Pretium's Master Plan? - Bitly

Pretium’s Master Plan? How a Feat of Financing Could Turn Brucejack into the Star of an M&A Show

Alex Godell | Managing Member Santeri Strategies June 2016

Against the backdrop of a prolonged pricing downturn, Pretium pulled off a heroic $700 million capital raise to fund mine construction at its Brucejack property. With a colorful cast of characters and several prominent industry themes interwoven throughout its evolving storyline, a closer look into Pretium offers a compelling window of insight into the world of mine finance and strategic planning. With Brucejack set to take the stage, this study will: 

Provide an overview of the Brucejack Project with a specific focus on the $540 million funding package completed with Orion Mine Finance and Blackstone Tactical Opportunities comprised of equity, debt, and stream financing components.



Illustrate key features of the stream financing model from the capital provider’s perspective including its inherent capital efficiency, its powerful margin structure, and its leveraged underlying exposure, which combine to posture the streamer for compounded capital returns.



Illustrate consequential implications of the stream financing model to the mine operator including potential time value decay, perverse pricing incentives, profit erosion, dilution, and an intrinsically unknown and unknowable cost of the stream.



Review the specific terms on which Pretium took the financing, finding that while it largely fits the feature profile of a conventional stream an innovative layer of protection has been incorporated through a series of stream repurchase options.



Review the management decisions Pretium will face during mine start-up as a result of those financing terms, with pending option exercise and loan maturity dates as early as December 31, 2018.



Propose that Pretium can secure Brucejack value by making an M&A play; a strategic move that could relieve the impending liquidity crunch and be supported by favorable transaction timing as a constructive industry landscape fosters M&A activity.



Put forth a scenario where Zijin Mining Group and Barrick Gold Corporation leverage their Strategic Cooperation Agreement to make a 100% takeover bid for Pretium, using their joint liquidity position to repay Pretium’s maturing term loan and repurchase the 8% stream production interest currently in place.



Conclude by detailing how Pretium, Zijin, and Barrick each contribute critical value in this hypothetical transaction scenario while each party also achieves its stated corporate objectives with: o

Pretium reaching commercial production at Brucejack, capturing asset value and delivering return to shareholders, while retaining long-term exposure to the asset through Barrick shareholdings.

o

Zijin providing access to deep Chinese financial capital pools along with competitive intellectual capital platforms, while growing its resource base and geographically diversifying its global footprint.

o

Barrick providing region-specific and world-class operating expertise as it replenishes reserves in a reasonably priced acquisition that preserves its balance sheet health and allows it to capitalize on the relative value of its shares.

© 2016 Santeri Strategies LLC All Rights Reserved

Disclaimer The author of this report is not a registered analyst or advisor with any financial exchange or any other regulative body. In accordance with the U.S. Investment Advisers Act of 1940 the information contained within this report is for illustration and discussion purposes only and is not a recommendation, an offer to sell, or a solicitation of any offer to buy, an interest in any affiliated entity or fund, nor should it be construed or used as investment, tax, ERISA, or legal advice. The information contained herein may not be complete and is subject to change without notice; no representation is made with respect to its accuracy, completeness or timeliness and it may not be relied upon for the purposes of entering into any transaction. In addition, certain information has been obtained from third party sources and, although believed to be reliable, the information has not been independently verified and its accuracy or completeness cannot be guaranteed. All projections, valuations, and statistical analyses are provided for illustrative and educational purposes only. They may be based on subjective assessments and assumptions and may use one among several alternative methodologies that produce different results and, to the extent that they are based on historical information, they should not be relied upon as an accurate prediction of future performance. This material is not intended to represent a comprehensive overview of any law, rule, transaction, or regulation. Santeri Strategies LLC and the author of this report make no representation or warranty as to the accuracy of the information contained herein and shall have no liability, howsoever arising to the maximum extent permitted by law, for any loss or damage, direct or indirect, arising from the use of this information by anyone relying on this material. All information used within the report has been obtained from publicly available sources. Certain definitions, assumptions, facts and figures, including but not limited to, Proven and Probable Mineral Reserves and Measured and Indicated Mineral Resources are defined as per the Feasibility Study and Technical Report Update on the Brucejack Project, Stewart, BC (“Feasibility Study”) generated by Tetra Tech and published June 19, 2014, which is available at www.pretivm.com. Companies mentioned in this report include: Anglo American plc B2Gold Corp. Barrick Gold Corporation Black Hawk Mining Inc. Blackstone Tactical Opportunities Central Sun Mining Inc. Franco-Nevada Corporation Freeport-McMoRan Inc. Goldcorp Inc. Kaminak Gold Corporation

