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It's been a busy year for M&A in the Gold Miners Index (GDX) with Kirkland Lake Gold (KL), and Agnico Eagle (AEM) set to join forces, AngloGold (AU) acquiring Corvus, and Fortuna (FSM) acquiring Roxgold. The most recent deal is the largest on the acquisition side this year, with Newcrest (OTCPK:NCMGF) announcing that it would acquire Pretium Resources (PVG), a single-asset producer in British Columbia. While some investors have scoffed at the deal, I believe this is a great deal for Pretium shareholders, and one could actually argue it's generous relative to prices paid across the sector historically. Given the low likelihood of a counter-offer, I sold my position into the news.
(Source: Company Presentation)
Newcrest announced last month that it would be acquiring Pretium Resources for ~$2.8 billion, with the deal representing a 22.5% premium to Pretium's closing price and a 29% premium to its 20-day VWAP. Based on Pretium's ~3.9 million-ounce reserve base and ~7.0 million ounce measured and indicated [M&I] resource base, this values Pretium's reserves at ~$718/oz, with its M&I resources valued at ~$386/oz. Some investors have scoffed at the price paid, but a look at prices paid across the sector historically would suggest that this was a great deal. Let's take a closer look below.
(Source: Company Presentation)
While we've seen many deals in the past few years sector-wide, major deals in Canada have been rare, with the most significant ones ($1.0+ billion) being Kirkland Lake's (KL) acquisition of Detour Gold and the tag-team acquisition of Osisko Mining 1.0 for its Canadian Malartic Mine. Smaller deals have included Atlantic Gold, Barkerville, Battle North, Kaminak, Balmoral, Monarch Gold, and Integra Gold. When it comes to the best comparisons, which is mega-deals, I would argue that the acquisition of Detour Gold and Osisko Mining 1.0 is the most relevant, and these deals were done at 0.90x P/NAV and 1.10x P/NAV, respectively. Based on an estimated After-Tax NPV (5%) of $1.60 billion for Pretium, the deal was done at a much higher multiple ~1.70x P/NAV at the ~$2.80 billion price tag.
(Source: Newcrest Mining Company Presentation)
If we look at these deals on a reserve and resource basis, Pretium was acquired for ~$718/oz on reserves and ~$386/oz on resources, which is more than triple the price Kirkland Lake paid for reserves in the Detour Gold acquisition. This was based on ~$3.90 billion acquisition price and Detour's ~15.4 million ounces of reserves (~$240/oz). On an M&I resource basis, Kirkland Lake also paid approximately 50% less, acquiring Detour Gold with its ~20 million ounce resource base for ~$196/oz. With this reserve base now looking like it could grow to 21+ million ounces after resource additions, this deal is looking even better for Kirkland Lake, with reserves being acquired for closer to $186/oz.
Moving over to the Canadian Malartic deal, the suitors paid roughly ~$400/oz for reserves and closer to ~$350/oz for M&I resources. This represents a steep discount to the price paid for Pretium on both a reserve and M&I resource basis. In both cases, Detour Lake and Canadian Malartic were much less complex deposits (high-volume open-pit) and had much larger production profiles, with production guidance of 500,000 plus ounces at the time of their acquisitions and average annual production profiles closer to 550,000 ounces.
(Source: Company Filings, Author's Chart)
Given the premium that Newcrest paid on not only a P/NAV basis, which is the most relevant, but also on reserves and an M&I resource basis, I would argue that Pretium shareholders got a great deal here. In fact, I would argue that this is a generous valuation for a single-asset producer that has struggled to pull its all-in sustaining costs [AISC] down below $900/oz. Generally, single-asset producers struggle to command valuations above 1.30x P/NAV, and in the current market, not even diversified low-cost producers in Tier-1 jurisdictions are able to command a multiple this steep.
So, what's in it for Newcrest?
