-- Published: Wednesday, 14 May 2014 | Print | Disqus
By Louis James, Chief Metals & Mining Investment Strategist
Sell in May and go away?
Precious metals tend to exhibit a seasonal pattern to their price trends, with summer weakness that leads to strength in the fall. Add to this the fact that mineral exploration in the Northern Hemisphere, especially in Canada, enters a sort of hibernation during winter months and then reawakens in the spring. With winter drill programs already announced, we typically see less news flow starting about now until well into the summer.
These variables combine to exacerbate the “sell in May and go away” conventional wisdom regarding the broader stock markets, as many brokers and promoters in our sector take their holidays during these relatively quiet months. Sometimes, even with stable or rising metals prices, shares in great companies can drop over the weeks and months just ahead, simply due to the lack of Push. Here at Casey Research, we call this Shopping Season, and it seems to have arrived early this year.
It is never safe, however, for metals speculators to head for the Bahamas and ignore the market for months; there’s always the possibility of a sudden black-swan event that kicks precious metals into a higher gear earlier than expected.
Further, individual companies can and do buck the trends all the time. That’s especially so if they’re working on a discovery that could deliver game-changing results at any time, working in a country where water doesn’t freeze in January, or working underground, where seasons are irrelevant.
And I’d like to introduce you to one of those companies today.
But What If Prices Go Lower?
Imagine that you were offered a brand-new Ferrari 458 Italia at a 75% discount during an economic downturn.
Even those not into high-maintenance cars would have to think about it—it could potentially be a very profitable trade.
Now suppose you bought the car, garaged it, cared for it, waited for the car market to turn around—and then the market got even worse for a while, and you saw the same car offered for 50% less than you paid for it.
While you might regret that you didn’t time the bottom right, would you conclude that the Ferrari was worthless?
I think you can see where I’m going here. Unless desperately short on cash for some extremely urgent need, nobody would sell our hypothetical Ferrari at a great loss; they’d simply wait out the downturn, no matter how long or painful. Whatever else might change, the Ferrari remains a Ferrari.
Just as, whatever else happens in the economy, an ounce of gold remains an ounce of gold. And yet, when it comes to the best-of-the-best gold stocks in the junior mining sector, investors seem increasingly willing to make the mistake of dumping valuable companies, simply because they are on sale. The error here is confusing price and value—and recognizing such errors before the market does is the essence of successful speculation.
Sales are for buying. A solid company with a deeply undervalued asset and all the cash needed to correct that mis-valuation is exactly the sort of bargain we like to buy during Shopping Season. That’s the kind of opportunity I have for your consideration today.
Regardless, and whether or not you buy the stock I recommend below, I hope you’ll read the case and watch the story as it evolves, to see if I’m right about the company.
Pretium Resources (PVG, US$7.24, PVG.TO, C$7.92, US$785.4 million market cap)
The Pretium story is simple: a group of serially successful geologists have made an extraordinarily large and spectacularly high-grade discovery in an area called Valley of the Kings, which is part of the company’s flagship Brucejack gold project in mining-friendly Canada.
We’re not talking about grams of gold per tonne (g/t) here, or even ounces, but kilos of gold per tonne in many drill intersections. And we’re not talking about a small, rich “sweet spot,” but a monster gold system with more than 6.6 million ounces of gold in Proven & Probable mining reserves, averaging 13.6 g/t gold, within 13.6 million ounces of gold in all resource categories, averaging 20.5 g/t gold.
There are 1.7 million more ounces at the project’s West Zone. Both zones are wide open for expansion—and are adjacent to 35 million ounces of bulk-grade gold in Pretium’s Snowfield gold project (which itself is adjacent to Seabridge Gold’s 63.9-million-ounce bulk-grade KSM deposit).
To give you an idea how rare a bird this is, a recent report shows 26 gold deposits larger than one million ounces—just 26 in the entire world—that have more than 10 grams of gold per tonne of ore.
There are only 11 such deposits above 15 g/t, which the Valley of the Kings zone beats, if you consider its 8.7 million ounces of Measured & Indicated gold averaging 17.6 g/t. To count publicly reported gold deposits that are both larger and higher grade than Pretium’s Valley of the Kings, you only need one finger.
That’s right: just one.
Pretium’s Valley of the Kings is the richest gold discovery in the last 10 years, and one of the richest in recorded history.
But that’s just the beginning. A deposit this rich will pay for many faults and still make for a highly profitable mine, but there are many questions to answer before one can say so. Is there a lot of mercury, arsenic, or other toxic elements in the mix? Is there a national park or endangered species living on top of the deposit? Is the local government likely to steal the mine if one builds it?
