Company Profile

Pretium Resources Inc. (TSX: PVG) is engaged in the acquisition, exploration, development, and operation of precious metal resource properties in the Americas. The company’s assets include Brucejack mine, Snowfield Property, Bowser Claims, and the Porphyry Potential Deep Drilling (PPDD) Project. The Brucejack Property is located in northwestern British Columbia, approximately 65 kilometres (km) north of Stewart and is comprised of four mining leases and six mineral claims totalling approximately 3,306 hectares in area. 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

• Steady production at Brucejack continues to generate stable cash flows: Amid the COVID-19 pandemic, the Brucejack Mine has operated continuously under the strict guideline and did not have any significant effect on production. Further, the company announced an updated mineral reserve and resource estimate and the life of mine to the Brucejack Mine. Unaffected production helps the company to generate a decent Q1FY20 free cash flow in Q1FY20, which came in at USD 41.8 million and recorded a growth of 19% on a YoY basis. The company remained on target to achieve free cash flow for 2020 in the range of USD 100 million to USD 170 million with an estimated average gold price of USD 1,450 per ounce. We expect the company to outperform its target, given the spectacular rally in the gold prices over the last couple of months.
• Increasing Gold prices is expected to benefit the group: The gold prices have recently tested a nine-year high of USD 1,829/oz. in June 2020, in the wake of heightened uncertainty in the global financial market and record-high money inflow in the Gold-based ETF funds across the world. The higher gold prices, coupled with a potential increase in the company's gold production, is likely to have a positive impact on the group's financials such as margin expansion and higher free cash flow generation. Further, gold prices have surged approximately 13% in Q2FY20, which implies that average gold realization prices are expected to outperform the company's full-year guidance. Hence, a positive surprise is expected in the Q2FY20 average realized prices.
• Higher free cash flow yield with stable balance sheet: The company’s free cash flow yield stood at 11.5%, which provides a greater margin of safety to the existing and potential shareholder. The company has a stable balance sheet with long-term debt to total capital ratio of 28.3%. Further, the interest coverage ratio stood at 3.89, which reflects that the group’s EBIT is approximately 3.9 times its interest expenditure.
• Shares were trading above crucial short-term support levels: At the last traded price of CAD 11.72 (on July 09, 2020), shares of PVG traded above the crucial short-term support levels of 5-day, 10-day, 30-day and 50-day simple moving averages, which is a positive price momentum. Further, a cross-over is forming on the daily price chart of the stock, as short-term 50-day SMA is expected to cross-over the long-term 200-day SMA, which is a strong breakout technical indicator. Also, at the last traded price, PVG shares traded just 4.9% below the long-term support level of 200-day SMA. Moreover, moving averages are also rising, which is another positive price trend. The Moving Average Convergence Divergence (MACD) is also rising, MACD is a widely tracked momentum indicator within the technical analyst's community, and the difference between 12-day Exponential Moving Average (EMA) and 26-day Exponential Moving Average (EMA) is positive, which is a positive technical trend in any underlying assets. Therefore, given the above positive technical indicators, PVG shares are carrying the potential to move up further from the current trading level.
• Risk Associated to Investment: The group is exposed to a variety of risks including consolidation in the gold prices after three consecutive months of surge, currency fluctuation in the wake of heightened uncertainties over a global economic recession. Further, there is a risk that depletion of the company’s mineral reserves would not be offset by discoveries, development, or acquisitions. If the group’s mineral reserves are not replaced either by the development of additional mineral reserves, there may be an adverse impact on the group’s future cash flows and earnings.

Financial Highlights: Q1FY20

Source: Company filing.

In the first quarter of FY20, the group’s revenue surged by 23% to USD 126.6 million against USD 103.1 million reported in the same period of the corresponding previous financial year. The higher revenue was primarily driven by a 22% surge in the average realized price of gold. In the first quarter of 2020, the company sold 80,460 ounces of gold at an average realized price of USD 1,605 per ounce, generating USD 125.1 million. In the comparable period of FY19, the company sold 81,434 ounces of gold at an average realized price of USD 1,319 per ounce, generating USD 102.4 million in revenue.

