LONDON (ResourceInvestor.com) -- Galahad Gold [AIM:GLA], has embarked upon something of a public relations offensive this week, contending that its stock is significantly undervalued by the market. But how well does this claim stand up to scrutiny?
The company’s primary asset is its stake in Northern Dynasty Minerals [TSX-V: NDM, AMEX: NAK], which stands at 23.4% fully diluted. In turn, NDM’s claim to prominence is its right to purchase 100% of the Pebble Project, a potentially very large copper-gold-molybdenum deposit in Alaska that is slated to reach the bankable feasibility stage this year.
In addition, Galahad holds 100% of the Skaergaard palladium and the Malmjberg molybdenum deposits in Greenland. Both the palladium and the molybdenum resources are thought to be sizable, and the deposits both contain quantities of other valuable metals. To boot, company is considering the acquisition of further resources in politically stable locations.
Galahad’s Chairman Ian Watson and its Finance Director Jim Slater profess to be puzzled as to Galahad’s current market capitalisation of £76m, but there are multifarious reasons to suggest that the market may have valued Galahad fairly.
First of all, the three current projects are still far from certain to reach production and realise any actual profit. NDM’s Pebble is generally thought to offer the greatest likelihood, but even this is not definite in technical terms, and the project may face a number of obstacles to its development, including the objections of both environmentalists and indigenous Alaskans. Some of the latter are behind the project, but some, rather ominously, are not. In addition, the project’s gargantuan capital cost and logistical challenges may ultimately prove stumbling blocks. The former and its portent of likely significant dilution may also be weighing on the shares that are presently traded.
The two projects in Greenland, while promising, are still relatively early stage, and Galahad is not being particularly expeditious in progressing them further, particularly with regard to Skaergaard. The management claims that it is in no rush to develop the projects, preferring instead to wait for the commodities ‘super cycle’, in which they are fervent believers, to proceed further and improve the margins on molybdenum and palladium.
The company designates part of the rationale for its formation as providing a way to play the Chinese growth story indirectly, and its management feel that the market is not according sufficient value to the extent of Galahad’s leverage to this trend.
But what they fail to justify is why Galahad is more leveraged to China than many other putative and current miners of industrial & precious metals, particularly given the conjectural nature of the properties in Greenland and to a lesser extent the one in Alaska.
The management assert that analysts and the market in general have failed to take account of the effect that the industrialisation China is and will continue to have on commodities markets, but while there may be isolated pockets of ignorance, this view generally seems rather implausible.
While the existence of a sustainable strong market in many commodities is probable given the likely demand growth that will be derived from the Chinese economy over the coming decades, it is doubtful that Galahad’s lack of developmental urgency, for which there is scant compelling rationale, will win the company many fans in the market. Even if the projects do eventually live up to their billing, the eschewal of a rapid asset development strategy leaves tempted investors able to wait and buy into the company once its potential becomes clearer, and to do so without significant penalty.
What generally gets investors most excited is the prospect of production and consequent tangible cash flow, more so than untested potential. Though companies with little more than untested potential to their name abound in today’s market, those of them with more focus and alacrity about them might just make more attractive investments than Galahad.
While biding one’s time developmentally can pay dividends, unless fully justified it merely injects uncertainty into a company, and can also be read as dissimulation. In addition, the size of the deposits in which Galahad is involved makes for a very long lead time, translating to a long period before profits are realised and within which things can go awry. The Malmjberg project is the most proximate to tangible output, slated at 2.5 years away under a preliminary proposed development plan. But there are other companies in the market today that offer better prospects of timely real cash flow.
Furthermore, Galahad’s management say that the company would prefer to involve a proven operator in any projects reaching that stage rather than managing them internally, and while this can be a sound idea in some cases it can also add extra complications.
Galahad is likely to spin off its International Molybdenum subsidiary, which holds the Malmjberg project and a second exploration licence in Greenland that is awaiting ratification, into a separate listed vehicle that would fund a bankable feasibility study on Malmjberg. The exact nature of the deal and the stake that Galahad will retain has yet to be finalised, but a dedicated management team might allow the molybdenum business to progress more rapidly, and the funds that would accrue to Galahad from the divestment could make it more likely to make progress with its other assets, though they will also reduce the exposure of the company to any upside in the molybdenum assets.
All that said, the three projects in which Galahad is currently involved may have the potential for practicable, truly large scale exploitation. In addition, influential mining fund managers RAB Capital have a substantial stake in the company, as do the Rothschild family, and Galahad boasts Dresdner Kleinwort Wasserstein as its house broker. But these endorsements are largely meaningless without the concurrence of a greater portion of the wider market, which Galahad believes it is lacking.
There may well be more Galahad bulls out there than merely the company’s own management, aforementioned notable shareholders and its house broker, the latter of which rates Galahad as a buy at anything up to 25p. Given that the share is currently trading at only 10.75p, then now may be the time for the bulls to act on the basis of their optimism.
