Pretivm Resources Inc. (PVG)

[n3m3sis]

Pretivm nearly for first gold pour - Seeking Alpha.


May 23, 2017 7:47 AM ET| About: Pretium Resources Inc (PVG)
Fabio Herrero
Fabio Herrero
Gold & precious metals, oil & gas, long only, Deep Value
Summary

Pretium owns the Brucejack project, a high-grade underground gold mine complex in British Columbia, Canada. It is weeks from cash flow and has an 18 years minimum mine life.

Commissioning is nearing completion and ore is being introduced to the mill. Production is expected to be 500,000oz Au at a very high grade (16.1 g/t) compared to industry averages.

The project sports an industry low All-In-Sustaining Cost of $446 with a 34% IRR and an NPV of almost $2B at a gold price of $1250.

Pretium additionally owns the Snowfield deposit, with 35m ounces of gold just north of the existing mine. It is the 6th biggest undeveloped gold deposit in the world.

Pretium (NYSE:PVG) is one of the biggest stories of the last few years in the gold mining space. The sheer size of it made believers and detractors of this project, even leading to a full-blown controversy. I am squarely bullish on Pretium and since at least 2012 I have seen the project grow. Thus, with the project now being in the final stages of construction, I am happy to see the share price momentarily depressed and will soon start to buy.

I wrote about Pretium for the first time some months ago when I penned an article about 10 junior gold miners finishing construction in 2017. Currently, Pretium is doing as expected as they are currently finishing construction on the Brucejack project. In this article I will explain in detail why the Brucejack project and the whole Pretium endeavor is a winning story and a strong buy at the current market price.

This article will be organized as follows: firstly, we will describe Brucejack as a mine project in general included the exploration potential around it. Next, we will revisit a controversy surrounding the consistency of the ore and outline why I firmly believe that there is actually more gold present on site than the conservative estimates that were made back in the day indicate. After assessing the quality of the assets in portfolio we will move to the management track record and capital structure sections in order to inform an eventual trading decision. Finally, in the valuation section, we will go deeper into how much Pretium is really worth vis a vis its market price, the amount of ore in the ground and its industry peers. This will be followed by a buy recommendation in the conclusion.

The Brucejack project

The Brucejack project is located in British Columbia, Canada, which is a safe and reliable jurisdiction. The company is very involved in the region and has different agreements with the local communities. This is reflected by for instance the fact that around 50% of the workforce is locally sourced from Northwestern British Columbia, 42% from the rest of British Columbia while the remaining 8% is from elsewhere in Canada. Moreover, commercial contracting and employment of local First Nations workforce has been ongoing since the project's discovery.

Brucejack location. (Company Presentation May 2017).



Construction of the mine is almost completed and as of the beginning of May, the construction team has in fact successfully handed over underground development to the operations crew while two long-hole drills are currently drilling off the stopes. This means that we are only weeks away from the moment that cash flow will literally start to pour in.

Brucejack does not only include the gigantic Valley of the Kings (VoK) deposit - which is where the mine is currently being built - but also other satellite deposits that are already at the exploration stage (as per the map above).

The other significant known deposit on the property is the Snowfield gold deposit, which we will discuss at further length in the exploration section. Here it must be noted that the Brucejack and Snowfield deposits are generally seen as the 6th and 28th biggest undeveloped gold deposits in the world (see below), hence making Pretium a potentially huge player.

Top 50 Undeveloped deposits (2013 Global Gold Mine & Deposit Ranking, Natural Resource Holdings).



As for now, the primary focus of the mine is the Valley of the Kings deposit which is comprised of high-grade visible gold going up to kilograms per tonne in some intercepts. This is within a lower grade gold quartz stockwork system. Proven and probable mineral reserves in the Valley of the Kings of 8.1m oz Au (15.6m tonnes grading 16.1 g/t Au) were outlined with a feasibility study completed in June 2014 and updated in December 2016. Mine life is projected to be eighteen years with a total gold production of 7.27m oz Au.

December 2016 Mineral Reserve Estimate (May 2017 Corporate Presentation).



Gold and silver recoveries are respectively 96.7% and 90.0% while average annual gold production will be between a sizeable 504,000 oz in the years 1-8 and 404,000 oz average during the expected life of mine. This is without considering the already known mineralization systems that were previously found nearby the existing mine plan.

In short, we are talking about high grades and a gigantic deposit. Or is this too good to be true?

The Controversy

Back in 2013 there was a controversy surrounding the resignation of Strathcona Mineral Services Ltd., one of the companies dealing with Pretium Resource's bulk sample. They had a disagreement with Snowden Mining Industry Consultants, which was the other independently qualified party for the feasibility studies. According to Strathcona, the Snowden studies were not valid and could thus not interpreted as mineral resources and reserves. The controversy was also covered by Hebba Investments in this article of October 2013 and it took quite some time for the dust to settle.

