Pretivm Resources Inc. (PVG)

[Tommy]

$PVG - Pretium Resources: Current Valuation Offers Acquirers An Accretive Transaction Even At A 40% Premium

http://seekingalpha.com/article/1693932-pretium-resources-current-valuation-offers-acquirers-an-accretive-transaction-even-at-a-40-premium?source=email_stocks_and_sectors&ifp=0
Executive Summary

The Pretium Resources' Brucejack project looks to be one of the few projects worldwide that is extremely high grade, contains a moderate to large amount of gold reserves, and has initial capital costs that are extremely low. One of the handful of projects that would offer good returns even at sub-$1000 gold. Additionally, the company is run by Robert Quartermain, the man who was involved with building Silver Standard Resources from a $2 million dollar exploration company into a billion dollar silver miner - so it is led by a man with experience unlocking the value of an exploration project and bringing it into development.

Based on the estimated economics of the Brucejack project, Pretium Resources is undervalued and using a conservative $700 per gold-equivalent ounce life-of-mine cost, this company should be valued closer to $11.00 per share rather than its current $7.50 valuation. If bulk-sampling results verify the project economics (and some drill intercepts are looking very good), then Pretium Resources can easily offer investors almost a 50% return based on a conservative $700 gold-equivalent ounce life-of-mine cost (investors should remember that the average cash cost for miners was more than $700 in 2012), which means that this company is one of the few explorers and miners that is significantly undervalued even at current gold prices and does not need a large rise in the gold price to justify an increase in its share price.

As investors dump precious metals stocks en masse, this is one of the babies being thrown out with the bathwater and offers long-term investors tremendous value.

Overview of the Company

In this article we will examine Pretium Resources (PVG), a mineral exploration company with properties in British Columbia, Canada. The company owns both the Brucejack and Snowfield project, but their flagship property is the Brucejack project and that property consists of the majority of the value of PVG, so we will focus on that in our analysis of the company.

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The Brucejack project is one of the largest, high-grade gold projects in the world. It is expected to produce over 7 million ounces of gold at an exceptional 12.0 grams of gold per tonne - which means Brucejack is a tremendously rich deposit.

Economic Details of the Brucejack Project

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Investors should remember that "reserves" are much more desirable than "resources" when it comes to mineral classes (though this discussion is beyond the scope of this article) and reserves demonstrate economic viability - so any comparison with other explorer mineral estimates needs to take this into consideration.

As investors can see, even though the Brucejack project is fairly large, it is not the largest project in terms of gold reserves; with other explorers having larger potential deposits such as International Tower Hill's (THM) Livengood project (almost 10 million gold ounces) and Chesapeake Gold's (CHPGF.PK) Metates project (18 million ounces of gold reserves). But the true value of Brucejack lies in its high-grade characteristics, which makes it much cheaper to actually mine the gold - grade almost always trumps quantity when it comes to exploration companies.

The project's initial capital costs are a relatively cheap $663.5 million and the project economics are the following:

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Since the project is such a high-grade project, it offers value even at gold prices under $1000 - which means that the project is very robust and still profitable at significantly lower gold prices. Even at current gold prices (around $1350 per ounce), it offers an after-tax IRR of 35% and a payback of 2.0 years, which is exceptionally good.

Is the Price Right?

One thing we like to do when analyzing explorers is put ourselves in the shoes of a CEO at a different company and then ask ourselves, "Would we acquire this company at a premium to the current price?" But to do that we will have to take a deeper look into the company's financials and its project economics.

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In the table above we have compiled the company's acquisition financials to find an approximate valuation for what the real acquisition cost would be at a 40% premium to the current share price. We've added 40% to the current market capitalization and then subtracted PVG's net "cash hoard" (cash minus debt). As investors can see to acquire PVG at a 40% premium, an acquirer would have to pay $1.15 billion dollars.

By itself that does not tell us much. So what we should now do is put some hard numbers on the Brucejack project in terms of our acquisition costs.

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As investors can see, acquiring PVG at a 40% premium would value each gold-equivalent reserve ounce at approximately $146.20, which is relatively good but other companies such as CHPGF, THM, and Western Copper Company (WRN) offer much lower numbers per gold-equivalent reserve ounce. But as an acquirer, that's not a bad price to pay to increase reserves.

