the shortfall could easily be financed by debt and we note Gold Road has previously maintained undrawn credit facilities totalling $400m.
“We expect market competition for Tier 1 gold assets to remain strong and Gold Road has been underbidder on multiple opportunities in the last three years,” the analysts said.
“But if Gold Road is successful, the De Grey holding, maintained since April 2022, could cornerstone the funding, neutralising the effect of the gold sector environment at the time.”
They said that the De Grey holding acted as a natural hedge for its ambitions to transact into a second gold asset in a Tier 1 location.
Some sources have played down the prospect of a sale of the De Grey interest by Gold Road, saying they are committed to the asset.
Equinox Gold owns the remainder of Greenstone. Equinox is listed in Canada and operates the project.
Bell Potter analysts said that Equinox Gold appeared to be the natural owner for Greenstone assets.
However, according to the company’s latest corporate presentation, it is already significantly leveraged, with drawn debt of $US535m, and convertible notes of $US451m.
The analysts say that Greenstone’s Open Pit Reserve and processing plant was very similar to Gruyere.
“The main difference we note is that the Greenstone Underground Resource could be mined contemporaneously with the Open Pit.”
The analysis about a possible Greenstone acquisition by Gold Road comes after it recently said 2024 production was now expected to be towards the lower end of the guidance range, at 300,000 ounces at a price of $2050 an ounce.
This was after it suspended production until mid April after rain damaged roads to get supplies to the Gruyere mine in March, impacting two quarters.
The analysts said Gruyere could not afford a disruption event of any form if it was to meet the lower end of guidance.
“As the issues are now resolved, we expect a share price recovery, supported by gold price tailwinds.”
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