We recommend keeping your gold positions. It seems clear gold is ready for some upside, asserts Omar...
A Golden Chance to Buy Gold Miner Pretium
02/21/2018 5:00 am EST
Pretium Resources (PVG) one of our favorite small gold companies is presenting investors with a gift. The deep decline the stock has experienced is a “golden” chance to add to positions, asserts Stephen Leeb, editor of Real World Investing.
Pretium’s Chairman is Robert Quartermain, equally gifted as geologist and manager and a man of unquestioned integrity is an iconic figure in the world of the development of precious metal ventures.
The January drop came on the heels of what analysts interpreted as disappointing results for the fourth quarter, which was the second quarter of production for its Brucejack mine, located in British Columbia, Canada. Gold produced was a somewhat lower than in the third quarter, which was the first quarter of production.
If anything, the sharp downdraft in the stock is testimony to how close the project has run to its timetable. Thus, even a hint that the project was not proceeding in a perfectly linear fashion was taken as a near catastrophe.
The initial quarters of production, while dedicated to producing profits, are also being used to put into place mechanisms for maximizing long-term returns. Important in this process is setting up systems that manage grades of ore so that the company has as much control of the amount gold (and silver) produced per quarter as possible.
Establishing grade management, which is essential in maximizing returns in a mine whose current life expectancy is about 18 years, is not necessarily consistent with consistent increases in production in the earliest stages.
Noteworthy, is that the “miss” in production should not be deemed in any way a disappointment. In any underground mining project, it is the nature of the beast that small obstacles are nearly impossible to avoid in the very early stages.
In the wake of the recent drop, PVG’s market cap has fallen to 1.36 billion. Based on a gold price of $1400, the after tax net present value of the mine remains about $2.4 billion. At gold $2,000 the figure would be approximately $4 billion. Over the next 18 years even $2,000 would be a huge downside surprise for me.
Bluejack is just the first project of several the company plans on the area it controls in British Columbia. In the early part of next decade the company will begin to develop Snowfield, a mine whose potential could exceed that of Brucejack. Beyond Brucejack and Snowfield there is the Browser area, where initial explorations have revealed extremely high gold grades, which could also have exceptional potential.
This year will be the company’s first full year of production. We expect free cash flow to exceed $200 million or a free cash flow yield of about 15 percent. How many companies — mining or otherwise — can boast of a FCF yield of 15 percent after only one year.
Though the stock sports a gain of over 60 percent from our initial recommendation in July 2015, the current price is a chance to add to positions or to take initial positions if you missed our initial recommendation. This is a stock whose current price we expect to multiply several times in the longer term.
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