But that metric doesn't value the quality of those ounces, to do that we have to add in the expected capital costs into our acquisition costs. Adding in the expected $663.5 million initial capital costs to our acquisition costs, gives us a total cost of $1.82 billion to buy the company at a 40% premium and bring the Brucejack project into production. That would come out to a cost of approximately $230.31 per gold-equivalent ounce to acquire PVG at a 40% premium to current prices and bring the project into production, which is exceptionally cheap.

Finally, to get a complete picture of the value of Pretium Resources we add in all the costs associated with sustaining the mine, total operational cash costs for the life of the mine, and all the estimated mine closure costs. This is pretty much all the costs associated with buying PVG at a 40% premium, putting the mine into production, operating the mine, and then closing it down - a version of all-in-project costs. After doing this we come up with a total cost per gold-equivalent reserve ounce of $687.60. So as an acquirer buying Pretium Resources at a 40% premium, it would cost me around $687.60 per gold-equivalent ounce over the lifetime of the Brucejack project - that is a pretty cheap valuation even with a 40% premium.

Essentially, what we are talking about here is the life-of-mine costs of the Brucejack project being under $700 per gold-equivalent ounce if the current NI-43-101 economics hold up. To put that in context, Thomson Reuters GFMS estimated the average sustaining cash costs for gold miners was $736 per gold ounce in the first nine months of 2012. This GFMS number does not include initial capital expenditures (and obviously acquisition costs with a 40% premium) which we did include in our PVG costs, and so the $687 figure is significantly higher than the true sustaining cash costs for the Brucejack project.

For comparison, Barrick Gold (ABX) reported its North American operations had an average all-in sustianing cost of $919 per gold-equivalent ounce in Q2FY13, Goldcorp (GG) reported Q2FY13 cash costs of $713 per gold-equivalent ounce, and Agnico-Eagle (AEM) reported cash costs of $785 for Q2FY13. Unfortunately, none of these comparisons are apples-to-apples since the cash costs reported by the miners are exclusive of acquisition costs, acquisition premiums, and initial capital costs which we have included in our $687 figure for PVG - which makes PVG costs higher than they would be if estimated on an even playing field. Even with the PVG costs weighted down, they are much better than the costs reported by some of the world's premier major miners. That means that this project would lower the cash costs of almost any major gold miner and that by itself should make it an attractive acquisition target.

Putting ourselves in the shoes of almost any major gold mining CEO we would find this transaction extremely appealing even with a 40% premium attached. But unfortunately for acquirers, we do not think CEO Robert Quartermain is a willing seller of the company even at a 40% valuation.

Which brings us to another important point - Pretium Resources is led by Robert Quartermain. He's the president who was involved in growing Silver Standard Resources (SSRI) from a $2 million company into a $2 billion company - so he has plenty of experience taking an asset from the exploration stage to production. He's also the man who left SSRI to form Pretium Resources to develop the Brucejack project (a former SSRI asset), so obviously he sees a lot of value in the project and probably is not willing to sell after 3 years at current prices.

Estimating a Valuation for Pretium Resources

Let us now try to value PVG based on the current project economics and an estimated of $700 per gold-equivalent ounce. The $700 life-of-project cost per ounce is our base case because at that price there would still be plenty of value per gold-equivalent ounce for the acquirer and it would incorporate some of the risks of the project (keep in mind sustaining cash costs for many miners averaged over $750 per ounce in 2012).

In a nutshell, how much would you pay for PVG if you were a mining CEO and wanted to buy the company at a $700 gold-equivalent ounce life-of-project valuation using only mineral reserves and total life-of-mine costs as presented in the company's feasibility study.

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As investors can see in the table above, if an acquirer wanted to purchase the company for $700 for the life-of-mine cost per gold-equivalent ounce it would pay up to $11.00 per each outstanding share of Pretium Resources. Remember that $11.00 is a very conservative valuation since it incorporates significant risk into the price because it is valuing PVG's total life-of-project costs and comparing them to other companies' sustaining cash costs.

