Recently Premier Gold (OTCPK:PIRGF) issued a preliminary economic assessment for its Hardrock project in Ontario, Canada. This economic assessment put some much needed financial metrics alongside the Hardrock project, and based on these numbers we believe that Premier Gold Mines offers investors a 25% upside in the current market based on the valuation investors are attaching to similar projects.
In this article, we will give a brief overview of the company (which will be important to back the assertion that our valuation is conservative), and then get into a valuation of the company based on its Hardrock project. We will do this by comparing this project to two other similar projects in the same region, and then show that using a similar valuation to these two other projects, the company should be trading closer to $2.50 per share (for US based shares) or an enterprise valuation closer to 280 million US dollars - a 25% premium to the current share price.
But before we go into more details about these reasons to be bullish about the company, let us give investors an overview of the company.
Brief Company Overview
Premier Gold Mines is an exploration development company that is focused on development in the United States and Canada. The company is led by President and CEO, Ewan Downie, who was the founder of Wolfden Resources (which was acquired in 2006 by Zinifex) and has over 20 years of exploration experience even though he is only in his mid-forties.
Premier Gold Mines has three core projects, which are all located in North America, with two in Ontario, Canada and one in the United States (Nevada). We'll briefly go over all three projects and then dig much deeper into the Hardrock project to develop a valuation for the company.
The Cove Project (100% Premier Owned but subject to a 51% Newmont Gold back-in)
In June of 2012, Premier entered into an agreement to acquire the Cove Gold Project in Nevada from Victoria Gold Corp. The Cove Project is located within the Eureka-Battle Mountain Trend that is host to a number of multi-million ounce producing and past-producing mines. It was primarily mined by open pit between 1986 and 2001, and produced around 2.6 million ounces of gold and 100 million ounces of silver during operations. Premier Mines acquired the project because it believes that the limited surface drilling offers the potential for additional mineralization.
What's very interesting about this deposit is that it is located in very close proximity to Newmont Gold's (NEM) producing Phoenix mine, and has a history of past production. Additionally, it also has very good infrastructure as it is located close to paved roads and power lines.
Finally, as investors take a look at a geological longitudinal view of the project, there are some very interesting intercepts and a lot of untested areas. For example, the Helen zone has a few high quality intercepts such as hole AX-27 (84.4 meters of 6.52 grams of gold), AX-35 (10.8 meters and 19.6 grams of gold), and AX-36 (10.5 meters of 40.47 grams of gold).
Obviously, there is a lot more drilling on the Cove project before it really becomes significant, but the potential is definitely there. It's also good to remember that some of the best places to look for gold are places where gold has been found before - and the Cove pit did produce a good amount of gold and silver in its history.
The Rahill-Bonanza Project (49% Premier Owned, 51% Goldcorp Owned)
The Rahill-Bonanza project is located in Red Lake, Ontario adjacent to Goldcorp's (GG) famous Red Lake mine, a mine that has been and is still one of the most productive mines in the world.
The map above is a little cluttered, but as investors can see, the Rahill-Bonanza property is located in the middle of the mine trend in between Goldcorp's Red Lake gold mines and its new Cochenour and Bruce Channel gold zones. In fact, that blue line represents a high-speed tram that Goldcorp is constructing to connect its Red Lake Gold mines complex to its Bruce Channel and Cochenour complexes, and can provide an excellent infrastructure opportunity to explore the Rahill-Bonanza property.
The Bonanza deposit has the following mineral resources:
The company plans to test and assay the drill results of a new structure that it has found immediately south of the tram line, and plans to release these results in Q1FY14. Additionally, the company is testing the primary target on the property (the "Wilmar Zone") and plans to release these initial results in Q1FY14.
So as investors can see, there is quite a bit going on in this property and we can expect news released in Q1FY14 to give us a better understanding of the potential of this property. Nevertheless, it shouldn't be ignored that this property has a very strategic location, Goldcorp has a 51% owner, and in a region of historic gold production.
