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Pretium Resources: Why They Sold 30 Million Ounces Of Gold..

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Pretium Resources: Why They Sold 30 Million Ounces Of Gold For $3.00/Oz

 

 

 

 

 

 

 

 

 

 

Pretium Resources: Why They Sold 30 Million Ounces Of Gold For $3.00/Oz

Dec. 08, 2020 5:41 PM ET
 

Taylor Dart

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Summary

• Pretium Resources sold its Snowfield Project last week to Seabridge Gold, at a price that was likely perplexing for many investors.
• However, this was an unattractive project for several reasons, and I believe it was the right move to divest the asset to improve the balance sheet.
• Based on the sale, Pretium can participate in Snowfield's upside through a 1.5% NSR if it does ever go into production, but has significantly improved its leverage in the meantime.
• I continue to see Pretium as an interesting turnaround story, and I would view any pullbacks below $11.00 as low-risk buying opportunities.

We've seen a significant increase in M&A in the gold sector during Q4, after a brief lull in Q3 with gold prices (GLD) near-record levels. The most recent deal was the announcement that Seabridge Gold (SA) is acquiring the massive Snowfield Project in British Columbia from Pretium Resources (PVG). This transaction likely has Pretium investors perplexed, with a sale price of below $4.00 per gold ounce, despite the gold price near $1,800/oz. However, I believe the deal was a wise move, given that it strengthens the company's balance sheet. Based on significantly improved leverage and strong earnings growth expected in FY2021, I continue to see Pretium as a Speculative Buy below $11.00.

(Source: Pretium Resources Company Website)

 

As noted above, it's been a hectic couple of months for M&A in the sector, with two notable project acquisitions as well by billion-dollar names. The first deal was the acquisition of a 70% interest in the high-grade Peak Project in Alaska by Kinross Gold (KGC), and the most recent deal was the divestment of Snowfield by Pretium. However, the latter transaction likely caused a double-take for many investors, with 34.95 million ounces of gold being sold for an upfront consideration of just $100 million. This translates to an acquisition price for Seabridge of just $2.86/oz, or $3.43/oz if we include the contingent payment of $20 million based on either commercial production at Snowfield or a Bankable Feasibility study with reserves. This is 95% below the 5-year average paid for gold ounces in the sector in Tier-1 jurisdictions, which currently comes in at $80.51/oz. Not surprisingly, this has many declaring Seabridge the winner in the surprising deal.

(Source: Snowfield Technical Report)

While the deal looks like a steal for Seabridge at first glance, it's important to note that not all ounces are created equal in the sector. In fact, low-grade ounces with significant capex rarely even trade above $25.00/oz, as we've seen from the valuations of companies like Seabridge Gold, Vista Gold (VGZ), and International Tower Hill Mines (THM). The reason for this discount is because these are not only very low-grade deposits relative to the peer average, but they also require a miracle or a very ambitious partner to move into production. In Snowfield's case, the deal falls into the exact same category as the above companies, with a 34.95 million ounce gold resource at an average gold grade of just 0.53 grams per tonne gold. It's important to note that the grades improve to closer to ~0.70 grams per tonne gold-equivalent when including silver and copper credits, but this is still a very low-grade resource by industry standards.

 

(Source: Pretium Resources 2011 Company Presentation)

While projects with low grades can still be quite profitable if they're in the right jurisdiction and have existing infrastructure, Snowfield does not fit this mold. In fact, the project is one of the most expensive gold projects to build in the world currently, with an estimated upfront capex cost of ~$3.47 billion. It's worth noting that these capital costs are based on the 2010 Preliminary Economic Assessment completed on the project, and the capital costs are likely even higher when accounting for inflation. If we look at other high-capex projects below in the sector below $5 billion, we can see that Snowfield is not an easy project at all to bring into production. This is especially true for a mid-cap miner like Pretium Resources with a market cap of ~$2.25 billion, as it has no way to finance the project.