Since shares currently trade less than $8, the current market price of PVG offers investors a significant upside and is one of the reasons why we believe that this company is a must-own for any precious metals portfolio.

Obviously, there are always risks with any investment, so let's quickly go over the major risks with Pretium Resources. This is by no means an exhaustive list, but these are the risks we think are the most important for investors to consider.

Risks to Consider

Bulk Sample Program - Even though there is a good degree of certainty with mineral reserve estimates, there are no guarantees that the actual amounts of gold and silver are as drilled. Currently, the company is undergoing a two-step bulk sample program to confirm the accuracy of the resource estimates. We believe that bulk sampling and milling should be completed by the third and fourth quarters.

So far drill results that have been publicly released seem encouraging, but if further sampling does not confirm the mineral estimates then that would be a significant negative on the company's valuation.

Project Permitting - Even if the Brucejack project has all the gold as advertised, it is of no value for investors if the project isn't permitted by the Canadian government. The company has submitted the necessary request to the authorities for review, so the permitting process has been initiated. The risk here is that if there are permitting issues then the project will be significantly hindered and the company will need to reevaluate its options.

Project Financing and Shareholder Dilution - Pretium Resources does not have the capital to finance this project by itself, so it will have to come up with a means to finance or sell the Brucejack project to an interested company. So far the financing has been through share issuance, which dilutes investors but we believe is much safer than debt financing so it is a necessary evil for investors. The major risk here is that if the company cannot finance the project favorably, than obviously it will be forced to sell royalties or project interest at sub-optimal rates, which would hurt current investors. We don't think this is a major risk because Mr. Quatermain is well connected in the industry, and through his time with Silver Standard, has experience financing a project from development into production.

Conclusion

We believe that even with the risks associated with an investment in Pretium Resources, the reward is just too appealing to pass up.

First and foremost, the company is headed by a CEO who was formerly involved in growing Silver Standard Resources from a $2 million exploration company into one of the largest listed primary silver producers. Additionally, Mr. Quartermain was extremely familiar with the Brucejack project while CEO at SSRI (they owned it) and more than likely left SSRI to focus his efforts on Brucejack. Investors should read between the lines here and see that he must have seen significant potential in PVG to give up his CEO position at a major silver producer - that by itself should pique investor interest.

Investors should simply look at the economics of Brucejack and realize they are tremendous, and if bulk sampling confirms what the NI-43-101 feasibility study shows for the project's reserves and economics, then this would be one of the highest grade and lowest cost mines in the world. This is a project that would be economic at $800 gold - a price which would put most other miners quickly out of business.

An acquirer could buy out the company for $11 per share (a more than 50% premium to the current share price) and still get the project at a cheap life-of-project $700 valuation - which would lower almost all major miners' total sustaining cash costs. Investors should remember that the industry averaged over $700 sustaining cash costs in 2012. Since shares trade under $8.00, investors have a significant upside if they have the patience to hold through the current pounding that precious metals shares are experiencing. Additionally, if current drilling and sampling confirms higher reserves (and there are some very attractive drill results being released) then this project could be even more profitable.

This is one of the few gold companies that offer investors tremendous potential at a very cheap price. Low initial capital requirements and large amounts of high grade gold are very rare these days. We would target a $11.00 share price at $1350 gold, which would value this company at a $700 per gold ounce life-of-mine cost - which in itself is a conservative valuation if the economics hold up after bulk sampling.

At current prices, we believe Pretium is significantly undervalued and offers investors terrific returns even at current gold prices. While hedge funds, index funds, and fast money have been selling the entire gold sector, Pretium has seen its share price drop to levels that simply do not account for the value in its Brucejack project. While there are always risks with exploration companies, we believe the rewards with Pretium Resources outweigh the risks so investors should buy aggressively while they still have a chance and hold for the long-term. More conservative investors may want to take an initial position and wait for bulk sampling results in Q3FY13 or Q4FY13 to verify project economics - but if they are good it may be too late. This is one of the few exploration and mining companies that are truly significantly undervalued and offer significant alpha for investors.

Additional disclosure: We have a significant position in PVG and currently plan to acquire more shares