The Trans-Canada Project (100% Premier Owned)
The Trans-Canada property is located in Geraldton, Ontario and is comprised of four different deposits as shown in the picture below.
Hardrock is the largest of the four deposits, with permitting and deposit development in progress. Additionally, open-pit drilling will commence in Q1FY14 with the goal to delineate and increase the resource and confirm the potential for a high-grade starter open-pit, which would be used to advance future underground operations at the deposit.
The current mineral resource for the deposit is around 3.2 million gold ounces indicated resources and 3.78 million gold ounces inferred, and includes all drilling through August 2013.
Additionally, there is an excellent table in the company's presentation that compares the Hardrock deposit with other Canadian deposits as shown below.
What's very interesting here is that the Hardrock deposit compares exceptionally well to other regional deposits, and if the 1.46 g/t grades can be maintained, it would rank as one of the higher open-pit grades in the region. Of course, it is still way too early in the lifecycle of this project to bank on this, but it is definitely worth noting.
Hardrock and Brookbank Preliminary Economic Assessments (Trans-Canada Property)
Let's now take a look at the Preliminary Economic Assessments that were issued by the company on January 28th, 2014 that we believe make it a very attractive investment. Investors should remember that these are only related to the Trans-Canada property and do not include anything in regards to the company's other two properties.
Hardrock Project Economics
Brookbank Project Economics
Additionally, the Hardrock project has pre-production costs of 410.6 million Canadian dollars with life-of-mine annual production ("LOM") of 202,700 ounces of gold over fifteen years (a little over 3 million ounces of gold). The Brookbank project has pre-production costs of 106 million Canadian dollars with life-of-mine annual production ("LOM") of 48,700 ounces of gold over seven years (around 350,000 ounces of gold).
As investors can see, both projects offer decent after-tax IRRs of 19% (Hardrock) and 24.7% (Brookbank) at a gold price of $1250 per ounce - which is actually very good (we like to see a minimum of 15% at conservative gold prices). Neither project is extremely expensive in terms of initial capital costs - which is very important in the current market as projects requiring large capital expenditures are currently out of vogue. Additionally, Brookbank could potentially be funded out of existing capital with only a little additional cash, which may give the company the option of producing at Brookbank to bring in the cash to develop Hardrock and its other assets.
Comparing Premier Gold to Two Other Ontario Gold Projects
So now let's get into the heart of this analysis which is how much the company is worth and why we like and own shares of Premier Gold Mines. To do this we will do a comparison of Premier Gold Mines Hardrock project with two other Ontario gold projects that we believe have some similar features. Of course, whenever comparing geological projects there are no exact comparisons - every project has differences. But the economics, production, location, and political/tax jurisdiction of these projects are similar so we believe it is a fair comparison to arrive at valuations for Premier Gold Mines.
The first is Rubicon Minerals' (RBY) Phoenix Gold project, which is located in the Red Lake gold district (near Goldcorp's flagship Red Lake mine). We profiled Rubicon Minerals a few months ago, so investors that want our opinion on the company can read that analysis.
The second project, which we will use as a comparison, is the Rainy River Resources Gold Project, which is also in Ontario, Canada. The interesting thing about this comparison is that this project was owned by Rainy River Resources and was acquired in May of 2013 by New Gold (NGD), which gives us a very concrete valuation of what the market is willing to pay for a project, and is the basis of our Market Capitalization and Enterprise Valuation for the Rainy River Resources Gold Project.
At the time of the acquisition, gold was trading at just below $1400 per ounce, so we based our comparative analysis on this price of gold and the valuations of each of the projects at this price. For the basis of the Rainy River Project estimates we used Rainy River's economic analysis and not the more recently issued New Gold analysis, since the Rainy River analysis was done BEFORE acquisition and thus was the project's estimated economics when New Gold bought out the project in May of 2013 for 310 million Canadian dollars.
