Pretium Resources (NYSE:PVG) made unwanted headlines in late 2013 when the auditor for the ongoing feasibility study (FS) resigned over what appeared to be a difference of opinion on how to interpret the nuggety nature of ore at the company's Brucejack project. A range of views were voiced by analysts and commenters and the resulting insecurity hurt the share price more than the subsequent release of a very robust FS could heal.

Permitting and financing of mine construction at Brucejack in British Columbia were the next milestones to be achieved after the filing of the FS, and after a false alarm in late 2014, it has taken until now to tick these two important boxes, both within a couple of weeks in September - a big month for investors and a watershed moment in the history of Pretium Resources. With all the new data out in the public domain, we would assume that many investors are currently making up their minds with regards to a possible involvement in this future gold miner.

After quietly observing the drama of this stock unfold from the sidelines, we would finally like to add our very own $0.02 in the form of the present article, exploring the details of the financing package, and analyzing its implications on the value of the awesome Brucejack project.

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The Brucejack Project

Much has been written about the Brucejack project here on Seeking Alpha, and we deem it sufficient to offer only a very brief summary, along with this link to a comprehensive discussion of the project by a fellow author, and a reference to the company presentation for more detailed information.

Phenomenal grades of 15.7 g/t gold plus substantial silver byproducts characterize the "Valley of the Kings" underground reserve, which is in fact a high-grade zone within a much bigger gold and silver bearing ore body. Even though, the reserve encompasses 6.9M ounces at the quoted grade, plus about 1M of additional ore at a slightly lower grade that will be included in the mine plan to support an 18-year mine life. Annual production rates are projected at over half a million ounces during the first 8 years, dropping to 324,000 ounces thereafter for a LOM average of 404,000 ounces. This will be a major precious metal mine; however, throughput of just 2,700 tpd will be sufficient to achieve these production targets due to bonanza grades and metallurgical recoveries of 96.7% for gold and 90% for silver.

Applying a gold price of $1,100/oz, the FS reported an NPV(5%) of $1.45B and an IRR of 28.5% after tax, for pre-production capex of $747M, or roughly half the NPV. Even at a gold price of $800/oz, the documented project remains imminently profitable, still reporting an NPV(5%) of $620M - all driven by first quartile all-in sustaining costs (AISC) of just $448/oz.

All said and done, this is one of, if not the most profitable large gold mining projects worldwide held by a junior exploration and development company with a market capitalization of $723M based on the share price of $5.40 at the time of writing.

Financing

We mentioned a false alarm in the introduction, referring to a C$81M placement to Chinese mining giant Zijin Group (OTCPK:ZIJMF) for a 9.6% stake in Pretium Resources, second only to the position Silver Standard (NASDAQ:SSRI) continues to hold. Speculation on further funding towards the Brucejack mine construction abounded around the time, but so far no further news with regards to this second-largest shareholder has been heard. Zijin Group is the same Chinese company that has been gobbling up various Australian gold miners and juniors in the past couple of years, and more recently has taken a substantial stake in Ivanhoe Mines (OTCPK:IVPAF) as well as purchasing 47.5% of Barrick Gold's (NYSE:ABX) Porgera mine in July this year.

Several smaller equity placements later, the company reported a cash position of C$68.9M at the end of June - sufficient to keep the company afloat for over a year at the recent cash burn rate, but nowhere near the required levels to commence mine construction. This situation has changed now however, and on September 15, PVG announced the terms of the long-awaited project financing package which has already closed on September 21. This package is designed to provide a total of $540M covering about 70% of the projected capex for mine construction at the company's Brucejack project in British Columbia, Canada. Orion Mine Finance Group and Blackstone Tactical Opportunities are the lenders in this financing initiative.

The financing package consists of three components:

• A $350M Senior Secured Loan facility;
• an off-take agreement;
• a streaming agreement; and
• a $40M private placement.

We would like to dissect these components in more detail in the next sections below before presenting our calculations with regards to the impact of this package on the project value.

Loan Facility

The $350M loan facility has a three-year term (extendable to 4 years) and bears a fixed interest rate of 7.5%. We argue that this is on the high side of what has been on offer in recent debt financings.

• For example, we note that Roxgold (OTC:ROGFF) has closed a debt facility with a six-year term in June which bears interest at a rate of around 5% (4.25% + LIBOR after completion) for a project not too unsimilar to the Brucejack project, but located in Burkina Faso; and
• Guyana Goldfields (OTCPK:GUYFF) completed debt financing for its Aurora project in Guyana just over a year ago, agreeing on a facility with an eight-year term bearing LIBOR-based interest of about 6%.

Pretium Resources and its lenders have agreed that the principal and accrued interest will be due at the end of 2018, with a penalized option to extend the repayment by one year. Given that mine construction will take some time, and payback time according to the FS is 2.7 years, we see a high probability of the extension penalty to come into effect, a hefty 2.5% of the principal outstanding at the time. Furthermore, it also appears highly unlikely that this debt can be repaid from cash flows by the time it comes due. The debt will almost certainly require refinancing which will likely create an overhang from day one.

Like many other Canadian resource companies, Pretium Resources has been stressing the positive effects of the weakening local dollar, and has even announced an initiative to revisit costing in the FS. Evaluation of cost reductions due to shifting exchange rates will presumably lead to lower-than-anticipated initial capex requirements. However, the denomination of the debt facility in US$ will claw back some of these gains since loan repayments will be disadvantaged by the described foreign exchange trend.