Newhawk Gold Mines Ltd. Orion Mine Finance Pretium Resources Inc. RBC Capital Markets Royal Gold, Inc. Silver Standard Resources Sprott Asset Management Inc. Zhaojin Mining Industry Co. Zijin Mining Group

The author of this report does not hold direct ownership of Pretium Resources Inc. shares but does hold either direct ownership of company shares or indirect ownership through exchange traded funds in several of the companies referenced herein. Indirect ownership through exchange traded funds may include Pretium Resources Inc. All opinions are completely independent and have not been influenced by any company in any manner. This report has not been commissioned by any third party and no compensation, financial or otherwise, has been received for its authorship. The name Santeri, Serial No. 86/910,753 and the Santeri Cube Logo, Serial No. 86/910,758 are service marks owned by Santeri Holdings LLC and are used under license. All material contained herein is Copyright 2016 Santeri Strategies LLC, all rights reserved. Use, copying, reproduction, distribution, display or transmission in any form by any means, without the express written permission of Santeri Strategies LLC is prohibited.

Contents The Project

1

The Financing

4

The Stream

8

The Price

14

The Cost

19

The Debt

22

The Royalty

24

The Equity

25

The Protection

27

The End Game

30

The Buyer

32

The Deal

35

Citations

40

References to external sources are denoted by inline numeric characters. Citation detail can be found at the end of the report. Footnotes are denoted by inline alphabetic characters referencing clarifying notes at the bottom of the page. All figures expressed in US Dollars unless otherwise noted.

Figures Figure 1: Brucejack Total (West Zone & Valley of the Kings) Reserve and Resource Estimates Figure 2: Brucejack Production Profile (Koz. and MMt. Ore) and All-In Sustaining Cost ($/oz.) Figure 3: Syndicate Financing, Total Brucejack Capital Needs, and Total Funding Sources, $M Figure 4: Pretium Equity Value and Shareholding Structure Figure 5: Pretium Cash Calls for Loan and Offtake Options, $M Figure 6: Pretium Cash Calls for Stream Options, $M Figure 7: Stream Financing Transaction Structure Figure 8: Syndicate Pre-tax Margins on Streamed Gold, $/oz. Figure 9: Illustrative Syndicate Margin Growth in Rising Price Environment, $/oz. Figure 10: Illustrative Comparison of Stream Agreement Carrying Interest Figure 11: Syndicate Identifiable Term Sheet Return (%) vs. Stream Exposure (Annual Volume, oz.) Figure 12: Average Apparent Contract Price for Metal Purchased Under Stream, $/oz. Figure 13: Discounted Average Apparent Contract Price, $/oz. Figure 14: Total Contract Price Paid for 8% Stream on Brucejack Production, $/oz. Figure 15: Total Contract Price ($/oz.) vs. Pretium's Retained Annual Production Share (oz.) Figure 16: Total Discounted Contract Price vs. Spot Gold Price, $/oz. Figure 17: Present Value of Foregone Sales on 8% Stream, $M Figure 18: Brucejack Profitability, $/oz. Figure 19: Cost of Stream, Pretium Option Scenarios, 100% Production Basis, $/oz. Figure 20: Cost of Stream, Sensitivity to Gold Price, $/oz. and $M Figure 21: Cost of Stream Restated in Terms of Loan Interest Rate Equivalent, % Figure 22: Cost of Stream Restated in Terms of Royalty Equivalent, % Figure 23: Cost of Stream Restated in Terms of Equity Dilution Equivalent, % Figure 24: Pre-tax Profit Share of Brucejack, % Figure 25: Pretium's Dimensions of Management Figure 26: 2018 Stream Repurchase and Loan Repayment Scenario, $M Figure 27: Pretium Net Liquidity, 2019 Loan Extension and 8% Stream Repurchase Scenario, $M Figure 28: Pretium Equity and Enterprise Value Acquired by Zijin and Barrick, $M Figure 29: Sources and Uses of Funds in Acquiring Pretium, $M Figure 30: Barrick Proforma Equity Structure