Note on the Comparison Table: The fields in yellow were estimated values since there was no pre-feasibility data for this particular gold price. Estimation for the Premier Gold Hardrock project was done by using a simple linear methodology where the difference between $1250 and $1450 ($200) was used and then added to the $1250 input values to arrive at the estimated values at a $1385 price (.675 or $135 / $200 - the difference between $1250 and $1385). The $1250 inputs were then multiplied by this difference to come up with an approximate ($1250 NPV input * 1.675). The same was done for the after-tax IRR using the 19.0 and 27.7 range.
Finally, the Rainy River Project valuation in the feasibility study used a $1400 gold price, so for these valuations we simply took those economic inputs and subtracted 1% to come up with the approximate inputs at a $1385 gold price.
As investors can see in the table above, these three Ontario gold projects have similar economic characteristics at a $1385 gold price. Rubicon's Phoenix gold project offers a higher IRR (27% versus 24.9%) than the Hardrock project and has a lower initial capital cost ($213 million versus $391 million), but it offers a lower after-tax NPV ($505 million versus $572 million for Hardrock) and produces less gold over the life of the project (2.1 million ounces versus 3.0 million ounces for Hardrock).
Compared to New Gold's Rainy River project (as of the Rainy River Resources original feasibility study), Hardrock offers a lower after-tax NPV ($572 million versus $878 million) and lower total gold-equivalent life-of-project production (3.04 million ounces versus 3.76 million ounces), but it offers a higher project IRR (24.9% versus 23.5%) and a much lower initial capital investment ($391 million versus $679 million). The capital cost comparison is extremely important because in the current market, capital for mining companies is very hard to come by and thus lower capital projects are receiving much more interest.
Valuing Premier Gold Based On Its Hardrock Project
Now that we have two similar economic projects to compare Premier's Hardrock project with we can come up with an approximate valuation for the company.
Based on simply matching the valuations of Rubicon Minerals and New Gold's Rainy River Resource acquisition, Premier Gold is between 30 and 33% undervalued, and the company should trade for anywhere between $2.53 and $2.59 per share (note: we are using the PIRGF ticker).
This is a significant undervaluation, and though Premier Gold has run-up over the last month (as have the other gold explorers and developers), we still think it has quite a bit to go to simply catch-up to the valuation the market is attaching to Rubicon Minerals and the price New Gold paid for a similar project acquisition.
Additionally, we went into details earlier about the other two major assets that Premier Gold holds (the Rahill-Bonanza and Cove projects); this valuation attaches ZERO value to either of these projects (or the small Brookbank project). Investors should remember that these other unvalued projects have participation of some of the largest gold companies (Newmont Mining and Goldcorp) and thus we feel it is inappropriate that they should hold zero value - which may make our estimated 30% undervaluation a bit conservative.
Conclusion for Investors
Both Rubicon Minerals' Phoenix gold project and the New Gold's Rainy River project acquisition have strong project economic similarities to Premier's Hardrock project, and based on the price that the market values these projects, Premier Gold has quite a bit of upside to simply match the valuations of these other two projects.
Thus we think it is quite fair to put the current market value of Premier Gold Mines shares at a $2.50 US Dollar valuation, based on comparisons with these two other similar projects. In fact, we believe this valuation is actually a bit conservative since it attaches zero value to Premier Gold's two other major projects. This is obviously not the case and the fact that two major miners (Goldcorp and Newmont Mining) have interests in these two projects shows there is potential in both of them.
At the company's current stock price (PIRGF shares trade at $1.95 as of 2/8/14), this means that Premier Gold Mines offers investors the potential for 25% returns simply to reach what we believe is a fair, conservative valuation for the company compared to what investors are paying or have paid for similar projects.
Finally, in case we haven't made the case strong enough for an investment in Premier Gold Mines, this company is one of the few miners that has seen significant insider buying over the last few months, and CEO Ewan Downie himself owns over 3 million shares. It is always good to see rising insider ownership, especially in gold explorers and developers, and this buying may be another sign that insiders feel that shares are undervalued.
Even without the fundamentals, which we believe are strong, the insider buying itself may be a sufficient reason to own shares in Premier Gold.