An UpdateQuote:
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After the release of the revised resource for the Hardrock open pit gold project in Ontario,
I thought I would take another look at the valuation of the liquid, dual-listed precious metal producer.
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My calculations arrive at a price of C$2.90 per share, which signifies a ~60% return to its previous close, so given the potential returns.
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The majority of the asset valuation (~70%) is linked to its 50% stake in the Hardrock project, where I estimated an upside of over C$1.1 billion (100%) applying the spot gold price (~US$1,500 or C$1,980) and the revised resource estimate, including a dilution factor.
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I applied a risk adjustment of 0.8x as the new financials will be made, internally,
closer to the end of the fourth quarter before a construction decision.
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The value of the 2,000-tonne-per-day Mercedes plant reflects the cost that a suitor seeking
to build a mine in the area, such as Silvercrest Mines (SIL.T) with its Las Chispas deposit,
would be willing to pay for a permitted plant facility and fast track its project through the
permitting process.
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I based the valuation of the company’s 40% stake in the South Arturo joint venture with
Barrick Gold (ABX.T, GOLD.NYSE) on the 2018 technical report for the El Nio underground
project and the Phase 1 open pit, which does not account for any upside in either project or
the value of the heap leach potential.
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In addition, the 100% stake in the Cove property on the 2018 preliminary economic assessment (PEA) with a 0.5x risk adjustment as more is drilling is required from underground to validate the resource.
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Finally, I used the end-of-June-2019 working capital position, which includes a “deferred
revenue” line of US$11 million linked to the current portion of the gold pre-pay with Orion
Mine Finance.
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I also deducted the fair value of the Orion silver stream and PG’s current long-term debt.
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Premier’s share price has fallen ~25% from a recent peak in early August as the short positions (~8 Msh) have weighed against its share price.
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The investors placing the bets are convinced that the company will return to the equity
markets and issue another ~110 million shares to fund its C$200-million portion of the
non-debt part of the upfront capital required to construct the Hardrock project.
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The company may have other alternatives if it chooses to proceed with the project;
however, I think that it may be best served by seriously considering offers for the project
to squeeze out the short positions.
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The potential acquirer can then vend off the pieces (Mercedes, South Arturo JV, Cove) to other parties leaving shareholders like us with a decent return.
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Other than an unforeseen corporation activity, several catalysts that may impact Premier Gold’s share price going forward include the following:
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a site visit to the South Arturo JV conducted by partner Barrick Gold (October) to
show the progress at development projects,
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improved performance from the Mercedes underground mine in Mexico (November),
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construction decision for the already-permitted Hardrock open pit gold project in
Ontario (December).
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End Quote.
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Acknowledgment: Exploration Insights Newsletter 10/13/2019.
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RJ