1 2 4 5 6 7 8 10 11 12 13 14 15 16 16 18 18 19 20 21 22 24 25 26 27 28 28 35 37 38

The Project Pretium Resources Inc. (Pretium) is currently developing one of the most intriguing mineral deposits in the world. Its high-grade gold and silver Brucejack Project is fully permitted, fully financed, and has construction underway with commercial production targeted for the second half of 2017. The property is located 65 kilometers north of the town of Stewart in northern British Columbia, a district long familiar with mining. A National Instrument 43-101 compliant feasibility study was completed in June of 2014 1 which defined total Proven and Probable Reserves (P+P) of 7.5 million ounces (Moz.) of gold and 30.7 Moz. of silver at average grades of 14.1 grams per tonne (g/t) and 58.0 g/t, respectively.a The mine will initially be comprised of two areas, the West Zone and the Valley of the Kings, the latter of which hosts the bulk of the gold mineralization containing 6.9 Moz. at 15.7 g/t. Measured and Indicated Resources (M+I) defined to date of 9.7 Moz. of gold and 48.9 Moz. of silver give Brucejack the grade and scale potential to become a world-class mine.

Figure 1: Brucejack Total (West Zone & Valley of the Kings) Reserve and Resource Estimates Grade Ore Tonnes, MMt.

Contained Metal

Gold,

Silver,

Gold,

Silver,

g/t

g/t

Moz.

Moz.

Proven

3.5

12.2

161.0

1.4

18.2

Probable

13.0

14.7

30.0

6.1

12.5

Total P+P Reservesb

16.5

14.1

58.0

7.5

30.7

Measured

4.4

12.0

195.8

1.7

27.7

Indicated

15.9

15.6

41.9

8.0

21.2

Total M+I Resourcesb

20.3

14.8

75.3

9.7

48.9

The feasibility study defined an 18-year mine life for the underground operation at a prescribed processing rate of 2,700 tonnes of ore per day. Despite the relatively modest throughput, the high-grade material results in projected annual gold production of 504,000 oz. for the first eight years and average life of mine (LOM) gold production of 404,000 oz. per year.

The feasibility study notes that due to rounding of some figures there may be minor discrepancies in total reserves and resources. Reference Tables 1.1, 1.2, and 1.3 in the June 2014 Feasibility Study. b Definitions of “Reserves” and “Resources” as used in the June 2014 Feasibility Study, with the Mineral Reserve estimate based on a cutoff grade of C$180/t ore and the Mineral Resource estimate based on a cutoff grade of 5.0 g/t of gold equivalent. Mineral Resources are inclusive of Reserves. a

santeristrategies.com

1

All-in Sustaining Costs (AISC)c have been scoped at $446/oz. allocated over total LOM refined saleable gold of 7.067 Moz., with achievable recovery rates of 96.7% for gold and 90.0% for silver. Refined saleable silver is expected to reach 26.28 Moz., with 45% of the aggregate gold and silver production being doré recovered using a gravity concentrator and the remaining 55% being concentrates bagged for storage and transport.

Figure 2: Brucejack Production Profile (Koz. and MMt. Ore) and All-In Sustaining Cost ($/oz.) Gold Production

Silver Production

Mill Feed

Koz. . 0.60

MMt.

0.50

1.00

0.40

0.80

0.30

0.60

0.20

0.40

0.10

0.20

1.20

Reclamation: $4/oz G&A: $20/oz

Sustaining Capital: $37/oz

Cash Cost: $385/oz

2035

2033

2031

2029

2027

2025

2023

2021

2019

2017

-

2015

-

AISC: $446/oz.

