Pretium Resources Inc (TSX: PVG) is an exploration and development company engaged in the acquisition, exploration, and development of precious metal resource properties in the Americas. The company owns the Brucejack Project and the Snowfield Project, both of which are located in northwestern British Columbia. The Brucejack Property is located in northwestern British Columbia, approximately 65 kilometers (km) north of Stewart and is comprised of four mining leases and six mineral claims totaling approximately 3,306 hectares in area and forms part of its total claims package that comprises over 122,000 hectares. Snowfield Property borders Brucejack Mine to the north and is comprised of one mineral claim with an area of approximately 1,217 hectares.

Investment Rationale

• Reaffirm 2020 Production Guidance: The Company produced 259,443 ounces of gold during the nine months ended September 30, 2020 and expects to meet 2020 gold production guidance at the Brucejack Mine of 325,000 ounces to 365,000 ounces. Production is planned to continue in the fourth quarter 2020 at an average rate of approximately 3,500 tonnes per day due to planned maintenance and an increased focus on waste management from increased lateral development with the objective of operating at the nominal rate of 3,800 tonnes per day at the end of the quarter. The average annual gold grade is expected to remain in the guidance range between 7.6 grams per tonne and 8.5 grams per tonne at an average gold recovery of 97.0%. Management believes 2020 production guidance remains achievable assuming there is no new significant impact on operations at the Brucejack Mine, including due to the COVID-19 pandemic.

Source: Company Presentation

• Strong Q3FY20 Performance: Net and comprehensive earnings for the three months ended September 30, 2020 were USD 31.175 million compared to USD 6.259 million for the comparable period in 2019. The increase in net earnings was mainly attributed to an increase in earnings generated from operations due to higher gold prices realized on ounces sold, a decrease in deferred income tax expense partially offset by an increase in production costs primarily as a result of higher volumes of ore processed. Further, for the three months ended September 30, 2020, the Company generated revenue of USD 154.876 million compared to USD 132.735 million.

Source: Company Presentation

• Improved Average Gold Realized Price: Average realized price is calculated as revenue from contracts with customers plus treatment and refinery charges included in concentrate revenue less silver revenue divided by gold ounces sold. For the three months ended to September 2020, the company’s average gold realized price improved to USD 1,935 per ounce, however, in the comparable period in 2019, average gold realized price stood at USD 1,486 per ounce.

Source: Company Presentation

• Strong Free Cash Flow Continues in Q3FY20: The company continues to maintain solid free cash flow in the third quarter of 2020, driven by higher cash generated from operating activities at USD 83.37 million vs USD 77.81 million reported a year before. For the three months ended September 30, 2020, the group’s free cash flow stood at USD 66.81 million against USD 65.13 million in a year over period. Also, a higher gold realization price is expected in Q4FY20, as despite recent correction, gold prices continue to trade near its year’s peak.

Source: Company Presentation

• Risk Associated with Investment: The Company is subject to commodity price risk from fluctuations in the market prices for gold and silver. Commodity price risks are affected by many factors that are outside the Company’s control including global or regional consumption patterns, the supply of and demand for metals, speculative activities, the availability and costs of metal substitutes, inflation and political and economic conditions.

Gold Outlook

Gold had a remarkable first half of 2020, increasing by around 25% from its low in March and significantly outperformed all other major asset classes. Though equity markets around the world rebounded sharply from their March lows, the high level of uncertainty surrounding the COVID-19 pandemic and the ultra-low interest rate environment supported strong flight-to-quality flows. Like money market and high-quality bond funds, gold benefited from investors’ need to reduce risk, with the recognition of gold as a hedge further underscored by the record inflows seen in gold-backed ETFs. Also, historically, gold has generated long-term positive returns in both good times and bad times. 

Further, in the third quarter of 2020, Gold ETF quarterly inflows of 272.5t took global holdings of gold-backed ETFs (gold ETFs) to a new record of 3,880t. While the pace slowed a little from H1, sustained inflows throughout Q3 demonstrate the continued momentum of ETF investors to add gold to their holdings. Also, in the same quarter the gold price rose to a record high of US$2,067.15/oz in early August. This was followed by a correction with the price closing the quarter around US$1,900/oz. Record high prices for gold were also seen in various other currencies, among them the rupee, the yuan, the euro and sterling. However, the pandemic further impacted the jewelry sector. Weakness caused by COVID-19 was compounded by record gold prices; Q3 jewelry demand fell 29% y-o-y to 333t. While China and India accounted for the largest volume declines, weakness was global.

