Gold and Silver miners (Jr and Exploration)

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Pretium Resources: Big Things Happen At The Valley Of The Kings

Sep. 15, 2017 11:27 AM ET|7 comments| About: Pretium Resources Inc (PVG)
Peter Arendas

Summary

The ramp-up process continues and gold sales are ongoing.

The steady state gold production is expected by the end of this year.

The capacity of the Brucejack mine should be expanded by more than 20%.

An exploration program is planned for Q3 2018.

The management is openly talking about repurchasing the stream and repaying/refinancing the debt in 2018.

No, Pretium Resources (PVG) hasn't reported that they reached the projected feed grades and production volumes. Yet. However, the recent developments provide a strong indication that the things should be on a good way. This week, Pretium Resources made a presentation at the Rodman & Renshaw 19th Annual Global Investment Conference. Pretium's slideshow and webcast from the conference provide some important information:

The mill operates at recoveries well above 95% for 3 months now
The metallic slag was eliminated
The ramp up of grades going into the mill continued in August and it will continue through Q4
The grade control system will come online early in Q4
Steady state gold production should be reached by the end of 2017
The gold sales are well underway (dore as well as concentrate)
A working capital surplus should be reached by the end of Q3
The management wants to focus on paying down the debt and repurchasing the stream in 2018, ideally from cash-flow, but a combination of cash-flow and refinancing is possible as well
The strategy of the company focuses on organic growth - reserves expansion + grassroots exploration + mine expansion
I like especially the fact that the management started to talk about its growth plans. They probably wouldn't pay too much attention to this topic, if they were not sure that the Brucejack mine ramp-up will be smooth and successful. This conclusion confirms also the statement of J. Ovsenek, Pretium's CEO:

The ramp up is going very well at Brucejack, we are targeting steady state gold production by the end of this year.
The probability of a future production expansion was mentioned several times in the past. However, it seems like it will occur surprisingly soon. Moreover, only limited CAPEX will have to be spent. According to the CEO, there is a lot of extra capacity within the mill, as it was designed very conservatively. As a result:

During commissioning, we ran the mill at 3,300 tonnes per day for (tpd) over 24 hours without any issues.
The management expects that the throughput should be expanded to 3,300 tpd or above. More information should be known by the end of 2017 when Pretium should apply for the expansion permits, as the throughput of only 2,700 tpd is permitted right now. The permitting process should take 6-12 months. The expansion CAPEX should be relatively low.

Expanding the throughput rate to 3,300 tpd, or by 22% may lead to significant improvements in the economics of the already great project. If Pretium manages to increase the throughput by 22% while maintaining the originally projected feed grades and recoveries, it will mean that the annual gold production should grow to 493,000 toz gold per year over the life of mine (615,000 toz/year over the first 8 years). Moreover, given the economies of scale, it would be possible to expect also a notable decline of the AISC.

Except of expanding the throughput rates, Pretium plans also to convert more resources into reserves and to outline more resources. During the presentation, Pretium's CEO seemed to be really excited about the Flow Dome zone that lies right to the east of the Valley of the Kings (VoK) deposit and that has mineralization identical to mineralization in the VoK:

We believe that the Flow Dome zone is essentially an extension of the Valley of the Kings to the east.
If this assumption is true, there is a good potential for the VoK deposit to be expanded from the current east-west strike length of 450 meters to approximately 1,450 meters. It is possible to expect that in this case, the Brucejack mine life would at least double. A drilling campaign in the Flow Dome area should start in Q3 2018. Another great news is that Pretium has identified an exploration target in the southeastern part of its huge property, where another Brucejack-like deposit could be buried.

Source: Pretium Resources

The management seems to be quite optimistic also about their ability to deal with the streaming agreement and debt. A senior secured loan facility worth $350 million matures on December 31, 2018. However, it is extendable to December 31, 2019. The facility bears an interest rate of 7.5%. The stream can be repurchased on December 31, 2018, for $237 million, or on December 31, 2019 for $272 million. The best Pretium can do is to get rid both of them as soon as possible. It means that it will need approximately $400 million for the debt repayment (the principal + accrued interests) and $237 million to repurchase the stream. Together, it is around $637 million. If Pretium manages to produce 500,000 toz gold from now till Q4 2018 (which should be achievable if everything goes well), at an AISC of $500/toz and if the average gold price for this time period will be $1,300, the Brucejack mine should generate cash-flow of approximately $400 million. Even if the production or gold price is lower, or the AISC is higher, there is a good chance to generate at least $250-300 million. In this case, Pretium shouldn't have any problem with refinancing the remaining $300-350 million, probably at an interest rate below 7.5% p.a. In other words, if everything goes well, there is a very high probability that Pretium will be able to get rid of the stream and to refinance the debt by the end of next year.

Besides the above-mentioned information from the Rodman & Renshaw 19th Annual Global Investment Conference, there are some other events that indicate that Pretium is on a good way.

On September 7, Robert Allan Quatermain, Pretium's executive chairman purchased 25,000 shares of Pretium Resources for $262,978. On August 22, Peter Merriman Birkey, another of Pretium's directors, exercised 18,000 options at a price of $7.86. It is possible to assume that both of them know very well what's going on at the Brucejack mine. If there were any reasons for worries, Quatermain probably wouldn't purchase the shares and Birkey would probably sell the shares immediately after the option conversion.

Another positive development is that as of September 18, Pretium Resources will be added to the S&P Dow Jones Precious Metals Index. This may help to increase the visibility of Pretium and also to increase the institutional ownership.

Given all of the above-mentioned facts, it is quite surprising that the short interest remains very high. The latest data show that the short interest stands at 14,981,500 shares which represent 8.27% of outstanding shares. Given the average daily trading volume of 1,596,600 shares, the number of days to cover is 9.4. It means that there are relatively high bets against Pretium. If Pretium proves them wrong, i.e. it is able to achieve the projected feed grades and gold production volumes, the short positions will have to be liquidated quickly which could lead to a nice short-squeeze.

Conclusion

Although the most important news is yet to be released, the currently known facts indicate that the Brucejack mine is on track. The steady state gold production should be reached by the end of this year. And the management is openly talking about expanding production, repurchasing the stream and repaying/refinancing the debt. More information should be known sometime in November after the Q3 results are released. I was considering the purchase of Pretium's shares for several months. I have finally decided to initiate a position. Although some of the risks still remain, the risk-reward ratio seems to be pretty favorable.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PVG over the next 72 hours.

https://seekingalpha.com/article/4107243-pretium-resources-big-things-happen-valley-kings