Dundee: Premier ‘living up to its name’

When it comes to development-stage assets, those offering a combination of higher-grade, simple mining and low-operating costs, and favourable jurisdictions are typically the ones that are acquired by larger producers, analysts at Dundee Capital Markets say. 

Premier Gold Mines’ (TSX: PG; US-OTC: PIRGF) Hardrock deposit enjoys all three of those attributes, Dundee analyst Joseph Fazzini writes in a lengthy report initiating coverage of the company with a $4.25-per-share target price — a hefty premium over the company’s current share price of $2.61 and its 52-week trading range of $1.28 to $3.52.

Not only does Hardrock have open-pit resources averaging 1.48 grams gold per tonne for 4.47 million contained oz. gold with the potential for low-cost production, Fazzini argues, but “the fact that it’s in one of the best mining jurisdictions in the world — Ontario — further enforces the merits of this project and underpins our buy rating … and likely puts it on the shopping list of most intermediate producers.”

He adds that “building Hardrock is not a back-up plan. We consider this team fully capable of taking the project into production. The past-producing nature of the operation also bodes well, as Premier Gold works to secure final permits in 2015.”

Premier is working on a feasibility study for Hardrock that is expected to be completed in the first half of 2015, and in the meantime is continuing with infill and step-out drilling.

Fazzini forecasts that permitting and infill drilling at Hardrock will continue this year and next year, with construction following in 2016 and 2017, and initial production in 2018. Hardrock is 5 km south of the town Geraldton and 250 km northeast of Thunder Bay. The deposit is next to the Trans-Canada Highway and has access to power, water and skilled labour. Between 1938 and 1970, the deposit fed four producing mines and turned out about 2.1 million oz. gold.

Premier updated the resource at Hardrock in July based on more drilling, steeper pit walls and a deeper pit. At a cut-off grade of 0.5 gram gold per tonne, indicated resources in the open-pit part of the deposit now stand at 83.87 million tonnes grading 1.47 grams gold for 3.97 million contained oz. gold and inferred resources add 10.23 million tonnes at 1.53 grams gold for 501,000 oz. gold.

The underground portion of the deposit, at a cut-off grade of 3 grams gold per tonne, sits at 5.17 million tonnes at 5.40 grams gold for 898,000 contained oz. in the indicated category and 12.92 million tonnes at 5.40 grams gold for 2.24 million contained oz. gold in the inferred category.

The global resource adds up to 112.2 million tonnes grading 2.11 grams gold for 7.6 million oz. gold.

“With few deposits hosting resources of this size, the project already stands out as unique,” Fazzini says. “While some may argue that the project lacks the scale of comparable projects (Canadian Malartic’s 10 million oz. and Detour Lake’s greater than 18 million oz.), the resource grade at Hardrock averages 1.5 grams gold per tonne, or 50% higher than Canadian Malartic and Detour Lake, which are both about 1-gram-gold-per-tonne deposits.” Fazzini adds that those figures don’t factor in any of Hardrock’s underground resource.

The analyst also reasons that Hardrock’s size is just right for it to become an acquisition target. He argues that larger gold producers often rule out acquiring “mega projects” because of the hefty capital they require to build and the commissioning risks they entail, and at the same time, aren’t interested in smaller projects because they won’t have much of an impact.

The key for acquirers is to find projects that fall into the 100,000 to 500,000 oz. “sweet spot,” Fazzini says, adding that he believes Hardrock would produce 286,000 oz. a year over its estimated 15-year mine life, and as a result offers “a meaningful level of production” that would likely be “a great addition to a larger production portfolio.”

According to a preliminary economic assessment released in October 2013 and based on a US$1,250 per oz. gold price, Hardrock would offer a 19% after-tax internal rate of return. Life-of-mine cash costs were estimated at US$763 per oz., and pre-production capital costs were estimated at $410.6 million, including an $83-million contingency. Fazzini estimates the total initial capex required to build Hardrock will be closer to $500 million.

Adding to the attractiveness of the company is its 49%-owned Rahill–Bonanza joint venture with Goldcorp (TSX: G; NYSE: GG) in Ontario’s Red Lake gold district; its 100%-owned past-producing Cove–McCoy project in Nevada’s Eureka–Battle Mountain trend, 22 km south of Newmont Mining’s (TSX: NMC; NYSE: NEM) Phoenix mine; and the $50 million it held on its balance sheet as of June 30. And the Trans-Canada property, which hosts Hardrock, also contains a number of other deposits such as Brookbank, 77 km west.

Premier’s top shareholders are Van Eck Associates with 11.4%; Fidelity Management & Research with 8.4%; BlackRock Investment Management LLC with 2.5%; I.G. Investment Management Ltd. with 2.3% and president and CEO Ewan Downie with 2.3%.