The high-grade ore drives robust project economics, with the feasibility study outlining a base case after-tax NPV5d of $1,445 million (M) generating an internal rate of return (IRR) of 28.5% at $1,100 gold, $17.00 silver, and USD:CAD exchange rate of 0.92.e Given the low AISC, the project should be durable to price downturns as indicated by the study’s estimates that Brucejack can still yield a 16.5% IRR at $800 gold and $15.00 silver. With permits in hand and funding completed, one of the primary remaining project risks lies in proving out the geology. Though the mineralized area has been identified, high variability in grade between the veins and surrounding stockwork poses a challenge. In order to gain confidence in grade distribution Pretium launched

Pretium defines AISC as including cash operating costs net of silver credits ($2,722.2M), Corporate G&A ($138.0M), Reclamation Cost Accretion ($27.5M), and Sustaining Capital Expenditure ($261.4M), for a total of $3,149.1 allocated over 7.067 Moz. of gold equating to $446/oz. Reference page 17 in Pretium’s European Gold Forum Presentation from 19 April 2016 and Footnote 9, Table 7 in Pretium’s Press Release dated 19 June 2014. d Using an aggregate tax rate of 41% and discount rate of 5%. Reference Table 22.3 and section 22.6 in the June 2014 Feasibility Study. e Pretium announced updated capital cost estimates in February of 2016 and new project economics in April 2016 with a revised silver price assumption of $14.00 and revised USD:CAD rate of 0.75. However, the operating cost estimates from the initial Feasibility Study were not revised with these new assumptions in either release. For consistency between operating cost estimates and resulting project economics, Santeri has maintained reference to economics and assumptions as originally published in the June 2014 Feasibility Study. c


2

a 60,000-meter infill drilling program in the Valley of the Kings in 2015 which targeted the stope areas to be mined in the first three years.2 Drilling recently concluded with assay results from the program confirming the anticipated style of the orebody thus far. Pretium President Joseph Ovsenek recently cautioned that they expect some variability in the deposit early on and only once mining begins will they get a true feel for the material.3 Given Brucejack will be an underground mine, delivering on the envisioned grade will be vital to achieving operating cost, capital budget, and production targets.

Betting on Brucejack Pretium is under the leadership of Chairman and Chief Executive Officer Robert Quartermain who was previously at the helm of Silver Standard Resources for a 25-year tenure. Shortly after his resignation from Silver Standard in 2010, Quartermain acquired the Brucejack and Snowfield properties from his former company for a total consideration of $450M,4 with $215M paid in cash and the balance paid in shares of Pretium through a concurrent IPO which valued the shares at $6.00 each.5 Upon deal closing Pretium focused its full attention on Brucejack, as Quartermain was determined to discover what mineralization was hidden in the Valley of the Kings. The project was quickly advanced, with a drilling program launched in 2011 and first results hitting gold intercepts of 18.76 g/t.6 As the exploration program continued with success, initial filing for permits followed in 2013. Pretium then cleared a major hurdle by publishing its definitive feasibility study in June of 2014 indicating a significant resource base and positive project economics. Provincial and federal permits required to inaugurate mine construction were received on September 1, 2015 which was soon followed by an announcement on September 5 that mine construction had commenced. Pretium then made its next big splash just 10 days later.


3

The Financing On September 15, 2015 Pretium announced a $540M financing package7 with a syndicate of two private funds, Orion Mine Finance and Blackstone Tactical Opportunities (“Orion” and “Blackstone”, or together “the Syndicate”) that provided nearly 70% of the funding required to advance Brucejack to commercial production.f The arrangement drew on a diverse suite of financing structures including a $40M equity placement, a $350M loan, and a $150M stream component. The deal also included an offtake agreement giving the Syndicate rights to 100% of the saleable gold production net of deliveries payable under the stream.

