Sprott Note28 Jan 2022 19:57
https://www.sprott.com/media/4826/220127-scp-pgm-equity.pdf
RECOMMEND HOLD FROM BUY
TARGET C$0.85/sh
RISK RATING: HIGH
We are impressed by the operational focus of new management, and are encouraged that lower than
desired grades could just be the results of a tougher ore body at McVeigh (western decline, 83koz @
6.7g/t). As this only represents 8% of reserves, once mining ramps up on the easier eastern ore body at
Austin (eastern decline, 676koz @ 8.6g/t), itself representing 67% of reserves, grades should improve. In
the LT, 8 Zone’s 228koz @ 17g/t, and extensions thereof, are the holy grail of course.
While sufficient development is into the eastern decline for drill cubbies, we don’t think there is sufficient development just
yet for the operational flexibility required to maintain when inevitable sub-prime stopes emerge. Today’s
equity covers just that. However, ~C$25m pq site opex implies mining costs potentially approaching
C$300/t against C$169/t DFS. While this will of course drop considerably once steady-state is reached, it
is unclear if this will occur fast enough to ensure no further equity is required. Specifically, 80koz pa and
spot US$1,792/oz implies C1/AISC of ~US$500/800/oz would be required to cover current outgoings, pre
tax, royalties, finance costs, G&A and debt principle. In the short term, the equity will fund additional
sustaining capex and opex burn during ramp up, but long-term mining costs are very hard to forecast with
a NAV of anywhere for C$700m to C$950m at C$169-300/t mining costs. As such, we lower our NAV
multiple from 0.9x to 0.7x to reflect our uncertainty until more visibility is provided on sustainable
operating metrics / costs.
On that basis, we lower our recommendation from BUY to HOLD and lower our
PT from C$1.60/sh to C$0.85/sh based mainly on the higher opex and lower NAV multiple. Of course we
hope for investor’s sake that this is the last equity, but that wasn’t the case several times last year. We
remain positive in the long term, as (i) completing East ramp development for higher grades at Austin, and
(ii) medium-term access to 8 Zone, have the potential to shift this operation from loss-making to profitable.
Why we like Pure Gold
1. Existing 1Moz @ 9g/t reserve in favourable jurisdiction
2. 80koz pa DFS lifts to 110koz pa with satellite 271koz @ 6.7g/t mineable in PEA
3. Permitting precedent to expand mill from DFS 800tpd to 1,089tpd, but potential 1,600tpd
4. Exploration upside: Wedge satellite(s), high-grade 8 Zone
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