Off-take Agreement

All gold to be produced over the current life of mine will be sold to the two lenders, either as part of the streaming agreement (see below) or as part of the off-take agreement. Sales into the off-take agreement will be paid at the prevailing market price, although details have not been released.

Interestingly, clauses have been added specifying the conditions under which Pretium Resources will be able to repurchase a portion of the gold off-take. We can think of only two reasons why this might be of interest: either to avoid deductions that might be applied when calculating the "prevailing market price"; or to be able to sell gold to another party perhaps favored by a major shareholder (think China and Zijin Group).

Private Placement

The $40M private placement for 3.85M common shares for each of the two lending institutions at just under $5.20 adds only about 5.7% new shares to the registry. Existing shareholders might be happy about the small degree of dilution, but we also have to question why exactly the lenders were not interested in taking a larger equity stake in PVG at this point in time.

The share price for the placement appears fair, representing the 20-day volume weighted average price prior to closure of the financing. This share price is well above the price of $4.73 (C$6.30) paid by Zijin not long ago, but less than the price of $7.25 paid by Liberty Metals & Mining Holdings for another small private placement in August.

Streaming Agreement

The lenders will advance $150M on closure in exchange for an 8% precious metal stream over the currently known mine life. In total, this stream concerns 565,360 ounces of gold, and 2.102M ounces of silver - or almost 1.5 years' worth of production spread over 18 years. The lenders will pay Pretium $400 per ounce of gold delivered into this stream and $4 per ounce of silver.

Several options to repurchase parts or all of the stream have been agreed upon, but all of them expire by the end of 2019, at the same time as the extended loan facility will come due.

From a cash flow point of view, we note that this stream will pinch margins for Pretium on both sides: firstly by reducing the effective gold price since the lenders will only pay $400/oz for their portion of the gold; and secondly, by lowering byproduct credits and thereby increasing AISC due to the reduced price received for the silver.

On a positive note, we observe that exploration upside beyond the current reserve has not been included. Remembering the substantial resource and exploration potential, we see a good chance for Pretium Resources to add mine inventory that will not be encumbered by the stream. We speculate that the recently announced exploration results can be interpreted as a signal to the market to this regard.

Assessing the Damage

This is a multi-faceted package and assessing the cost to the project will need a number of assumptions. We have also decided to avoid overthinking and will be using a highly simplified model to estimate the cost of the individual financing components:

• We have taken the NPV(5%) documented in the FS as a basis;
• calculated the annual costs of the debt, and the stream;
• discounted these future cash flows to lenders back to present value using a 5% discount rate to arrive at a present value estimate of these cash flows; and
• proceeded to deduct this present value of the cash flows to lenders from the NPV.

Too simplistic? Not strictly correct in an accounting sense? Granted, but a back-of-the-envelope approach to get a ballpark number, and good enough for your humble scribe. Here it goes...

The attached table shows a hypothetical summary account statement for the loan facility: initial payment of $150M, staged payments of the remaining $200M, and interest for each year in a somewhat simplified scenario. Repayments also include the mentioned penalty for the anticipated loan extension to the end of 2019. The difference of $116.5M between the principal of $350M and the final repayment of $466.5M can be viewed as the "financing cost", to which the "extension penalty" of $8.75M needs to be added. Discounting these costs leaves us with a present value of $103M for debt financing costs.

Moving on to the stream, we refer to the attached table showing annual production, stream deliveries and finally the discounted cash flows to Pretium Resources' streaming partners for an assumed gold price of $1,100/oz (same as the FS base case) and an assumed silver price of $15/oz, and also taking into account the payments of $400/oz gold and $4/oz silver.

The total of the discounted cash flows amounts to $308.1M, and after deducting the upfront payment of $150M results in a profit of $158.1M - an astounding implied yield of 105% for the lenders.

The FS computed a base case NPV(5%) of $1.45B for the project. After deducting the "present value" of the financing costs and the stream from this NPV, we arrive at an updated NPV of $1.19B, or 82% of the original NPV. This model ignores many factors (first and foremost tax), but we believe that it still provides a ballpark figure for the slice which the lenders have taken from the project. Roughly 18% of the value has been transferred to the lenders via the debt and the streaming agreement according to this model.

And of the remaining 82% the lenders take additional 5.4% via the private placement. In total, these calculations indicate that Pretium Resources is transferring 22.4% of the present Brucejack value to its lenders. One can play with many of the assumptions of this model, but we believe that our estimate is in the correct ballpark, and the outcome of the financing negotiations must have been rather pleasing for the lenders.

And it does not end there. The debt will need restructuring at the end of 2019 and this will give the lenders another shot at an even greater slice in due time. And if PVG decides to shop elsewhere, or terminate the streaming agreement or the off-take agreement, the lenders stand to profit handsomely from the various termination penalties. And finally, we remind readers that 30% of the capex will still need to be organized and our bet would be that Orion and Blackstone are already mapping out the conditions.

The wild card here is Zijin Group. We assume that this strategic shareholder might be less than impressed by this financing deal, and might be biding its time perhaps until the remaining 30% of capex needs to be found.

Takeaway & Investment Thesis

We opine that Pretium Resources has had to part with a substantial portion of the value of its Brucejack project in order to secure the announced financing package. And we submit that the onerous conditions implied in this package are a reflection of the substantial risks that are still perceived to be present. The financing package also leaves the company with the overhang of still needing to find 30% of the capex for mine construction, and with the need to refinance the debt at the end of 2019.

It is for all these reasons that we expect shares to trade under pressure going forward, and we are not tempted to initiate a position in Pretium Resources for the time…

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