Figure 3: Syndicate Financing, Total Brucejack Capital Needs, and Total Funding Sources, $M Source

Syndicate Financing

Equity

Private Equity Placement

Debt

Senior Secured Loan

Stream

Funding $40M

Basic Description Each subscribed for 3.85M shares at $5.20 with a right maintain pro rata ownership

$350M

$150M advanced at closing, remaining $200M drawn within 18 months

Stream Agreement

$150M

Rights to 8% production for ongoing payments of $400/oz. gold and $4.00/oz. silver

Total Syndicate Financing

$540M

Contingency, $35M

Working Capital, $56M

Mine Underground, $101M

Indirect Costs, $98M Total Capital Cost, $697M

Owner Costs, $160M

Offsite Infrastructure, $81M

Mine Site, $165M

Common Share Equity Raise, $146M

Syndicate Equity, $40M

Syndicate Stream, $150M

Incurred Cost to Sep. 30, 2015, $66M

Total Financing, $752M

Syndicate Loan Facility, $350M

Capital costs reference the update published on 17 February 2016 which revised estimates down to $697M from an initial $747M. Revisions included capital rescoping as well as a revised USD:CAD rate of 0.75 from 0.92. Total financing of $752M shown in Figure 3 exceeds capital needs of $697 depicting that no further construction funding is required. Reference page 17 in Pretium’s European Gold Forum Presentation from 19 April 2016. f


4

Entering Through Equity The equity component of the Syndicate’s financing package contributed $40M through a private placement with Orion and Blackstone each subscribing for 3,848,004 common shares at a price of $5.1975 per share.8 The subscription included rights to participate in any subsequent equity issuances on a pro rata basis to maintain its proportionate ownership interest in Pretium. Orion exercised that right in March of 2016, subscribing for an additional 752,906 shares at a price of $4.589 per common share after Pretium announced a marketed offering of 28,384,000 common shares.10 Orion’s participation contributed to a total equity raise of $146M which concluded all necessary funding for the construction of Brucejack.

Figure 4: Pretium Equity Value and Shareholding Structure Silver Standard, 9.6% Pretium Share Structure as of April 15, 2016 Retail, 26.9% Pretivm Mgmt, 2.0% Syndicate, 4.77%

Zijin, 8.7%

Institutions, 48.0%

Funds from Syndicate Equity

US $40M

Funds from Common Share Offering

US $146M

Shares Outstanding

177.2M

Fully Diluted Share Base

186.3M

Market Capitalization

CAD $1,460M

Market Capitalizationg

US $1,139M

Lending for Offtake The financing package takes on an additional layer of complexity in the loan, offtake, and stream components. Each includes a series of independent options that can be exercised at Pretium’s call. The $350M credit facility is a Senior Secured Loan with $150M advanced to Pretium at closing and the remaining $200M to be drawn down within 18 months.11 Interest is accrued at a fixed annual rate of 7.5% and is payable in full along with principal at the maturity date of December 31, 2018. Pretium can the extend loan maturity date one year to December 31, 2019 by making a payment of 2.5% of the principal outstanding. The base offtake agreement is applicable to 100% of the 7.07 Moz. of saleable gold net of stream deliveries. Gold delivered under the offtake will be purchased by the Syndicate at then prevailing market prices. At Pretium’s option, the offtake can be reduced to either 50% or 25% of remaining gold production by making a lump sum cash payment of $11.00/oz. of remaining gold production if exercised at year-end 2018, or $13.00/oz. if exercised at the end of 2019. Market capitalization as of 15 April 2016 and includes Pretium’s listings on both US and Toronto exchanges. USD:CAD exchange rate of 0.78 used for conversion, the applicable rate as of the same date. Reference page 36 in Pretium’s European Gold Forum Presentation from 19 April 2016. g


5

To limit the permutations in scenario modeling, we have consolidated the loan facility and offtake agreement into a single financing component. Though intangible value in having long-term access to gold could be assigned to the Syndicate, as the agreement calls for prevailing market price to be paid upon delivery no incremental economic margin is assumed to be gained or lost by either party on the metal delivered under the offtake agreement in this study.

