Perpetua Resources (PPTA) Update – Staying The Course
Shares of Perpetua Resources (PPTA) are having a tough day today following the release of a Financial Update. This Financial Update is part of the process for formalizing its loan application with the U.S. Export-Import Bank (EXIM), which indicated potential financing of up to $1.8 billion in the Stibnite gold project via a Letter of Interest in April 2024.
There is a lot to unpack here so let’s take it one step at a time.
First, the Financial Update is based on basic engineering work from a variety of engineers, consultants, utilities and financial advisors. It takes the technical data from the company’s Feasibility Study (drafted in 2020 and last updated in 2022) and advances it to get to a basic engineering level. There were no material changes to the technical aspects of the projects (i.e. no increased estimates to gold and antimony reserves and resource), mainly improvements and adjustments to infrastructure, equipment and processing designs.
The bad news is that when factoring in current cost estimates for construction and operations, which have gone up considerably since 2020, the project will now cost more to get up and running than previously modeled. The initial capital estimate is $2.215 billion, including a $192 million contingency. This is roughly $1 billion more than the $1.263 billion in the 2020 feasibility study.
The good news is that commodity prices have also gone up considerably. Gold is at $2,900/oz. (was at $1,600/oz. in 2020), antimony is $10/lb. (was at $3.50/lb. in 2020).
So, at current prices, the project should throw off more average annual EBITDA in the first four years ($1.37 billion a year vs. $566 million in 2020) and free cash flow ($1.12 billion a year vs. $500 million in 2020) than previously modeled in the 2020 base case.
All-In Sustaining Costs on a byproduct basis are expected to average $435 per gold ounce over the first four years of production and under $760 per ounce over the life-of-mine, positioning the Stibnite Gold Project to become the lowest cost gold project in the United States, Canada and Australia.
The project’s estimated after tax Net Present Value (NPV) is $3.65 billion. That NPV value is the sum total of the project’s after tax cash flows discounted back to the present time, assuming a 5% discount rate (the risk free rate). Back in 2020 the base case NPV estimate was $1.864 billion. So this is roughly double that amount.
The after tax internal rate of return (IRR) is 15.4%, and the project is estimated to break even at 3.2 years. That IRR is lower than previously estimated, and the payback period is longer. The 2020 IRR was 27.7% and the after tax payback period 2.5 years.
The bottom line here is that the project’s estimated rate of return is still considered viable, but it’s lower than previously expected given the aforementioned cost and commodity price estimates.
However, if we boost the price of gold to $3,100/oz/ and antimony to $22/lb. the IRR goes to 29%, which is higher than the estimate in the 2020 Feasibility Study.
So what do we do with this information?
First, consider that, given what we think we know right now, the project doesn’t look as valuable as it did when costs were lower. Freaking inflation.
But it’s still a viable project. And if you believe gold and antimony prices will go up faster than costs (seems likely) and/or if you think Perpetua will discover more resources on its property (seems likely) the project will look better in the future than it looks now.
Second, recognize that we’re working with best guess estimates, which are imprecise at best. The goal with these estimates is to see if a project is viable, and then, if it is, get building. Once that happens the process of adding more resources and reserves through exploration begins.
Finally, recognize that Perpetua is going through the required steps to get permits, get financing, and get building. That process should create value in the company. What this new Financial Update tells us is that they’ll need to go after more financing than previously expected. Seems like one step back to take two steps forward.
Important to the stock’s performance and creeping up the Lassonde curve is the market’s belief in the bull case scenario. We may well sell this stock before it gets far into the resource mining stage, so we can benefit from belief in what can happen without waiting around to see what actually happens.
On the financing front, management has said that the recent basic engineering work suggests an increase of over 15% in the number of job-years (a measure the EXIM is familiar with) and that they think this could mean a corresponding increase to the $1.8 billion indication of interest. We will see.
In addition to the EXIM the company is “evaluating a number of potential strategic and financing opportunities.”
On the construction front, the company is not sitting still.
They have entered into an agreement with Idaho Power Company (IPC) to begin sourcing long lead equipment needed to bring more electricity to the project site. The estimated cost is $90.2 million. Perpetua needs to approve any expenditures over $1 million. Perpetua will pay IPC $18.8 million upon agreement execution (which I assume is right now) with remaining payments due quarterly through 2027 (works out to just under $8 million a quarter by my math).
In the coming weeks management is going to need to do some work to smooth things over with investors. The pressure is really on now to figure out an investor-friendly financing package.
I think the stock will still work. The risk of this type of development/reaction is exactly why I started with a half position. The world of development-stage gold mining is wild.
We may add another quarter position next week. But for now I am keeping Perpetua at buy half and will let the stock digest this news. That said, for risk tolerant investors that feel like they have a decent grasp on what all this means and can be patient, I wouldn’t argue against averaging down some here, just not to a full-size position yet. BUY HALF
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