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SolGold (LON:SOLG) after the Franco-Nevada deal


Shares in gold and copper exploration company SolGold (LSE: SOLG) edged higher this week after the Australian firm secured a $150 million agreement with Franco-Nevada and while the deal adds to the finances already raised late last year from a share sale to BHP the company has a long way to go before securing the full $2.5bn it needs to develop its Alpala project in Ecuador.

The Alpala is part of the Cascabel concession in Ecuador, located towards the northern end of the Andean copper belt, one of the richest deposits of copper on the planet and the home of the world’s top four copper mines.

The company will update investors on the latest development in its financing next Tuesday (19 May at 12.30 UK time). It will have to show a significant dent in the required $2.5bn mountain to really make SolGold shares a buy.

What is block caving?

One of the key issues is SolGold’s plan to use block caving, a relatively new way of mining that is technically complicated but if set up properly is very productive and far cheaper in the long run.

Block caving has the capacity to cost only about a tenth of what traditional underground mining costs. It involves creating a reinforced underground level above which the ground is weakened through controlled explosions until it starts collapsing onto itself. The ore broken during the collapse is then funnelled away through a series of pre-constructed underground tunnels.

The conundrum for SolGold is finding the high level of initial capex required to put block caving in place particularly now that the coronavirus has created a lot of distress in the financial system.

Late last year SolGold sold additional shares to Australian miner BHP which now owns a stake close to 15% and is the second-largest holder after Newcrest Mining, itself an experienced user of block caving. The technique has been used in copper-gold deposits and is particularly useful in harder to reach deposits where the richer veins lie deeper than 200-300 metres of depth.

The deal with Franco-Nevada is a streaming deal which will give Franco-Nevada perpetual access to 1% of the stream from the future smelter to be built on the site. As part of the deal the two firms also agreed a relatively small but high-cost loan that will initially last for four months with the intent to complete a feasibility study.

Coronavirus in a time of political strife

If successful with raising finance the company will operate in a country with a mixed political picture. While on the one hand Ecuador softened mining regulation over the last decade to make it easier for foreign companies to operate there – see notably the progress made by gold miner Lundin and the Chinese-owned Mirador copper mine, both of which started exporting their first metal in late 2019 – the political background is not fully stable.

A series of protests late last year ended up with casualties in the streets of the capital Quito and the subsequent state of emergency led to Mirador copper reducing their operations for a period of time. Now the coronavirus is getting its grip over Latin America with the number of cases growing not only in Ecuador but even faster in neighbouring Peru.

To eventually get copper and gold flowing out of Alpala, SolGold’s chief executive Nick Mather will have to climb not only the physical mountain but a metaphorical one too.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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