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Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
Your research is part of your investment process:
Pretium Resources Inc (NYSE:PVG)
We will take a look at a junior miner, Pretium Resources Inc (NYSE:PVG). I know most are not interested in mining, especially a junior resource company, but this example will illustrate a point of what do you need to know. What is important? See a review of the company here: http://www.pretivm.com/investors/presentations/default.aspx
Pretium Resources Inc (NYSE:PVG) is an explorer/developer with a big deposit (7 million ozs. of gold (Au) in Western Canada.
WHY INVEST (from company web-site)
High-grade gold, located in Canada
Pretivm is aggressively advancing the development opportunity at Brucejack, its advanced-stage, high-grade gold exploration project in northern British Columbia. Probable mineral reserves in Brucejack’s Valley of the Kings comprise 6.6 million ounces of gold (15.1 million tonnes grading 13.6 g/t gold). The Valley of the Kings remains open to the east and west along strike and at depth.
A feasibility study for a 2,700 tonnes per day underground mine at Brucejack was completed in June. The mine is expected to produce an average of 426,000 ounces of gold annually for the first ten years and an average of 321,500 ounces of gold annually over a 22-year mine life. Engineering and permitting activities for the Brucejack Project continue to advance.
A 10,000-tonne bulk sample is currently underway at the Valley of the Kings, including a 15,000-meter underground drill program.
Pretium has a 35 million ozs. Snowfield deposit, and now a Feasibility Study at its smaller and nearby Brucejack project. Here the Valley of Kings and West zones show a total of 7.3 ozs of Proven and Probable Reserves and the potential of being built even at sub-$1300 gold prices.
The Study’s results (see figures below) were released June 11, and Mr. Market was not impressed—closing at $7.94 on June 14, 2013.
|Valley of Kings Feasibility||Alternative||Base Case|
|Price Gold (AU)/Silver (AG)||$800/$15||$1,350/$20|
|Produ/Yr. 1st 10||465K Au||300K Ag|
|Life of Mine||322K Au||300G ag|
|NPV pre-tax||$1.41 bil||$5.28 bil.|
|Payback pre-tax||4.7 yrs||2.1 yrs.|
The deposit’s economics seem good with $664 mil. Capex for a mine and 2,700 tones per day mill on site producing 426 K ozs. of gold per year for first ten years and 322K over the life of the mine (LOM). Net of 300K ozs. per year of silver credits (deduct the price of silver co-produced from cost of producing gold), LOM cash cost is seen at $458 per oz and $508 per oz All-in sustaining costs.
Ok, if you studied this sector by reading all the annual reports of the majors (AEM, GG, ABX, AUY, etc) and periodicals on mining you would have sense of the quality of the deposit and grade. This seems like a good deposit with its large size, low cash costs, and high-grade per ton milled. So why a poor response by the stock market? What am I (You) missing here? The key is to know WHAT questions to ask. Study of an industry and the companies within that industry will lead you to develop a context to frame questions.
Let’s step back a minute and use common sense. A company/asset/deposit is worth all of its future cash flow discounted back to the present value. But here the company is not yet producing gold so it has no cash flows only the cash drain of development; it has a huge deposit with (on the surface) great economics. This big deposit has to be developed and produced so our focus has to be on the cost of that capex along with all other costs to bring the deposit into production. In other words, what is the cost to bring that deposit into production discounted back to today?
What don’t we know? What are we missing? What do we need to know to analyze such a company?
You would need to know how to place the company’s drilling results into context. The deposit’s first problem is the ore’s nature. It is “nuggety” with the ounces distributed unevenly. Drilling only sees a 2 inch to 4 inch sample width every 10’ to 25’. Mines have been built and failed because the grade between the frill holes was much lower than the grade estimated from the drill samples..
From the Feb-12’s Preliminary Economic Analysis: “V of K exhibits extremely skewed grade… where high grades and the majority of the metal are located in less than 5% of the data. So the feasibility Study could have been done on drill data that isn’t representative of the whole deposit. To add more information, PVG is now taking a 10,000 tonne bulk sample with results due by end-13 to increase confidence in the drill results. (Mr. Market is probably smart to wait/be skeptical)
Second is permitting. Go to Google Earth and view the area from the sky or view some of the pictures in the presentation (link above), the deposit is in or near a glacier which will pose construction challenges and environmental disposal difficulties. Finally, what will be the true financing cost for the near $700 million capex? Do shares have to be sold at a sub $8 or $7 price? How much dilution will an investor suffer? Perhaps share count would double from 100 to 200 million shares.
The point is that Mr. Market is right to take a “wait and see” attitude. An investor has to take a wholistic view of total costs to get the deposit to market. Most of the analyst reports neglect to mention ALL of the potential costs, the analysts instead focus on the “story” of a huge deposit. For example, from one newsletter:
In the two and a half years since the sale, Pretivm has defined a spectacular high-grade resource. “In 2009 we had 400,000 ounces of gold and 16 million ounces of silver at Brucejack. The Valley of the Kings area at that time just had a half a dozen drill holes. Between 2010 and 2012, we drilled 174,000 meters and now have over 8.5 million ounces at 16.4 grams per tonne gold open at depth and in all directions.”
Quartermain with high grade Valley of the Kings core. Photo: Wayne Leidenfrost
In this day and age, gold projects with the richness and size of Brucejack and the jurisdictional advantage of being in Canada and close to current and former mines like Eskay Creek are rare. Pretivm is in a league of its own among junior companies.
Analysts at BMO seem to agree, commenting that Brucejack is “the right size for the current market environment.” Its underground mine will be finished in 2016; Quartermain says it is projected to cost approximately 600 million dollars and yield over 400,000 ounces of gold per year.
Pretivm clearly beats out the other large-scale gold projects in Canada — almost all of which are low grade, requiring Capex in the multiple billions, which isnt realistic in today’s market environment.
Presently, ten research firms are covering the company with an average target price of greater than $20 per share. Shares in PVG last traded at $6.01.
Perhaps if you believe gold and silver prices will be much higher and you realize the risks in this company like much higher costs than expected, many years unti production–if ever, then you might view PVG as a way-out-of-the-money, long-dated call option on much higher gold and silver prices. You might be willing to lose 50% to 100% of your investment to make 5xs to 10xs your money. Your analysis is part of your portfolio management/risk analysis.
You could set up a table to test your assumptions based on much higher costs and high gold prices.
For me, I feel the risks/rewards are better elsewhere, so I pass.
Obviously, if you don’t understand all the costs, obstacles and risks to this large deposit, then you will over-value the company or be surprised that the stock languishes where it is today despite the “world-class” deposit.
The quality of the asset is critical but the skill of management to raise capital and develop the project is also important. The CEO has had success before: http://ceo.ca/pvg/. However, I shy away the problem of estimating what will be the true all-in costs of mining this project.
Perhaps readers have a few examples of their own that they would like to share?