The total cost of sales for the first quarter 2020 stood at USD 89.5 million, which is equivalent to USD 1,112 per ounce of gold sold compared to USD 74.0 million or USD 908 per ounce of gold sold in the comparable period in 2019. The total cost of sales increased primarily due to higher production costs for additional lateral development and drilling as well as the higher depreciation and depletion charges resulting from the Mineral Reserve update.

The total cash cost stood at USD 787 per ounce of gold sold compared to USD 686 per ounce of gold sold in the previous corresponding period. The increase in the cash cost was driven by higher production costs incurred for additional lateral development and drilling. All in Sustainable Cost (AISC) came in at USD 996 per ounce of gold sold compared to USD 868 per ounce of gold sold in the same period of the previous financial year. Average realized cash margin in the Q1FY20 stood at USD 768 per ounce of gold sold compared to USD 571 per ounce of gold sold in Q1FY19.

The group reported higher earnings on account of higher gold prices along with a decrease in loss on financial instruments at fair value which was partially offset by an increase in depreciation and depletion expense. Earnings from mine operations stood at USD 37.1 million compared to USD 29.2 million in Q1FY19. Net earnings stood at USD 6.2 million during the quarter compared to USD 4.2 million in the previous corresponding period.

The group generated a free cash flow amounting to USD 41.8 million, higher than the USD 35.0 million generated in the first quarter of 2019. Cash generated from operating activities increased to USD 52.5 million compared to USD 39.9 million in the previous corresponding period.

During the Q1FY20, the company repaid USD 16.7 million of the USD 480 million senior secured loan facility.  At the end of the first quarter of 2020, the outstanding balance on the Loan Facility was USD 367.3 million.

Stock Performance

At the closing (on July 09, 2020), shares of PVG traded approximately 0.85% lower at CAD 11.72. In a year-over period, PVG shares tested a 52W high of CAD 18.30 on 04-Sep-2020 and a 52W low of CAD 6.25 on 16-March-2020. At the last closing price, its shares traded approximately 36% below its 52W high price level and approximately 87.52% above its 52W bottom, which implies that at the last traded price, its shares were tilted towards the 52W high price level.

PVG shares featuring a negative price return of 13.25% and 18.89% on a YoY basis and YTD basis. However, in the past three months, its shares have recovered approximately 16% and delivering a price return of 3% and 6% over the month and in the last 5 trading sessions, respectively.

Further, 14-day and 9-day Relative Strength Index (RSI) oscillator hovering above 50%, which is generally a favourable trend indicator in any underlying assets.

Top-10 Shareholder

The top 10 shareholders have been highlighted in the table, which together form around 38.03% of the total shareholding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. holds the maximum interests in the company at 9.02% and 7.56%, respectively. The institutional ownership in the VPN stood at 68.69% and ownership of the strategic entities stood at 1.19%, respectively.

Source: Refinitiv, Thomson Reuters

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

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

Stock Recommendation: The company reported decent performance in the first quarter of 2020, with a significant surge in revenue on a YoY basis, led by higher gold realized prices. We expect the group’s realized price to increase further in the second quarter, considering the recent rally in the gold prices. Higher realized price is likely to result in revenue growth and earnings expansion. Further, the company has a stable balance sheet with long-term debt to total capital ratio of 28.3%. The management stated that the group remained on track to achieve its FY20 guidance in terms of production, cost and free cash flow.  

From the technical analysis standpoint, its shares were trading above the crucial short-term support levels of 5-day, 10-day, 30-day and 50-day simple moving averages, which is a positive price momentum. Also, The Moving Average Convergence Divergence (MACD) is also rising, and the difference between 12-day Exponential Moving Average (EMA) and 26-day Exponential Moving Average (EMA) is positive, which is a positive technical trend in any underlying assets.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a Buy recommendation at the closing price of CAD 11.72 (as on July 09, 2020), with a lower double-digit upside potential based on the NTM Peer’s Average P/CF multiple of 7.7x on the FY20E Cash Flow per Share. We have considered Alacer Gold Corp (TSX: ASR), Equinox Gold Corp (TSX: EQX) and B2Gold Corp (TSX: BTO) etc., as a peer group for the comparison purpose.

*Recommendation is valid at July 10, 2020 price as well.

Disclaimer

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