Pretium raises Brucejack’s capital costs, accelerates commissioning

Pretium Resources (TSX: PVG; NYSE: PVG) has upped the estimate of the amount of money it will need to finish building its Brucejack mine in northwestern British Columbia.

Capital costs — including working capital and contingencies — are expected to run to US$811.1 million — a 16% increase from the US$696.8 million the company estimated a year ago.

The new forecast includes US$68.8 million of working capital for the first three months of production, but doesn’t take into account any revenue generated during this time.

The good news is that the company has enough cash to finish construction. Commercial production is on target for 2017, and Pretium has decided to accelerate commissioning. Dry commissioning is scheduled to start in March and wet commissioning in April.

Construction of the high-grade underground mine, 65 km north of Stewart, started in September 2015.

David Haughton of CIBC World Markets says the 8.7 million oz. gold in reserves at Brucejack’s Valley of the Kings deposit (15.6 million tonnes grading 16.1 grams gold per tonne) could be on the radar of a number of potential acquirers.

A view of the mill building and camp in February at Pretium Resources’ Brucejack gold project under construction in northwest British Columbia. Credit: Pretium Resources.

In a research analysis called “The Pretium appeal: What-if,” the mining analyst names six companies that he says could be interested in acquiring Pretium, most likely after Brucejack achieves sustained production, or some time in 2018.

The names on his list are: Agnico Eagle Mines (TSX: AEM; NYSE: AEM), Barrick Gold (TSX: ABX; NYSE: ABX), Goldcorp (TSX: G; NYSE: GG), Kinross Gold (TSX: K; NYSE: KGC), Newmont Mining (NYSE: NEM) and Yamana Gold (TSX: YRI; NYSE: AUY).

“Each acquirer has the size and capacity to acquire Pretium, and both the ability and expertise to operate the Brucejack mine,” Haughton writes in his Feb. 14 research note.

“All six acquirers could benefit from adding long-life production with lower cash costs. An all-stock transaction may be value accretive for all six potential acquirers up to a 40% takeover premium at spot, and in the absence of cost savings or tax efficiencies.”

“Pretium offers high grade [16 grams per tonne gold], low cost [all-in sustaining costs of less than US$500 per oz.] and long life [greater than 18 years and 8.7 million oz. reserves], with meaningful [0.4 million oz. per year] underground mining potential in the safe jurisdiction of Canada,” ranked 15 of 209 jurisdictions in the 2015 Fraser Institute study, he says.

Assuming a 30% takeover premium in an all-stock acquisition, Pretium “could represent a meaningful percentage of each acquirer,” he notes, calculating the potential percentages as 11% of Barrick; 12%, Newmont; 16%, Goldcorp; 19%, Agnico Eagle; 34%, Kinross; and 45%, Yamana.

Haughton estimates that a Pretium acquisition would lift Agnico Eagle’s production 25% during 2018E to 2027E at 5% lower cash costs; Barrick, 10–15% during 2018E to 2025E at slightly lower cash costs (2–5%); Goldcorp, 15–20% during 2018E to 2025E at slightly lower (less than 5%) cash costs; Kinross, 15–25% during 2018E to 2022E, then over 35% beyond 2023E at 5–10% lower cash costs; Newmont, 5–10% during 2018E to 2024E, and improving cash costs 3–6%; and Yamana, 25–35% during 2018E to 2024E, while slightly improving cash costs 1–3%.

Digging more deeply into the possible scenarios, however, Haughton reasons that an all-share acquisition “appears to be a stretch” for Yamana and Kinross, while “corporate strategy may limit the interest of Agnico Eagle and Newmont.”

Barrick, meanwhile, “could easily afford to acquire Pretium from a valuation perspective, but the contributions would improve production just 5–10% during 2018E to 2025E, so more initiatives are required to materially enhance the production profile.”

Goldcorp, he says, “could benefit the most from acquiring Pretium, in terms of meaningful improvements to the production mix.”

Looking at other scenarios, a combination of Detour Gold (TSX: DGC) and Pretium “could create an interesting, low geopolitical-risk Canadian miner,” Haughton muses, but “different mining styles and few operational or cash flow synergies suggests a low probability for the merger.”

Having said that, if Detour and Pretium were to combine in a merger of equals, the combined entity “may become an attractive stock for investors and also a compelling target for large acquirers, such as Barrick,” he adds.

“Pretium could add 0.3 to 0.4 million oz. per year to the Detour production profile and lower all-in-sustaining costs by US$150 per oz. during 2018–2021, ahead of the assumed higher-grade phase of Detour,” subject to revision with the likely delayed access to West Detour, he says.

As for potential acquirers overseas, Haughton rules out Gold Fields, Randgold Resources, Newcrest and AngloGold Ashanti.

Inside the mill at Pretium Resources’ Brucejack gold project. Credit: Pretium Resources.

Gold Fields “does not appear large enough, Randgold has a 20% internal rate of return using US$1,000 per oz. gold, and both Newcrest and AngloGold Ashanti may not have the traction with investors for an all-stock acquisition in Canada,” he argues.

Haughton points out that Pretium will transition from a gold mine developer to a gold producer over the next six months, although he doesn’t expect full production until 2020. But in the meantime, he forecasts Pretium will become “free cash flow positive after the mine start-up, with a growing cash accumulation on the balance sheet thereafter.

“First gold production is possible in early first-half 2017, with a ramp-up to commercial production by third-quarter 2017,” he says. “The stock could appreciate as the risk associated with project construction lowers with ramp-up of production, and as the mine confirms the potential of the orebody.”

The mining analyst puts Pretium’s enterprise value at US$2.4 billion, made up of a US$2-billion market capitalization and US$0.2 billion of net debt.