PVG Financial Highlights: Q3FY20

Source: Company Filing

• The Company generated revenue of USD 154.876 million compared to revenue of USD 132.735 million in the comparable period in 2019.
• Gold production totaled 86,136 ounces, on track to achieve 2020 annual guidance, compared to 88,227 ounces in the comparable period in 2019. Gold recoveries averaged 97.6% compared to 97.0% in the comparable period in 2019.
• The sale of 81,068 ounces of gold contributed USD 153.247 million of revenue at an average realized price of USD 1,935 per ounce. In the comparable period in 2019, the sale of 90,713 ounces of gold contributed USD 129.142 million of revenue at an average realized price of USD 1,486 per ounce.
• Cost of sales was USD 92.209 million or USD 1,137 per ounce of gold sold, compared to USD 86.150 million or USD 950 per ounce of gold sold in the comparable period in 2019. Cost of sales increased primarily due to higher production costs for additional lateral development, definition drilling and the impact of COVID-19 safety protocols (USD 2,054). Depreciation and depletion expense increased due to the 2020 Mineral Reserve (defined below) update. Cost of sales per ounce of gold sold also reflect lower volumes sold in the period.
• Total cash costs were USD 755 per ounce of gold sold, resulting in an average realized cash margin of USD 1,135 per ounce of gold sold. In the comparable period in 2019, total cash costs were USD 640 per ounce of gold sold, resulting in an average realized cash margin of USD 784 per ounce of gold sold.
• AISC was USD 1,016 per ounce of gold sold, on track to achieve 2020 annual guidance, compared to USD 878 per ounce of gold sold in the comparable period in 2019.
• Net earnings were USD 31.175 million compared to USD 6.259 million in the comparable period in 2019 with the increase primarily resulting from higher gold prices realized on ounces sold, a decrease in gain (loss) on financial instruments at fair value, a decrease in deferred income tax expense partially offset by an increase in production costs due to higher volumes of ore processed, costs due to COVID-19 and higher depreciation and depletion expense.
• Adjusted earnings were USD 50.863 million compared to USD 34.024 million in the comparable.
• Cash generated by operations was USD 83.371 million compared to USD 77.813 million in the comparable period in 2019. Free cash flow was USD 66.809 million, on track to achieve 2020 annual guidance, compared to USD 65.126 million in the comparable period in 2019.
• On September 30, 2020, cash on hand was USD 175.009 million (December 31, 2019 - USD 23.174 million) and the Company had positive working capital of USD 82.350 million (December 31, 2019 – a deficit of USD 66.805 million).

Top-10 Shareholder

The top 10 shareholders have been highlighted in the table, which together forms around 42.39% of the total shareholding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. holds the maximum interests in the company at 10.20% and 9.85%, respectively. The institutional ownership in the PVG stood at 79.45%, and ownership of the strategic entities stood at 1.57% respectively

Source: Refinitiv (Thomson Reuters)

Stock Performance

In a year-over period, PVG shares bagged 35% and outperformed the benchmark index by 36% at the same time. The stock generated a price return of 10% on YTD basis and outperformed the index by 12% in the same period.

1-Year Price Chart (as on November 11, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Over the past 52-weeks, PVG shares have registered a 52w High of CAD 19.13 (on September 16, 2020), and a 52w High of CAD 6.25 (on March 16, 2020). At the last traded price of CAD 15.86, its shares traded approximately 153% above its year’s bottom and 17% below its year’s peak.

 

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation: The company reported solid performance in the third quarter ended on September 30, 2020, as the Brucejack Mine produced 86,136 ounces of gold and 130,975 ounces of silver. For the comparable period in 2019, the company produced 88,227 ounces of gold and 124,958 ounces of silver. Increased tonnes processed in the third quarter of 2020 offset the higher gold grade in the third quarter of 2019. Further, The COVID-19 pandemic has not directly affected 2020 gold production or sales. Also, The Company produced 259,443 ounces of gold during the nine months ended September 30, 2020 and expects to meet 2020 gold production guidance at the Brucejack Mine of 325,000 ounces to 365,000 ounces.

Further, the company outperformed the industry margin profile in the third quarter of 2020, with an EBITDA margin of 55.8% vs industry median of 37.6%, Operating margin of 36.4% against the industry median of 20.7% and a net margin of 20.1% as compared to 7.9% reported a year-ago period. This reflects the competitive advantage of the company against the competition.

Source: Refinitiv (Thomson Reuters), Kalkine Group

Also, the company has maintained a prudent capital mix, with long-term debt contribution of 25.1% in the total capital, with Net Debt/EBITDA ratio stood at 3.53x, implies lower balance sheet risk.

Therefore, based on the above rationale, relative strength PVG shares recorded on the stock exchange and valuation, we have given a “Buy” recommendation at the closing price of CAD 15.86 on November 11, 2020.

*Recommendation is valid at November 12, 2020 price as well.

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