Gold Road Considers Major Stake In Greenstone; Investors Wary Of Potential High Costs

Gold Road ELKMF, an Australian mid-tier gold producer, confirmed interest in acquiring a stake in Greenstone Gold Mines – a Canadian joint venture project between Equinox Gold EQX and Orion Resource Partners. With escalating geopolitical conflicts and a re-ignited threat of inflation, mergers and acquisitions have accelerated as gold keeps climbing to yet another fresh high.

The Greenstone project, situated in the Geraldton-Beardmore Greenstone Belt in Ontario, is set to commence production soon. With a process plant operating 365 days per year and a mill output averaging 27,000 tons per day, its anticipated annual yield is around 400,000 ounces of gold.

This news coincides with a period of operational adjustments at Gold Road’s flagship Gruyere mine in Western Australia. The past quarter witnessed production shortfalls attributable to lower-than-planned ore mining and processing plant availability. These hurdles also resulted in an attributable all-in-sustaining cost of $1,273 ($AS 1,973) per ounce, exceeding initial projections.

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The latest earnings call highlighted Gruyere’s operational performance, including a 12-month lost-time injury frequency rate significantly below the industry average. However, challenges such as mining underperformance and lower-than-planned ore mining impacted production and free cash flow in the December quarter.

Most recently, the mine struggled under heavy rains across the region, which disrupted operations in March.

In 2023, Gruyere produced 322,000 ounces of gold at an attributable all-in-sustaining cost of $1073 ($AS 1,662) per ounce, slightly outside the annual guidance range. Looking ahead to 2024, Gold Road forecasts gold production between 300,000 and 335,000 ounces at an attributable all-in sustaining cost of $1,226 ($AS1,900) to $1,323.5 ($AS 2,050) per ounce.

Operational improvements, including increased waste movement and construction projects, aim to enhance productivity and cost efficiency. Yet, labor availability remains a looming concern; thus, management's decision to diversify into a Canadian project is not surprising.

Yet, investors did not like the news, with Gold Road’s share price closing 6.59% lower. The primary concern appeared to be the potential cost associated with the Greenstone acquisition, as rumors suggested a price tag exceeding $650 million, raising questions about the company’s capacity to finance such a substantial purchase.

While the company is completely debt-free, its $100 million cash balance means either taking on a lot of debt or issuing significant equity, potentially diluting existing shareholder value.

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