RE:Premier Gold in NewsletterMarch 31, 2020
Comment: Premier Gold — Forcing the issue at Hardrock
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The project’s timeline was thrown into disarray in early January when PG’s joint venture (JV) partner, Centerra Gold (CG.T), decided to file a court claim in an Ontario Superior Court declaring that the technical report submitted by the independent JV company to the board of directors (comprising representatives of both CG and PG), and which included an updated resource, should not be deemed a feasibility study (FS).
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Centerra continues using the reserves declared in the 2016 FS, which suggests that the 27,000-tonne-per-day Hardrock open-pit gold project would require an upfront capital expenditure of C$1.24 billion or US$880 million.
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Therefore, Centerra would need US$440 M to fund its 50% stake in the project.
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Centerra’s goal is to delay a construction decision while avoiding any dilution of its position or triggering penalty payments.
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The company ended 2019 with US$687 M in working capital;
however, most of it is tied up in stockpile inventories at Kumtor in the Kyrgyz Republic, which leaves it with only US$42 million in cash.
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Furthermore, it generated only US$25 million in free cash flow in 2019 and is servicing a US$70-million long-term debt.
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Still, its balance sheet may be adequate for the planned capital expenditures in 2020 if it can process the majority of the stockpiled ore.
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Centerra has forecast US$405 million in capital expenditures for 2020, including US$236 million in capitalized stripping of the open pit at Kumtor.
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It will also spend US$50 million on exploration and US$35 million on G&A.
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The planned expenditures do not include any spending on the Hardrock project because of the legal dispute.
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To force the issue, Premier Gold, supported by an unnamed third party, has announced an offer to acquire Centerra’s 50% stake for US$205 million (C$290 M), based on US$175 million in cash and the assumption of Centerra’s remaining obligations (US$30 M).
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Premier Gold and Centerra Gold announced plans to form the 50/50 JV on the Hardrock asset in 2015.
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At the time, Centerra, who was under different leadership, paid C$85 million upfront to Premier and committed to funding C$185 million of project expenditures (~US$30 M remain).
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Therefore, the offer is an ~8% premium to Centerra’s expenses to date.
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On a 100% basis, the valuation of the project based on the offer (US$410 M) would be an 18% discount to the 2016 feasibility study value of C$709 million (US$501 M) and an even more significant discount (45-50%) to my valuation (C$1,127 M, ~US$790 M), considering higher Canadian gold prices and with the resource upgrade embedded.
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But, as Premier Gold points out, its offer “...represents a substantial premium to the median of current analyst consensus valuations attributed to Centerra’s 50% interest.”
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One bank has valued the Hardrock project at US$55-60 million (~C$80 M) based on ~US$25 per ounce for its resource, even though it has a feasibility study with a mine plan.
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The important takeaways of the offer are that:
a company with much deeper pockets than Premier Gold is willing to buy the project and help it secure funding for its half stake
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the value offered for Centerra’s 50% stake is equivalent to Premier’s current enterprise value (US$200 M, EI estimate) without considering its other assets in Nevada and Mexico
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The valuation of Premier on a net asset value per share basis to C$2.10 (vs. C$2.90) or US$1.50 (vs. US$2.20) after assessing the Hardrock project based on the mark-to-market offer for the 50% stake and using a weaker Canadian dollar (1.42 vs. 1.32),
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In summary, it’s a bold move by Premier Gold and its unknown partner to push Centerra Gold into making a decision rather than waiting for a court ruling.
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If Centerra takes the offer, I suspect that Premier’s focus will switch to the Canadian asset.
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Regarding Premier’s other projects, it appears that more drilling is required to extend the mine life at El Nio and the Phase 1 and Phase 3 open pits to generate a mine plan worthy of an updated technical report at the South Arturo JV with Barrick Gold (ABX.T, GOLD.NYSE).
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Premier is in the process of suggesting a program for Barrick’s approval for 2020.
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It is critical to get some mine plans published for public consumption to be able to generate more realistic valuations.
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Acknowledgment: Exploration Insights Newsletter - Joe Mazumdar & Brent Cook - 03/31/20
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RJ