I don’t have space in this column to deliver an entire “Casey 8 Ps” analysis of the company, but the questions above have been thoroughly addressed in the company’s June 2013 feasibility study. That study is being updated in view of the company’s late 2013 bulk sample, which produced almost 50% more gold than the company’s estimates predicted.
Pretium also discovered more gold veins when it went underground for the bulk sample, and is incorporating those and other new discoveries into its mine plan.
Nevertheless, and despite what is a somewhat aggressive—at the moment—gold price assumption of $1,350 per ounce, the study yields some terrific results, including:
- After tax net present value (NPV-5% discount) of $1.8 billion
- After tax internal rate (IRR) of return of 35.7%
- Project finance payback in 2.2 years
- Mine life of 22 years, at an annual rate of 425,700 oz. per year
- All-in sustaining cost of $508 per oz.
Critical point: even at an unrealistically low $800 gold price, the project still makes money (IRR of 13.7%).
In short, this project has all the signs of a world-class, high-margin gold mine in the making, at a rate of production large enough to make Pretium of interest as an acquisition target for any of the world’s major gold producers.
That’s particularly important today, because one of those major producers, Goldcorp (GG, G.TO), just lost out in a bidding war over Canada’s Osisko Mining (OSK.TO). Goldcorp has shown its appetite for acquiring large, world-class assets while prices are down, and it has a good $3 billion in working capital to pursue them.
It’s hard to imagine a more attractive takeover target than Pretium—and if that happens, these shares could easily jump 20% to 30% in a day.
That’s no exaggeration; just look at Osisko’s stock chart, and you’ll see that it jumped more than 20% when Goldcorp made its offer last January and is close to doubling since then.
But the beauty of the situation is that Pretium doesn’t need to get bought out in order to hand us a major win; the company is fully funded for this year’s work advancing the project, and even has a little cash flow coming from a small amount of (very high-grade) mining allowed under its exploration permit. Given the exceptionally high rate of return on investment the Brucejack project boasts, we think the company will be able to obtain bank and other financing to build the mine and become a highly profitable mid-tier gold mining company.
Investors who buy now win either way, which is why this company is one of those listed in our special report, 7 Must-Own Mining Stocks for 2014, which you get free if you try a risk-free subscription to the International Speculator today.
You can read all the details about Pretium in that report, but there’s one more thing I should tell you, in case you decide not to subscribe; there’s a reason besides gold’s correction that these shares are selling for less than half of what they were a couple years ago.
It’s quite the drama, actually; last October, one of Pretium’s consulting engineering firms (a highly respected firm in its field) quit the job abruptly. On the way out, they basically said that the Brucejack resource estimate was bogus—that the deposit wasn’t really there!
That’s pretty extreme, but even more extreme was the consultants saying that, based on their statistical analysis, the Valley of the Kings bulk sample then under way should be stopped, being a waste of time and money. Management and a second consulting firm that made the resource estimate calculations (also highly respected) said they wanted to see the proof in the pudding of the bulk sample.
And a good thing, too, because their view was fully validated by the bulk sample; instead of the 4,000 ounces the bulk sample was originally estimated to produce, the sample actually yielded 5,865 ounces of gold—and that in a toll mill in Montana, not optimized for Brucejack ore.
Of course, that took time to show, and before the company could prove its point, a ridiculous number of ambulance-chasers announced class-action lawsuits on behalf of shareholders, and the whole circus took this formerly $17.92 stock all the way down to $3.10.
Now, I have known management at Pretium for many years, and was dead certain they were not faking their deposit, so I doubled down. (Yes, I personally own shares in the company; I bought them after recommending the stock to subscribers, and I am not allowed to sell them before giving subscribers a chance to do so first.) Many International Speculator subscribers were able to buy shares close to the $3 mark and have more than doubled their money on those investments since then. Because I was right: the bulk sample results vindicated management—and added a significant amount of cash to the till. The company is back in the race today.
But it’s not too late to build a position in this great company with the discovery of the decade in hand. Due to gold’s continuing fluctuations, the shares are still selling for not much more than they were at IPO—before the company made its record-smashing Valley of the Kings discovery.
Remember; a Ferrari is a Ferrari, value is value, and when you can buy a high-margin $1.8 billion asset for $785 million (or US$7.24 or C$7.92 per share), that’s a bargain.
To find out more about Pretium and our six other 7 Must-Own Mining Stocks for 2014, I encourage you to subscribe to the International Speculator today. Remember that you have three full months to check out our newsletter, and if you’re not happy with it, cancel any time within those three months for a full refund.
Or, if you decide to just buy or watch the stock to test us out, that’s fine too; I sincerely hope you’ll make a bunch of money, and come back for more.
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-- Published: Wednesday, 14 May 2014 | E-Mail | Print | Source: GoldSeek.com