Figure 5: Pretium Cash Calls for Loan and Offtake Options, $M Option 1: 100% Offtake

$410M

Option 2: 50% Offtake


$39M

$58M

$410M

$410M

Loan & Interest Repaid December 31, 2018 Loan Principal & Accrued Interest


$436M



$46M

$69M

$436M

$436M

Loan & Interest Repaid December 31, 2019 Optional Offtake Reduction Payment

Selling a Stream The stream portion of the funding package provided Pretium with an initial capital payment of $150M upon closing. In return for the capital payment, the Syndicate gained rights to purchase 8% of the 7.07 Moz. of refined gold and 26.28 Moz. of refined silver for $400/oz. and $4.00/oz., respectively. The series of stream options allows Pretium to reduce the stream interest to 4%, 3%, or to repurchase it in its entirety with each option contingent on Pretium making a cash payment to the Syndicate. h The options are exercisable on one of two dates, either December 31, 2018 or December 31, 2019.

The payments of $237M and $272M required to repurchase the stream are explicitly stated amounts per the legal agreement. Using the formula delineated in Article 7.3 of the Purchase and Sale agreement of $150,000,000 * (1.15) D/365 where “D” is the number of days between 21 September 2015 and the option exercise date, it can be deduced that the option exercise payments were defined as the amount that generates a 15% return for the Syndicate. h


6

Figure 6: Pretium Cash Calls for Stream Options, $M Option 1: Repurchase Full 8% Stream

Option 2: Reduce Stream to 3%

Option 3: Repurchase Full 8% Stream

Option 4: Reduce Stream to 4%

Option 5: No Exercise, 8% Stream Applies

$272M $237M $150M

$150M

$20M Exercisable December 31, 2018

Exercisable December 31, 2019

The Big Picture With this $540M funding package Pretium was able to execute a significant capital raise in a challenging environment when much of the rhetoric surrounding access to capital centered on the taglines of balance sheets being burdened by debt and equity markets being restricted. Those themes propelled alternative forms of financing into the forefront of the mining industry, with stream financing in particular taking the spotlight. As these stream agreements have risen to prominence, traditional discounted cash flow (DCF) and IRR models have been relied on to assess transaction value. Closer examination of the stream financing model will demonstrate that it is a structure built on principles from which a number of mathematical conclusions can be drawn, and that the limits of traditional valuation models prohibit both the full value proposition to the streamer and full risk profile taken on by the miner from appropriately being captured in these transactions. This study will illustrate each of those principles, beginning with the stream financing model from the capital provider’s perspective. We will then turn to the mine operator’s perspective, finding that streams pose many potential entanglements which carry long-term implications. Examining Pretium’s agreement will show that a novel form of defense against these intrinsic dangers has been incorporated into the terms. Comparing the terms of Pretium’s stream agreement to the other components of its capital structure will construct a picture of the financial path it will face as it advances Brucejack toward commercial production, and by studying that course a possible end game for Pretium will be proposed. The study will conclude with a viable scenario that could achieve that suggested end.


7

The Stream The stream financing model is constructed on three basic terms: an upfront capital payment, a percentage interest in streamed production, and the ongoing metal purchase price for that stream. The beauty of the streaming model is that the simplicity of those three terms combine to create ingenious features far beyond what is plainly seen on the term sheet. Namely, and from the capital provider’s perspective, the stream model is inherently efficient in allocating capital, it creates a powerful margin structure that both grows on the upside and protects on the downside, and it has an embedded exposure profile that creates the opportunity for compounded value growth. These features construct a platform on which the capital provider stands for leveraged return.

Figure 7: Stream Financing Transaction Structure 1. Upfront Capital Deposit

Pretium

Syndicate 2. Metal Purchase Payments

3. Metal Delivery

The Smart Money As precious metals prices have declined over the past several years, stream capital has been aggressively deployed leading analysts to refer to stream finance providers as the, “smart money of the gold industry,”12 noting that they employ a large base of intellectual capital in the form of mining engineers, metallurgists, and financial consultants to facilitate their due diligence and investment execution. The Smart Money Thesis then follows that the intellectual capital deploys its financial capital at low points in the price cycle, positioning stream finance providers to benefit from upturns in market prices.


