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Scotgold Resources: THE INVESTMENT CASE

Scotgold's rights issue is crucial step towards full production at Cononish

Scotgold's rights issue will go a long way towards bringing in the funds to get Cononish into production
Scotgold's rights issue is crucial step towards full production at Cononish
INVESTMENT OVERVIEW: SGZ The Big Picture
Gold production is planned shortly

Longer-term, the plan is to ramp up the Cononish gold mine in Scotland to a production rate of 24,000 ounces per year, according Richard Gray, chief executive of project owner Scotgold Resources PLC (LON:SGZ).

The more immediate target, though, of 12,000 ounces, takes the company half way there.

WATCH: Scotgold Resources keen to crack on with construction after £2.65 mln raise

And the building blocks that will make that happen are now being put in place.

First off, there’s the recently-announced £2.65 mln two-for-three rights issue. This is being fully-underwritten by the company’s chairman and major shareholder Nat Le Roux, and represents a tangible expression of faith from him in the future of the project.

If shareholders choose not to take up their rights in this fundraise, Le Roux is more than happy to invite third parties in, but failing that, his own money will provide the equity component of the funding that Cononish requires to get built.

It’s a major tick in the box and allows Scotgold to go out to other sources of finance with its cornerstone investment already in place. Any shareholder who wants to avoid dilution can do, simply by following his or her rights, and given that the funding itself represents a major milestone in de-risking the project, there is a feeling that this could be a good entry point.

What’s more, in the event of a shortfall in the uptake, other existing investors will be able to apply for an additional allocation and actually increase their percentage holding.

READ: Scotgold plans £2.65 mln fundraising via fully underwritten rights issue

“With this rights issue we’ve raised about a third of the funds we need to build the project,” says Gray.

“We knew we needed a chunk of equity in the pie. And this way represents an opportunity for our existing shareholders to get in now while the price is still reasonable and as we de-risk.”

He concedes that many of Scotgold’s shareholders have small-scale holdings and may not be in a position to follow their rights. But he insists that everyone ought to be given the opportunity.

He also accepts that although the rights issue represents a key step on the road to financing Cononish, the journey is not yet finished.

“The key message is that we accept that it’s not the full monty and we can’t say we’re definitely going ahead,” he says. “But by doing this now we have significantly de-risked the second tranche.”

There remains the technical and bureaucratic approval of planning permission to be surmounted, and going to banks for finance wouldn’t be viable before that hurdle had been cleared anyhow.

READ: Scotgold Resources submits revised Cononish application; eyeing decision by end of year

But it won’t be long. The planning decision is likely in December, and Scotgold wants to be ready to respond whichever way it goes.

There’s actually not much nervousness that the decision will go against the company, but even so, the feeling is that now is a good time to bring in money so that if any appeal is required work on site can continue without being overshadowed by any funding uncertainty.

On a more optimistic note, if and when the permission is granted and with the cornerstone equity finance already in place, talks with banks ought to be fairly brief and to the point.

It’s a small operation, but there’s lots of margin on offer. The company knows that in part because it’s already been operating on site at a low level with the processing of an old stockpile through a pilot-scale plant.

But it’s also been at work refining the project design.

“The biggest issue has been demonstrating that there are alternatives to the previous tailings facility,” says Gray.

“The new design of the tailings dam is a drystack system which will be used to build forms which mimic the local topography. The original system would have cost £5 mln up front. But with the new system the cost is spread out over the life of the mine.”

Which means that the overall price tag the company is putting on getting phase 1 up and running is a mere £7.4 mln. The underwritten rights issue takes the company a long way there. Attractive economics should do the rest.

 

 

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