Description

Some tables and charts could not be copied into VIC; a version including additional tables and charts is available here: https://docs.google.com/open?id=0B8JQBxIp5NxKUmVLbnF4T3YxeUE

Summary and thesis:

At current levels, I believe that a long position in Pretium Resources (TSX: PVG) [market cap of ≈$1,500mm] paired with a short position in Seabridge Gold (TSX: SEA) [market cap of ≈$700mm] presents a compelling risk reward profile. PVG and SA are both development stage gold companies located in very near proximity to one another in British Columbia. PVG owns a truly world class asset and could very well be worth >2x the current share price; SA owns assets that will likely never be developed and the equity should have option value only.

First a disclaimer of sorts: on the whole, junior miners are a tough group to make money in and each company typically tells a superficially compelling or tempting story that rarely comes to fruition.

In that context, this idea is driven by two views:

1) I believe that PVG’s high-grade project is truly unique and world class. Unless the numbers are flatly untrue, the grade and size of the project sets it apart from 99% of gold projects.

2) I do not believe that either of SA’s projects will be developed anytime in the remote future and the equity should only have option value that is worth considerably less than SA’s ≈$700mm market capitalization. In the very unlikely case that the projects are developed, PVG’s projects (in exactly the same geographic area) will no doubt also be developed and prove much more valuable.

Both PVG and SA control vast amounts of low-grade gold resources located in the wilderness of British Columbia. I believe that neither PVG’s nor SA’s low-grade resources will be developed anytime in the remote and deserve, at best, minimal option value.

The difference, however, between the importance of the low grade resource for both companies is critical: for PVG the bulk grade project is a wholly secondary part of the story that the company largely ignores; for SA, the bulk grade project is heavily employed as a promotional took by the company (CEO: every share of SA contains 1 ounce of gold, etc.).

In addition to the bulk grade projects, both PVG and SA have a single other project as well. PVG’s project is an absolute world class project that represents the largest high grade undeveloped gold project in the world and which I believe is likely to ultimately be acquired by a strategic buyer. SA’s project is a low grade 2^nd or 3^rd tier project that I believe is unlikely to ever be developed.

Accordingly, a long PVG / short SA position allows an investor to safely short the bulk grade exposure on which SA’s story has largely relied and take long exposure to what I believe is a highly attractive opportunity in PVG’s high grade project.

Through SA’s KSM project, SA controls 64.0mm ounces of low grade (≈.5 GPT) gold reserves and resources.

PVG controls 68.4mm ounces of similarly low grade resources through both low grade resources at their Brucejack project and through their Snowfield project.

I believe two points are critical as regards PVG’s and SEA’s high grade resources:

1)     I believe there is extraordinarily little chance either project is ever developed

2)     Even if one believes development is feasible, the value of PVG’s and SEA’s resources should be effectively similar

On the first point:

PVG management admits that they view their low-grade resource as nothing more than a long-term option that would be valuable in a much higher gold price environment.

That the SA story has lasted this long is a testament to management promotion and investor hope. However, SEA is in no position to create any value from their KSM project and the stock price will slowly continue to further reflect that. For SA, perceived viability of KSM is critical to maintaining their story and their equity price. Should gold prices decline materially, SA’s stock will more quickly reflect reality.

For reference, Northern Dynasty Minerals (TSX: NDM) controls the largest bulk tonnage product in the world (Pebble, 100mm+ ounces gold resources) and has seen its market cap decline to $228mm.

PVG – Background:

Pretium was formed in 2010 through the purchase of Snowfield and Brucejack from Silver Standard for approximately C$450 million (C$215 million in cash and C$235 million in equity), Robert Quartermain, former CEO of Silver Standard, acquired the asset from Silver Standard and formed PVG. Subsequently, a number of Quartermain’s former lieutenants departed Silver Standard for PVG.

PVG controls two assets:

1)     Brucejack – within Brucejack there is a high-grade and low-grade component

2)     Snowfield – an entirely low-grade project

PVG is wholly focused on the development of the Brucejack High Grade (BJHG) project.

PVG - Brucejack High Grade:

The Brucejack High-Grade (BJHG) project represents the highest grade and perhaps the very largest high-grade development project in the world.

BJHG vs. Courageous Lake:

In my view, the most problematic issue with the Courageous Lake is IRR projection. Simply stated, I do not believe that a low-grade gold project requiring $1.5bn in CapEx has a chance of getting off the ground with a 12.5% IRR and a 7.4 year payback (pre-tax) based on $1,600+ gold. Indeed, even at $1,900+ gold project economics do not justify the project getting financed. The economics simply are not attractive (a 7.4% pre-tax IRR at $1,384 gold? Who finances that?) and at gold prices sub-$1,300 the project becomes uneconomic on an absolute basis.

PVG’s BJHG project, conversely, has robust economics (25% IRR post-tax) even at $1,100 gold. Moreover, the upfront capital cost of BJHG is only $436mm vs. $1.5bn for Courageous Lake. In summary, BJHG vs. Courageous Lake:

-       Much less upfront capital

-       Much higher IRRs at current gold prices

-       Much less leverage to the gold price

-       High economic at very low gold prices vs. uneconomic at similar gold prices.

For PVG, I have constructed a model based on their PEA in order to perform sensitivity analyses – the numbers produced by my model closely match those produced by PVG’s PEA. [For whatever reason, I cannot manage to construct a model for the SA’s Courageous Lake project that matches their outputs.]

Sensitity Analysis:

Peer based valuation:

The following is to demonstrate that in all likelihood PVG is undervalued on both an absolute and relative basis, and therefore a long position in PVG hedged with a short position in select gold miners or a gold miners index is likely to generate attractive returns.

Simple Valuation – based on peer EV / Resource ounce valuation:

Catalyst