Premier Gold Mines (TSX: PG; US-OTC: PIRGF) has brought in Centerra Gold (TSX: CG; US-OTC: CAGDF) as its joint-venture partner for its flagship Trans-Canada property, including its advanced Hardrock gold project, in the Geraldton-Beardmore greenstone belt of Ontario.
Centerra, which operates the Kumtor gold mine in the Kyrgyz Republic and the Boroo gold mine in Mongolia, can acquire a 50% interest in Trans-Canada by spending up to $300 million on the property.
The company’s cash payments would include $85 million upon the deal closing, expected March 6, and up to $185 million in development funds to help complete the Hardrock feasibility study, including a resource update for the project expected later this year. Any remaining funds would go towards mine construction.
Centerra also agreed to provide Premier up to $30 million, based on the results of the updated resource estimate. The junior will not need to contribute to the joint venture until the partners have used Centerra’s $185 million. Afterwards, the companies would evenly share all costs at the Trans-Canada property.
On a conference call, Premier’s CEO Ewan Downie said the partnership provides a non-dilutive financing for Hardrock. “We view this as a great way for the company to ensure that we can build the Hardrock project or advance it to development with very little to zero dilution to our shareholders, and essentially provides for fully financing Hardrock to production.”
Dundee Capital Markets analyst Joseph Fazzini views the transaction as “very positive,” as it provides more clarity on the project. “Between Centerra’s initial capital injection and the balance sheets of both partners, we consider Hardrock to be fully financed from an equity perspective.” He notes the partners will still need to raise debt or other funds to complete any mine construction. Fazzini has a “buy” and a $3.50 target on Premier.
A January 2014 preliminary economic assessment (PEA) envisioned Hardrock starting as a 10,000-tonne-per-day open-pit operation before expanding to 18,000 tonnes per day in the third year. Estimated start-up costs were $410.6 million, not including the $166.2 million for the mill expansion. Average annual production was 202,700 oz. gold at total cash costs of $737 per oz. over 15 years.
Downie notes the PEA used a smaller 2013 resource estimate, while the feasibility study will incorporate the larger July 2014 resource of 4.87 million oz. gold from 89 million indicated tonnes grading 1.70 grams gold per tonne, and 2.74 million oz. gold from 23.2 million inferred tonnes at 3.69 grams gold. As a result, Premier has been looking at a larger mill at start-up, estimated in 2018, and expects higher annual and life-of-mine production.
John Pearson, Centerra’s vice-president of investor relations, says the joint venture gives Centerra exposure to not only Hardrock’s resource but to the other deposits on the Trans-Canada property. “We’re pretty excited about it because the property has a large land package and exceptional exploration potential.”
Located 250 km northeast of Thunder Bay, the 330 sq. km Trans-Canada property also contains the Brookbank, Kailey and Key Lake gold deposits. Brookbank is the most promising, with a 2014 PEA showing it could add 48,700 gold oz. a year for seven years to Hardrock’s production.
BMO analyst Andrew Breichmanas notes the interest in Hardrock adds to Centerra’s project pipeline that includes Gatsuurt in Mongolia and Oksut in Turkey, and it helps diversify the company’s asset portfolio.
“BMO Research estimates that development of the various projects could see Centerra production reach more than 1 million oz. gold a year and dilute the contribution of the Kumtor mine in the Kyrgyz Republic from 90% last year to 60% by 2018,” he writes. Breichmanas rates Centerra as a “market perform,” with a $7 target.
“Definitely a goal of the company is to reduce our geopolitical risk, and certainly by acquiring 50% of this asset and property, I think we have achieved that,” Pearson says, adding the company will consider other Canadian growth opportunities.
Downie says the deal lowers Hardrock’s development risk.
“It’s a tremendous step for us to truly be in a position to reach our goal of transitioning from explorer to producer, and with our strong balance sheet that we have, it will allow us to continue to advance our Red Lake and Nevada assets,” he says.
Premier owns 100% of the McCoy-Cove gold property in Nevada and 49% of the Rahill-Bonanza joint-venture with Goldcorp (TSX: G; NYSE: GG) in Red Lake, Ont. It has $120 million in its treasury.
Centerra had US$328 million in cash and equivalents at the end of September 2014.