Pretivm Resources – A Gold(en) Speculation

Pretivm Resources Inc.
Symbol: PVG (NYSE) MCap: $863.79 million
Industry: Basic Materials – Gold Mining Long-term debt: $23.25 million
Project: Brucejack – Valley of Kings SO: 243,806,016 (fully diluted basis)
Recommendation: Strong Buy Price: $5.49 (as of 16-March-2016)

Overview

In January 2010, Robert Quartermain, the President and CEO of Silver Standard Resources Inc. abruptly left the company without citing any reason. He had been with the company for 25 years, growing Silver Standard from a small silver exploration company to a major silver producer.

In October 2010, he incorporated a new company – Pretivm Resources Inc. Pretivm purchased two projects from Silver Standard – Brucejack and Snowfield in British Columbia, Canada with intent to explore and develop those properties. The Brucejack project proved to be a world-class deposit, being both large and high-grade. This became the company’s cornerstone project.

About Brucejack

The Brucejack project consists of the Valley of Kings and West Zone. The company has an 18-year mine plan on this project, targeting the higher grade Valley of Kings initially and the lower grade West Zone during the second half of the mine plan. The following table shows the Valley of Kings deposit as per the 2014 feasibility study.

Category Tonnes (mil) Gold (g/t) Silver (g/t) Contained (mil ounces)
Gold Silver
Proven & Probable Reserves 13.6 15.7 11 6.9 4.6
Measured & Indicated Resources 15.3 17.6 14.3 8.7 7.0
Inferred Resources 5.9 25.6 20.6 4.9 3.9

The grades shown in the feasibility study are understated. The company has assayed several samples containing grades well north of 200g/tonne. During an interview with an analyst, the CEO whipped out one particular rock grading 2 kg gold in a 17 kg rock. There is scope for the grades to significantly go up when the deposit is put into production.

Mine Development & Economics

The company is currently fully cashed up to build the mine. Construction is in progress and the first gold pour is targeted in Q3 2017.

Low Case Base Case High Case
Gold Price (US$/ounce) $800 $1,100 $1,400
Silver Price (US$/ounce) $15.00 $17.00 $21.00
Net Cash Flow (US$) $2.02 billion (pre-tax)

$1.34 billion (post-tax)

$4.16 billion (pre-tax)

$2.72 billion (post-tax)

$6.35 billion (pre-tax)

$4.13 billion (post-tax)

Net Present Value

(5.0% discount) (US$)

$985 million (pre-tax)

$620 million (post-tax)

$2.25 billion (pre-tax)

$1.45 billion (post-tax)

$3.54 billion (pre-tax)

$2.28 billion (post-tax)

Internal Rate of Return 20.3% (pre-tax)

16.5% (post-tax)

34.7% (pre-tax)

28.5% (post-tax)

47% (pre-tax)

38.7% (post-tax)

Payback (from start of production period) 4.4 years (pre-tax)

4.5 years (post-tax)

2.7 years (pre-tax)

2.8 years (post-tax)

2.0 years (pre-tax)

2.1 years (post-tax)

Exchange Rate (US$:C$) 0.92 0.92 0.92

Share Ownership

Until the recent round of financing, the CEO personally owned 2% of the company. The interests of management are aligned with those of the shareholders. The top shareholders are Silver Standard, Zijin Mining, Black Rock Asset Management, Van Eck Associates and Liberty Metals & Mining. The company maintains good relations with the analyst community and is covered by several equity research departments in the resource space.

Qualitative Factors

  • The gold mining industry has endured the longest bear market in history in terms of duration. Pretivm has managed to raise capital and attract investors even in this market, which is an amazing feat for any management. The company is in good hands
  • The company has cut $50 million from their initial CapEx estimate for mine construction. In an industry known for its cost overruns, this again reinforces the view that the company is well managed and will over-deliver on the NPV estimates
  • Mines deplete and ounces taken out of the ground need to be replaced. Pretivm has a world-class deposit in mining friendly Canada, with attractively valued shares, making it a takeover target for a major gold producer
  • First Nations, the indigenous people who can be unfriendly to mining interests in their area, are on-board with Pretivm’s operations. They should have no hassles on the labour front

Recommendation

With current gold prices hovering around $1200-$1300 per ounce, having staged a sharp rebound this year and expected to go higher, the company is trading at an attractive discount even to its base case post-tax NPV of $1.45 billion. With mine construction already in progress, the market should narrow the discount to NPV as they make progress. Also, the company is continuing its exploration activities and has already announced several sets of spectacular drill results, further expanding the size of the deposit.

As shareholders, we benefit on three counts – (1) higher gold and silver prices increasing NPV; (2) more ounces added to the deposit increasing life of mine and production; (3) narrowing of discount to NPV as construction progresses.

Target price: $9 as per base case, with blue-sky potential based on exploration upside and gold prices. The stock could quite easily triple or quadruple over the next five years.

For further information, please visit http://www.pretivm.com/home/default.aspx

Disclosure: I am a shareholder since July 2015.

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