Is the Hardrock gold project, 275 km northeast of Thunder Bay in northern Ontario, a shovel-ready gem or a promising project in need of further technical work?
Joint-venture partners Premier Gold Mines (TSX: PG; US-OTC: PIRGF) and Centerra Gold (TSX: CG) have painted two very different pictures of the development-stage project in a legal dispute that began late last year.
In a statement of claim filed against Premier’s subsidiary in Ontario’s Superior Court in late December and viewed by The Northern Miner, Centerra accuses the company of inflating Hardrock’s resource estimate to improve its own profile.
Centerra is seeking to have the project put on care and maintenance, and asking for a declaration that an October 2019 mineral resource update not be considered a feasibility study and that the joint venture’s board of directors not be required to green-light Hardrock’s development based on it.
“To maximize its own apparent value, [Premier] has taken steps to increase the perceived value of its interest in the Hardrock deposit in northern Ontario, which accounts for a substantial portion of the value attributed to Premier Gold Mines,” Centerra said in its claim. “Premier Gold Mines has pushed to inflate the resource estimates for the Hardrock deposit in order to spur development and make the deposit — and, by extension, itself — appear more attractive.”
Premier hit back in mid-February with a statement of defence and counter-claim that called Centerra’s objections to the technical work unfounded, and alleged Centerra was trying to prevent Hardrock from being green-lit unless it could control the project development, in contravention of the companies’ partnership agreement.
“Contrary to the [partnership agreement] … Centerra has no intention of allowing the project to be developed unless Centerra controls the timing of development and is responsible for construction of the project,” Premier said.
Both Premier and Centerra declined The Northern Miner’s requests for comment.
At the heart of the dispute, which is being waged through the companies’ subsidiaries, is the October mineral resource update for the open-pit gold project. The update reported total measured and indicated resources of 147.5 million tonnes at 1.5 grams gold per tonne gold, or an estimated 7.1 million oz. contained gold— an 11% increase over the project’s 2016 estimate.
The update, conducted by G Mining Services, also reported a 21% increase in grade, 26% increase in ounces and 4% increase in tonnes versus the measured and indicated open-pit resources in the 2016 estimate.
The update was three years in the making. Under the partnership agreement, Greenstone Gold Mines — the joint venture managing Hardrock — can only approve the project if its feasibility study demonstrates a post-tax internal rate of return of 15% or higher on an after-tax and pre-financing cost basis. When the project’s 2016 feasibility study showed a post-tax IRR of 14.4%, the GGM directors opted to approve additional work to advance the project to the point where they could make a development decision.
According to Premier’s statement of counterclaim, the 2019 update — delivered to the GGM board in September — demonstrated Hardrock would have a 17.6% post-tax IRR.
Centerra disagreed with the report’s findings. In its statement of claim, the company accused G Mining of not acting independently and took issue with the firm’s technical work on Hardrock, saying that the choice and application of specific grade shells, and the use of a hard boundary on those shells, aren’t supported by the data and “significantly influence the overall grade of the deposit.”
It also disagreed with the “aggressive” level of capping applied, and said G Mining’s cost estimates were too low, at odds with similar projects in Canada and the prevailing market conditions and were a reflection of “material design deficiencies.”
“The work underlying the 2019 Hardrock project update cannot constitute a feasibility study because, given the problems with the methodology applied and the estimates being used, it cannot reasonably serve as the basis for a final decision by a proponent or financial institution to proceed with or finance the development of the Hardrock project,” Centerra said in its claim. “Any attempt by the partnership to try to obtain financing with these issues unresolved is likely to have lasting, negative consequences on the partnership’s ability to raise funds for the project in the future and may make any such financing impossible.”
G Mining, which is not named as a defendant in Centerra’s lawsuit, declined a request for comment from The Northern Miner.
When put to a vote on Dec. 20, 2019, GGM’s four-member board was split down the middle. In Premier’s counterclaim, it argued the positive IRR necessitated that directors vote in favour of project development, and that Centerra and its two directors were in breach of the agreement. Centerra disagreed, asserting its directors had the right to a negative vote.
In late March 2020, Premier made a US$205-million offer to acquire Centerra’s stake in Hardrock, saying that it was making the bid in co-operation with another undisclosed company that wanted to take Hardrock through to production. Centerra rejected the offer in early April.
“Centerra’s decision not to accept our offer confirms that Centerra recognizes the substantial value of the Hardrock project and is inconsistent with its refusal to make a positive feasibility decision in connection with the project,” Ewan Downie, Premier’s president and CEO, said in a press release on April 8.
Premier’s offer was necessary to demonstrate Hardrock’s value and its own to the market, Joe Mazumdar, co-editor and analyst at Exploration Insights, an industry newsletter, said in an interview. (Mazumdar owns stock in Premier but not in Centerra.)
Premier, which is trading at $1.69 on the Toronto Stock Exchange as of May 11 — down from a recent high of $2.26 at the end of October, when it reported strong third-quarter results — isn’t properly valued, Mazumdar said, and Hardrock makes up a large part of its valuation.
In a research note on Jan. 24, the Bank of Montreal’s Andrew Mikitchook downgraded Premier’s target price to $3.75 per share from $4.75 to match production and cost guidance at its Mercedes mine in Mexico. But the mining analyst said in his note to clients that the change in target price was also meant to reflect an expected delay at Hardrock. Mikitchook wrote that he targeted 2023 for production, a change from his earlier estimate of 2022, to allow time for the legal challenge to be resolved.
Mazumdar argues that the offer “is forcing Centerra to say: ‘What do we do with this project?’ Otherwise, for Premier, the market’s impression is the project isn’t economic, there’s a problem with it, that’s why Centerra doesn’t want to build it.”
Some analysts are valuing Centerra’s stake in Hardrock at less than $100 million Canadian, Mazumdar added. “So for [Centerra], if they don’t think the project’s worth anything, take the US$205 million, say goodbye, and then fund your own stuff and you’ve got a big delta there in valuation that you’re realizing. But I don’t think Centerra thinks like that — I think Centerra thinks the project’s worth more. Otherwise, they would have taken [the money] and walked away.”
In addition, Mazumdar said Hardrock, even at its 2016 resource estimate, makes economic sense given the climbing price of gold, which in October was around US$1,500 per oz., and is currently around US$1,700 per oz. due to coronavirus-related market uncertainty and the unprecedented global fiscal stimulus measures taken to combat the economic impact of the pandemic.
“Right now, and especially with local Canadian gold prices and the weaker Canadian dollar, the project looks even better than it did before,” Mazumdar said. “Even if they approve the old feasibility study, the project looks much better.”
Mazumdar speculated Centerra’s lawsuit was a tactic meant to avoid spending capital on Hardrock this year, when it already has funds allocated to its Kumtor mine in Kyrgyzstan.
“It’s not a situation where Centerra doesn’t want to build the project. They do, and they say that in their presentations,” he said. “It just seems to me that right now because of their other capital commitments and other projects that they don’t want to build it right now.”
“Under the agreement … if they approved the new feasibility study, there is a timeline that starts in terms of construction, financing, and the project starts building potentially by the summer if everything went correctly at the end of 2019.”