8

Though stream finance providers have certainly been opportunistic in their capital deployment, they benefit from a stream business model that is inherently predisposed to efficiency in allocating capital in a form that equity investors and mine operators do not have at their disposal. This inherent capital efficiency manifests itself in two forms. The first is that the streamer has the ability to allocate its stream capital investment specifically to the single asset in which it wants to invest. Though Pretium has maintained a commitment to its shareholders to focus near-term corporate resources on developing Brucejack,i it also has the undeveloped Snowfield exploration property in its portfolio. A traditional equity investor buying shares of Pretium stock is exposing their capital to risk across the entire portfolio of assets; developed or undeveloped, proven or unproven, robust or marginal. That equity investment creates a dependence on the management team to allocate their dollars efficiently across the portfolio. Even with a proven management team that competently allocates their capital, the equity investor has resigned control over the specific purposes for which their capital is used. In contrast, the streamer retains control over the stream capital they invest. This is illustrated by Article 3.3 of the Brucejack Metal Purchase Agreement where the Syndicate explicitly states that its stream capital is to be used only, “…for the purpose of funding the construction and development of the [Brucejack] Project in accordance with the Mine Plan.”13 The second form of inherent capital efficiency is that the streamer has no obligation to service the mine through capital calls after its initial investment is made. The Brucejack feasibility study scoped $261.4Mj for ongoing sustaining capital over the mine’s life covering milling additions, equipment replacement, and tailings embankment construction.14 The Syndicate has no obligation to contribute any of that necessary capital, bears no exposure to risk of that capital budget being overrun, and is not required to provide funding for unforeseeable capital burdens that arise over the mine’s life. Its investment is completed in entirety upfront and through the ongoing stream payments. This makes stream financing a very low cash burn business model. The streamer can deploy its capital when it wants to, not when it has to. The recent decline in prices has forced many producers to raise cash by divesting assets just to stay solvent as they have a constant flow of capital needs. The streamer does not carry that burden. It can either hold its investment activity until a more favorable pricing environment returns and its cash flows increase or it can take advantage of the dip in the price cycle by putting its capital to work. So not only does the low cash burn design reinforce the inherent capital efficiency of the stream model, it also insulates the streamer from downside price risk.

Company statement included within the Snowfield Property Overview listed on Pretium’s website. Reflects a USD:CAD rate of 0.75 revised from 0.92, as is consistent with the capital estimate Pretium used in defining all-in sustaining cost. Reference Pretium’s news release dated 17 February 2016. Equivalent to $320.7M at a 0.92 exchange rate, the capital estimate cited in the June 2014 Feasibility Study. i j


9

Profit Power The second variable in the streaming model is the ongoing price at which the streamer agrees to purchase the stream of production. There are two primary price structures being utilized in stream agreements for these payments, either pricing as a percentage of the prevailing spot market price or using a pre-defined fixed price. Pretium and the Syndicate employed a fixed-price agreement, with terms obliging the Syndicate to pay $400.00 per ounce of gold and $4.00 per ounce of silver delivered under the stream. With this fixed-price agreement, the Syndicate has effectively become a gold and silver producer with fixed operating costs. These fixed operating costs create a powerful margin structure. With an assumed spot price of $1,100 goldk the Syndicate generates pre-tax profit of $700/oz. on streamed gold, a margin of nearly 65%. These sturdy margins provide even further mitigation of downside price risk.

Figure 8: Syndicate Pre-tax Margins on Streamed Gold, $/oz. $1,200

$1,100

$1,100

$1,100

$1,100

$1,100

64%

64%

64%

64%

64%

Robust Margins

$400

$400

$400

$400

$400

Fixed Costs

1

2

3

4

5

Time

$1,000 $800 $600 $400 $200 $0 Syndicate Cost of Gold Stream

Syndicate Margin on Gold Stream

In addition to the robust base margin structure, the fixed-price agreement eliminates the risk of margin erosion through cost inflation for the streamer. Preliminary estimates for AISC at Brucejack are $446/oz. of gold, but embedded within that number is operational execution risk along with exposure to rising costs through foreign exchange rates, energy prices,

k

Spot gold price of $1,100 selected for modeling to maintain consistency with assumptions used in Pretium’s June 2014 Feasibility Study.


