- Pretium Resources released its Q1 results on Friday, reporting quarterly gold production of 83,000 ounces at all-in sustaining costs of $996/oz.
- While all-in sustaining costs continue to trend higher, the strong gold price is providing a bump to margins, allowing the company to generate $0.18 in earnings per share for Q2.
- The company is one of the few companies that has not withdrawn its FY-2020 guidance, as it has seen only negligible impact on its operations from COVID-19 to date.
- While further upside is possible as the stock remains reasonably valued compared to peers, I would view any rallies above the $10.25 level as an area to book some profits.
It's been a mixed start to the Q1 earnings season for the Gold Miners Index (GDX) as we've seen some companies like Agnico Eagle (AEM) significantly affected, and others barely affected at all. In a surprising turn of events, Pretium Resources (PVG) is one of the few companies maintaining its guidance, a definite trend change from prior years, as the company has seen minimal effects on its operations to date. While all-in sustaining costs continued to trend higher and came in at $996/oz last quarter, the robust gold (GLD) price and new leadership could be catalysts for a turnaround here finally, though we're still in the early stages. Given that Pretium is trading at a reasonable valuation at less than 12x free cash flow, further upside is possible towards the $10.00 area. However, given that Pretium remains a cost laggard with a complex mine on its hands, I would view any rallies above $10.25 as an area to book some profits.
Pretium Resources is one of the first names to release its Q1 earnings results, and the company reported gold production of 83,000 ounces in the quarter at all-in sustaining costs of $996/oz. Based on these Q1 results, the company is tracking just below its FY-2020 production guidance of 345,000 ounces, though the company made clear that it is sticking with FY-2020 guidance despite uncertainty surrounding COVID-19. From a cost standpoint, all-in sustaining costs were up 14% year-over-year, from $868/oz in Q1 2019 to $996/oz. However, these cost figures are sitting near the company's ultra-conservative guidance mid-point of $985/oz, so it's certainly possible the company could meet guidance if cash costs come in similarly through 2020. Let's take a closer look at the operations below:
As we can see from the table below, grades remain an issue at Brucejack, with the head grade in Q1 2019 coming in at 7.80 grams per tonne gold, well below the 8.70 grams per tonne gold head grade we saw in the same period last year. The one piece of good news, however, is that mill throughput has increased significantly at 3,793 tonnes per day in Q1. This is a massive improvement from the average production rate of 3,570 tonnes per day in FY-2019. Unfortunately, as noted above, all-in sustaining costs continue to trend higher, and guidance for FY-2020 was set at $985/oz, 11% above FY-2019 levels of $888/oz. Therefore, even if Pretium does manage to meet guidance, it will be producing gold at a cost figure that's above the industry average, despite having a mine that's higher-grade than 95% of mines producing worldwide. The silver lining, however, is that the gold price is bailing Pretium out and making the company's margins and earnings look much better than they would otherwise. Let's take a closer look below:
As we can see in the above chart I've built, we have all-in sustaining costs in red, which have clearly trended higher since Brucejack began production, and we have the gold price, displayed by yellow bars. While there has been minimal improvement in all-in sustaining costs in the nearly three years that Brucejack has been in production, the gold price continues to inch higher, with the metal having its best year in a decade in 2019. Therefore, while all-in sustaining costs are limping higher each quarter, and we've seen no progress in getting them down, the gold price is more than making up for this, allowing for material margin expansion. In Q1 alone, the company realized an average gold selling price of $1,605/oz, a better figure than the majority of companies that have released earnings to date, contributing to significant margins and free cash flow generation all thanks to the gold price. This has been an unexpected but welcome tailwind for Pretium, as the company would be floundering based on its sub-par operational performance in a gold bear market, or even a dull market for that matter.
It is worth noting that all-in sustaining costs in Q1 were slightly higher year-over-year due to a minor jump in sustaining capital expenditures, from $3.6 million to $5.7 million. Therefore, in the absence of this marginally higher sustaining capital, all-in sustaining costs were closer to $78.0 million for Q1 2020 and increased closer to 10% year-over-year vs. the 14% figure quoted earlier. Let's take a look at the company's growth metrics below:
As we can see from the chart above, Pretium has seen a rather disappointing trend in annual earnings per share [EPS] since FY-2018. If we look above, annual EPS grew only 2% last year vs. a 19% increase in the gold price, and annual EPS is on track to grow just 4% this year vs. the industry average projected annual EPS growth rate of over 20%. Based on this meager growth profile, Pretium has provided no leverage on the gold price as a miner should, and it's also lagging the majority of its peers in the earnings department. However, Pretium's good fortune has extended to its operations, as the company has not been subject to mandatory shutdowns like the rest of Canada, given that it's based remotely in British Columbia. Therefore, while many other miners are withdrawing guidance and seeing earnings estimates slashed by analysts, Pretium's annual EPS estimates have actually inched higher. The recent bump in earnings estimates was by 3 cents from $0.54 to $0.57, forecasting 4% growth rather than the non-existent growth expected as of January before gold moved sharply higher.
If we look ahead to FY-2021, however, analysts seem to be getting more bullish on the stock, possibly tied to the announcement of a new CEO in Jacques Perron, a more robust gold price, and the addition of two new directors with extensive mining experience. As we can see from the FY-2021 EPS estimates, they are currently sitting at $0.78, reflecting a robust double-digit growth rate next year, and a definite improvement in the company's earnings trend. It is far too early to be putting a ton of weight into these numbers, given that we have a global pandemic on our hands, as things could undoubtedly change drastically in 18 months, but this revision higher is a positive development for the time being.
Moving over to gross margins, we also see some improvement here, though once again, this is attributed to a strong gold price. As we can see above, Pretium's margins have improved nearly 1,000 basis points from Q4 2018 levels and finished Q1 at 33.8%. This was a slight drop-off from the Q4 gross margin figure of 35.1%, due to the increase in all-in sustaining costs sequentially. However, if Pretium can see costs come in below $980/oz in FY-2020 in line with guidance, the company should be able to maintain a 35% gross margin rate going forward, given that Pretium enjoyed gross margins of 33.8% last quarter with an average gold selling price of roughly $1,600/oz. Currently, the gold price is more than 5% higher at $1,690/oz. Assuming an average gold price of $1,650/oz or higher for FY-2020, the annual EPS estimates of $0.57 for this year are likely on the conservative side.
Pretium Resources had another satisfactory quarter. Investors can be comforted with the fact that the new CEO has extensive underground mining experience, and the gold price is making up for the mediocre operational performance. If we ever were going to see a turnaround in Pretium's stock and a potential bottom, a strong gold price and a shake-up in management might be the catalyst for it, a silver lining here for investors. Besides, Pretium is currently trading at barely 12x free cash flow, suggesting that the valuation isn't unreasonable, even after a 100% bounce off the lows. Based on a reasonable valuation and a rising gold price, it is certainly possible that Pretium could grind higher towards the $10.00-$10.50 level on this bounce. However, Pretium remains a cost laggard with a complex mine, and for this reason, I would view rallies above the $10.25 level as an area to book some profits.
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Analyst’s Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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