However, Strathcona's reservations were proven unfounded by the spectacular results of a 10,000t bulk sampling process that was made later in 2013. In my opinion, Snowden's methods were more than redeemed as results proved in accordance with their earlier assessments on both the lateral and vertical continuity of the vein systems comprising the stockwork, as well as the location of high-grade corridors of mineralization in between the more vastly mineralized envelope. To go into the details: the 5,865oz of gold that were produced from the 10,302 dry tonnes of excavated material surpassed the target of 4000 oz of gold which were estimated to be produced from the bulk sample by almost 50%. This is clearly remarkable and I am eager to see the actual numbers when production will be properly underway later during the year.

Moreover, since 2013, Pretium has released hundreds of drill holes with fantastic results. At every point, they consistently found equal or greater amounts of gold than expected in the estimations. I hence feel confident that this past controversy is no longer relevant and we will not discount Pretium's data and resource estimates in our valuation.

Exploration

Near the Valley of the Kings deposit there are a number of satellite deposits that have shown very promising results. The West Zone has a proven and probable mineral resource estimate of 0.6m oz Au and 26m oz Ag with respectively 6.9 and 279 g/t. Moreover, the company encountered high grade intercepts in many other places, including on the east side, while there is also potential at depth.

Nearby exploration potential (Corporate Presentation June 2016)



Snowfield is where the real unlocked value lies for Pretium. It lies just north of Brucejack and hosts a near-surface, low-grade, bulk tonnage, porphyry-style gold deposit with gold-copper, molybdenum and rhenium mineralization. Currently, a higher grade gold-copper core with silver and molybdenum has been outlined.

The company completed a NI 43-101 resource estimate in February 2011. The gold resource includes an astounding 25.9m oz Au of measured and indicated resources and 9.0m oz of inferred resources at a cut-off grade of 0.30g equivalent per tonne. In short, we can say that this is a relatively low grade yet gigantic deposit as mineral resources furthermore include:
- silver resources of 75.8m oz measured and indicated & 51.0m oz inferred
- copper resources of 2.98 billion oz measured and indicated and 1.10 billion oz inferred
- molybdenum resources of 258.3m oz measured and indicated and 127.7m oz inferred
- rhenium resources of 22.5m oz measured and indicated and 11.5m oz inferred

Snowfield is at the moment in stand-by as the company wants to stay opportunistic on the way it will realize value. Pretium has however entered into a confidentiality and cooperation agreement with Seabridge Gold (NYSEMKT:SA), whose KSM project shares a common boundary with Snowfield. The two are operating on a win-win basis and the company does not need to expend further funds on the project until 2022. Overall, despite the stand-by status, this is an enormous asset that the market is valuing at almost zero. In my opinion, this is one of many reasons why this stock is undervalued and thus a good buy currently. Something which we will elaborate more on in the valuation section.

Let´s now move on and check management track record and capital structure of the company.

Management

Pretium is the creation of Robert A. Quartermain, the current Executive Chairman. Over his 40-year career in the resource industry he gained an extensive global experience in geology, exploration and development.

Here is the bio from the company website:

Dr. Quartermain was the president of Silver Standard Resource (NASDAQ:SSRI) from 1985 to 2010, over which time the company grew from a small exploration company with a market capitalization of over $2 million, to a company with a producing mine, five advanced development properties, a pipeline of early stage exploration properties and a market capitalization of over $2.0 billion. Dr. Quartermain is currently the Executive Chairman of Pretium Resources, which he incorporated in 2010...
.... and is now completing construction of a gigantic high grade gold mine.

Joseph Ovsenek is the President, Director and CEO of Pretium. He joined the company in January 2011 and is the person in charge of all day-to-day operations. Ovsenek has over 20 years of international management and legal experience in the precious metals industry. Before Pretium, he served in senior management roles for Silver Standard for fifteen years. Apart from being responsible for the company financing, he was also instrumental in developing the corporate strategy here via the acquisition and sale of several assets.

George Paspalas acts as the lead director of Pretium. He was previously President and CEO of MAG Silver (NYSEMKT:MAG), President and CEO of Aurizon Mines and COO of Silver Standard Resources Inc. Before this he worked with Placed Dome and was responsible for constructing and operating complex open pit and underground mines in Canada, South Africa, Tanzania, Australia and South America.

Current CFO is Tom Yip, who brings with him 25 years of financial management experience in the mining industry. Until recently, he was the CFO for International Tower Hill Mines (NYSEMKT:THM).

The other directors and managers are all experienced and I believe able to well manage this company.

Capital Structure

Share capitalization is clean with 6.67m incentive options and no warrants against 180.84m shares outstanding, meaning an acceptable and normal dilution (that is actually substantially lower than usual when benchmarked against the junior gold miners peer group).

Share capitalization and top shareholders (Company Website)



Management has a 1.98% ownership (+ incentive options), something that I always like to see. BlackRock - with $5.4 trillion in assets under management the world's largest asset manager - is the biggest shareholder, followed by another asset management company: Van Eck Associates. Silver Standard is a historical partner of Pretium while Zijin Mining participated in a pre-construction financing. Orion Mine Finance is the partner in the $540m construction package that financed the mine. The other major shareholders are a mix of merchant banks and asset management firms.