(Source: Snowfield Technical Report)

If we compare Snowfield to other large-scale gold projects globally, we can see that the capital costs dwarf that of other projects, even if the production profile is enviable. As shown below, Snowfield is the most expensive project with upfront capex between $200 million and $5 billion worldwide. It comes in just behind NovaGold's (NG) Donlin Creek and Seabridge's KSM in terms of upfront costs, which are two projects that have been sitting idle for years due to their hefty upfront capex requirements. However, as noted earlier, the actual upfront capital costs are likely closer to $4 billion once we factor inflation into the construction costs, and the construction timeline is three years to build the project. Therefore, even if Pretium somehow managed to finance the project and get it permitted, which would be at least an 18-month process, it would take over 3.5 years to begin commercial production at Snowfield once early works started.

 

(Source: Author's Chart)

If we estimate a minimum of a year to partner with one or two parties and find financing for Snowfield, a minimum of 18 months to fully permit Snowfield, three years of construction, and a six-month ramp-up, we're looking at 2026 before Pretium ever saw this project head into commercial production. Therefore, while a 27-year mine life at Snowfield with an average annual output of 700,000 ounces of gold and ~44 million pounds of copper might make some investors salivate, it just wasn't practical for Pretium. In fact, the project isn't practical for any gold company unless gold stays above $2,000/oz. Unless a company or two parties is willing to take on a significant risk by laying out $4 billion in capital upfront with the hope of payback by 2029, I don't see how Snowfield ever gets built.

These are two major risks, especially when companies like Newmont have stated that they have no issue with maintaining gold production over the next decade, and they're more concerned with returning value to shareholders than forking over huge amounts of capex. In fact, if a gold company was going to make a big move and build a large-scale gold project, Vista Gold's Mt. Todd Project in Australia makes far more sense with upfront capital requirements of less than $800 million, but still a robust production profile of ~400,000 ounces per year.

(Source: Vista Gold Company Presentation, S&P Global Market Intelligence)

 

Hopefully, the above analysis has helped to clear up exactly what was wrong with Snowfield and why sitting on this project made little sense for Pretium. Besides, suppose this analysis is incorrect, and a large gold or copper company decides to make the bold move to partner with Seabridge to build it out. In that case, Pretium still benefits from a 1.5% net-smelter-royalty on the project. Therefore, all is not lost by selling the project. Meanwhile, Pretium gets to place the $100 million upfront cash payment from Snowfield against its credit facility and reduce its long-term debt by $100 million to closer to $300 million. This not only de-risks Pretium as it is finally putting a significant debt in its long-term debt, but it also improves Pretium's leverage significantly with estimated cash and short-term investments of $235 million in Q4 2020 and debt of just over $300 million. Assuming similar free-cash-flow generation going forward (trailing-twelve-month free cash flow: $241 million), Pretium should be able to move to a net cash position by the end of Q3 2021.

(Source: Author's Chart)

The initial reaction by most is likely to shake one's head at the recent deal by Pretium, but I think it was brilliant for the company. Not only does the company retain long-term upside in Snowfield, but it helps to improve its balance sheet, lower interest expense, and helps Pretium move to a net cash position sooner. This gives Pretium the flexibility to start exploring M&A by FY2022 to move away from complete reliance on its Brucejack Mine, which has proven to be an unpredictable asset at times when it comes to deviations in quarterly performance. Besides, as CEO Jacques Perron notes, Snowfield was not being factored in Pretium's valuation while it was in its portfolio, with Pretium trading at just 9.4x FY2021 annual EPS estimates ($1.24).

(Source: YCharts.com, Author's Chart)

 

While I was previously lukewarm on Pretium Resources, I continue to see a successful turnaround in place, and I think the recent move to divest Snowfield emboldens the turnaround thesis. This is because the heavy debt load that has weighed on Pretium's valuation is finally being paid down at a rapid pace, and Brucejack is finally performing solidly. Besides, the new CEO Jacques Perron has proven he can under-promise and over-deliver even in challenging circumstances like 2020, contrary to what we saw under previous management, with guidance constantly missed by a mile. Given that Pretium is trading at less than 9.5x FY2021 annual EPS estimates, I continue to see value at current levels. Therefore, I stand by my belief that Pretium is a Speculative Buy below $11.00, with a conservative fair value of $13.64, assuming the company can meet its FY2021 earnings estimates. I have chosen $11.00 as this bakes in enough of a margin safety between the buy-zone and the conservative target price.

Disclosure: I am/we are long GLD. 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.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.https://seekingalpha.com/article/4393700-pretium-resources-why-sold-30-million-ounces-of-gold-for-3_00-oz