Pretium Resources (NYSE:PVG) is a mining exploration company with assets in British Columbia, Canada. It consists of a high-grade resource, the Brucejack Project, in advanced-stage exploration; and a lower-grade resource, the Snowfield Project, uneconomic at current gold prices. The CEO of PVG, Bob Quartermain, likes to call it "our long-term call option".
Pretium Resources came to my attention when its Qualified Person, Graham Farquharson, resigned from the project, citing "no valid gold". His reasoning was that extreme grade gold were standalone nuggets and needed to be excluded from the resource estimate. As someone with a statistics background, it quickly became clear to me that Mr. Farquharson did not understand what an outlier is- the outliers were everywhere! Later on, the Bulk Sample results came out and confirmed what many knew- that not only were the extreme grade samples not outliers, but that the resource was being underestimated by applied a top cut on them.
The Brucejack Project area had previously been permitted in the 1980s. Brucejack Lake has no fish and is expected to find itself the destination for much of the tailings. British Columbia has a mining-friendly provincial government and permitting is not expected to be an issue.
The Capital Expenditure required to build the mine is expected to be $700M. At current prices, this is expected to lead to close to 100% dilution. I believe this fear of dilution is what is keeping the price undervalued and why it represents an opportunity.
Hide and Seek
As part of B.C mining regulation, exploration companies can process up to 1000 tonnes of ore per calendar year. In a November 2013 presentation, PVG Chief Exploration Officer, Joe Ovsenek, has suggested that the company's 2013 ore could contain up to 11,000 to 18,000 ounces of gold. He went further, suggesting that an option to fund a big portion of the capital expenditure of $700M would be to first mine the highest grade areas, producing as much as $200M to $300M of gold.
In recent presentations, CEO Quartermain has both stated that the ounces from the 1000 tonnes are expected by the end of February.
Next Steps for De-Risking
1. The ounces are expected in February. If PVG can pull out at least 11,000 ounces from the bags, it should prove that the higher grade areas can provide some help to finance the capital expenditure.
2. Feasibility Study is expected by June. The study will examine various options for step-up operations.
3. Price of Gold above $1,350 in Q4. PVG plans to finance using capital markets in Q4 2014. The prior feasibility study is based on $1,350 gold.
PVG has a world-class deposit in a safe jurisdiction. I believe that it is undervalued going forward and the key will be to finance the mine without creating too much dilution.