We can confidently assess that the quality of the share structure is good, with strong hands keeping management on track while management itself has skin in the game and, as we have said, is willing and capable to deliver.

Valuation

As the company will become a producer over the next few months, much of the execution risk associated with mine building will be behind Pretium. The main incognito is the price of the main commodities produced, namely gold and silver. As we and the company are price takers in this, we will consider a flat gold price in the next foreseeable future for the purpose of our analysis.

In this valuation, we will value the Snowfield project at $0 as it is too speculative in nature and the monetization path is not clear at this point. It is however a fantastic asset and makes that Pretium is not a one asset company and hence it offers a lower risk profile compared to others that are.

Economics of the Brucejack project (Corporate Presentation May 2017).



I am not the only bullish analyst. On May 1st, The StreetWiseReport published three analyst views that, in my opinion, are spot on. BMO Capital Markets analyst Andrew Kaip notes that Pretium:

"continues to make positive progress at its Brucejack mine, with a number of components and services commissioned or moving thereto, and wet commissioning nearing completion. The company remains on track for the production of gold concentrate and doré in the coming weeks." He highlights that "PVG has over 187kt of ore stockpiled on surface and underground, up from ~163kt in late March" and rates Pretium as an Outperform with a target price of $19.50."
Moreover, Eric Zaunscherb, an analyst with Canaccord Genuity,

Maintaining the target price of $17.50 and reiterating a Buy recommendation, Zaunscherb highlights that "Pretium Resources is trading at a 0.67x P/NAV(5%). This is a premium to the means of peer covered development companies at 0.59x and covered small- to mid-cap producers at 0.58x. A premium is justified given the project's scale, scalability (exploration potential), low sovereign risk, and potential appeal as an M&A target."
It is important to note here that the Pretium share price went down somewhat from the beginning of the month making the P/NAV5 closer to 0.60, even better for new investors.

Finally, ROTH Capital Partners analyst Joe Reagor believes that:

"Brucejack will begin initial gold production in the coming weeks and that it will steadily increase production over the remainder of 2017." He also explains that the company will "avoid running high value ore through the mill until it optimizes recoveries and throughput... estimating production of 41,000, 72,000, and 117,000 ounces of gold over the three remaining quarters of 2017, respectively." He stated that the firm's "valuation for PVG is USD$3.0 B or USD$15.69 per fully diluted share.
Pretium's share price was $9.09 at the close of May 19th 2017 which I think is a steal. Considering that starting now it will literally become a cash machine as it has some of the lowest all-in sustaining cash cost per oz in the industry at $446 per oz of gold.

Brucejack's AISC compared to intermediate gold producers (Corporate Presentation September 2016).



Here we must consider that at a gold price of $1250, the company would generate $3.5B in cash flow. In the event of a gold bull market in the next years, Pretium will generate billions of dollars more in free cash flow at almost no added cost.

Production estimates and economics (Corporate Fact Sheet March 2016).



Some other positive factors that are not fully considered by the market is that the construction-financing package included a stream that the company could decide to buy back. Pretium has the flexibility to buy back some of the stream that it sold to Orion Mine Finance, further enhancing the economics of the project. Here you can find the details of the stream.

Stream Agreement between Pretium and Orion Finance (Company website).



Before moving to the conclusion I would also highlight that all present calculation use a conservative CAD:USD of 0.75 (while it is presently closer to 0.73). Costs are mainly in CAD while revenue are in USD, meaning that if the Canadian dollar would fall more, the company would benefit from an even lower production cost. Note here that, of course, the opposite is also possible.

Before we conclude, we must consider a last valuation metric that is always interesting to take into account. The market cap is now $1.6B and for this, a shareholder gets 13m oz gold at Brucejack and 35m an Snowfield, i.e. a grand total of 48m. This leads to a price of $33.33 per oz of gold in the ground ($1,600,000,000 / Oz 48,000,000 = $33.33). Relatively cheap compared to industry peers, especially if we consider a re-rate as a producer and that it is in a safe jurisdiction.

With a P/NAV of 0.70 that will be soon be re-rated as Pretium becomes a producer, no more dilution expected, the possibility to enhance the economics of the project by buying back some of the stream, the ownership of Snowfield I feel confident into recommending a buy of Pretium at this price.

Conclusion

Pretium is highly leveraged to the price of gold and as such it has some inherent risk that are not company specific but industry specific.

That said, if we consider a flat gold environment in the foreseeable future, at $9.09 per share it is a compelling buy as we have seen. Our valuation is robust as we are entirely discounting the value of Snowfield, the 6th biggest undeveloped gold deposit in the world.

I recommend to immediately open a buy order with a limit at $9.09 or lower with a target of $13.60 or 50% more in the next 12 months, which is when the company re-rates as a high margin producer.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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