The Pretium acquisition for Newcrest allows it to become the largest gold producer in British Columbia, with Brucejack's 300,000 plus ounce production profile adding to its meaningful production profile in the province at Red Chris (70% owned). It also further diversifies the company with more mines and a more concentrated focus in Tier-1 jurisdictions. This is because while Newcrest has a significant portion of production from Tier-1 jurisdictions, it does have a large weighting in Papua New Guinea at its Lihir Mine.
(Source: Newcrest Mining Company Presentation)
Of course, the other reason that Newcrest pounced on Pretium is for its exploration upside, with Pretium releasing eye-popping intercepts at the North Block Zone, and also releasing incredible intercepts from the Golden Marmot Zone. Between several top-25 intercepts sector-wide at the North Block Zone (shown below), a lower-grade (relative basis) target at Hanging Glacier, and a new discovery at Golden Marmot, it's looking like Newcrest could have a new mining center on its hands to the north of Brucejack, and could add 2.0+ million ounces to its reserve base in the next three years near-mine.
(Source: Company Filings, Author's Chart)
(Source: Newcrest Mining Presentation)
Assuming Pretium is able to add ~2.0+ million ounces to its reserve base for a total of ~5.9 million ounces of gold, the price paid for Newcrest for reserves comes in closer to ~$475/oz. I would argue it's still early to add in this upside, given that Golden Marmot is a sparsely drilled target, even if the grades are outstanding. Having said that, this does make the deal much more attractive to Newcrest and explains why it was willing to pay a premium to acquire Pretium.
Having said that, if we compare these deals to Detour and Malartic even under the ~5.9 million-ounce assumption for Pretium, this is still a large premium to the average price paid of ~$320/oz on reserves. Besides, as is clear from Odyssey Underground and the Saddle Zone, the suitors in these cases paid a great price for ounces in the ground and got a major bonus. This is because Kirkland Lake has uncovered over seven million ounces in the Saddle Zone at Detour Lake, and the Canadian Malartic Partnership has added over 12 million underground at Malartic. In Newcrest's case, it's making a bold bet on resource upside, which should pay off, but there are no guarantees.
Perusing the comments section of Pretium articles, it's quite clear that some investors are scoffing at the Pretium deal, noting that the premium is nowhere near enough and that management is selling out. This could not be further from the truth, and Pretium's CEO Jacques Perron is actually getting a great deal for his shareholders. This is because Brucejack alone has an estimated After-Tax NPV (5%) of ~$1.60 billion, and this deal implies a P/NAV multiple of 1.70x, which is unheard of in this sector. In fact, one of the only companies to trade near this valuation consistently was Kirkland Lake Gold pre-Detour acquisition, which had industry-leading costs and an average reserve grade above 15 grams per tonne gold.
(Source: Pretium Resources Presentation)
Investors may argue that the Brucejack After-Tax NPV (5%) does not factor in exploration upside, and this is entirely true. However, suppose we add in a generous $650 million in exploration upside ($325.00/oz on reserves x 2 million ounces). In that case, Pretium's fair value jumps to ~$2.25 billion (NPV 5% + exploration upside), or ~$2.18 billion after subtracting out $70 million in corporate G&A. Based on the ~$2.8 billion takeover offer, this still values the company at ~1.30x P/NAV which is a very generous multiple for a single-asset producer with a mine that has underperformed expectations since it went into production. Therefore, not only do I see a very low likelihood of another suitor coming in, but I see the disgust with the price paid by Newcrest as completely irrational.
(Source: Company Presentation)
While there's always chatter on message boards that another suitor could be sniffing around, I see the likelihood of another bid as very low, given that the suitor would have to pay over 1.50x P/NAV plus a break-fee ($100 million), which would make this one of the most expensive acquisitions in the past decade. There's no question that Pretium should receive top-dollar given that this is a top-5 exploration story sector-wide, but this deal values Pretium at top-dollar, and it's a great outcome for shareholders given that the asset will be drilled out more aggressively, and it removes the single-asset risk that made Pretium a trading vehicle only. Given the low likelihood of another suitor, I sold my position at $14.30, with the takeover offer being a pleasant surprise relative to my conservative fair value for the stock of $12.00 in a non-takeover scenario.