10

grade deterioration, mining difficulties, metal recovery, and a host of other factors. Pretium will need to effectively manage its operating costs as these headwinds are encountered to prevent margin compression. The fixed-price stream agreement ensures that the Syndicate’s margins are protected from that potential cost inflation, leading to pure leverage to price increases. Not just price leverage; pure price leverage. For the Syndicate, each dollar of spot gold price increase passes directly through to its margins with no risk of it being forfeited. It doesn’t compete with Pretium for that upside and it doesn’t rely on Pretium’s operational execution to protect it. With pure leverage to the upside and low fixed costs protecting the downside, the streamer’s margin structure has a risk profile that is asymmetrically skewed upwards.

Figure 9: Illustrative Syndicate Margin Growth in Rising Price Environment, $/oz. $1,600 $1,400 $1,200

$1,100

$1,200

$1,300

$1,400

$1,500 Pure Leverage

$1,000 $800

64%

67%

69%

71%

73%

$400

$400

$400

$400

$400

Fixed Costs

1

2

3

4

5

Time

$600 $400 $200 $0

Syndicate Cost of Gold Stream

Syndicate Margin on Gold Stream

Opportunity for Gain The final variable in the stream agreement is the percent interest in mine production the streamer holds. With its initial capital investment and ongoing metal payments the Syndicate has purchased rights to 8% of Brucejack’s annual gold and silver production for the first 18 years of planned mine life. Having a fixed life on the stream of 18 years is an important term to note. Many traditional stream agreements allow this carrying interest for the total realized mine life, which can be extended through several means. Should it be resources being converted to reserves on the back of higher prices, the streamer compounds its leverage to price as the increase directly benefits its margins as well as increases delivered volume. Should mine life extension be through discovery, the streamer gains volume exposure at no incremental cost as they do not contribute to the exploration budget that led to the discovery.


11

This protracted carrying interest is core to the streamer’s value proposition. Commenting on its $610M precious metals stream acquisition on Barrick Gold Corporation’s Pueblo Viejo mine, Royal Gold President and CEO Tony Jensen noted: “With regard to reserve optionality it has been our experience that good mines get better… [Barrick is] looking to extend the mine life by expanding the tailings facility and has a potential to convert a lot of those resources into reserves…I think this is a fantastic opportunity to be associated with for decades and decades.”15 With an open-ended time horizon on the stream interest the streamer gains a ceaseless option on price, production, and discovery while the asset owner bears the execution risk of operating the mine and the capital risk of optimizing the mine. That perpetual exposure is a potential hose of value leakage for the miner with an incalculable outward flow. By explicitly defining the Syndicate’s stream interest as applying to only the saleable gold and silver as estimated in the June 2014 Feasibility Study, Pretium has turned off the tap on that latent value transfer. This limitation was an intentional strategic term Pretium negotiated to protect Brucejack’s exploration upside and resource conversion. “When you start putting in higher levels of streaming, and the stream lasts forever, then the potential upside starts going to streaming holders and away from your existing shareholders,”16 said Quartermain while discussing the stream component of Pretium’s financing package.

Figure 10: Illustrative Comparison of Stream Agreement Carrying Interest 0

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20

Open Interest on Time

Illustrative LOM Stream

Brucejack Stream

Open Interest on Deliveries

18 Years Capped Deliveries:  8% Stream, 598 Koz. Total  4% Stream, 300 Koz. Total  3% Stream, 225 Koz. Total

The intangible value the streamer places on this exposure becomes evident when dissecting the structure of the options in Pretium’s stream agreement. As shown in Figure 11 below, if Pretium repurchases the 8% stream in full then the Syndicate will receive a cash payment that generates a 15% return on its capital while its annual streamed volume will go to zero as depicted by the red dot. From that anchor point, the Syndicate was then apparently willing to trade lower term sheet return for higher stream interest.


12

If Pretium reduces the stream to 3% in 2018 the Syndicate will only receive an identifiable 13.8% return on its capital but it will have approximately 12.5 Koz. of gold exposed to spot pricing each year for the 18-year mine life. The other options in the arrangement continue in the same bargained return-for-exposure tradeoff, with the open exposure leveraged through its powerful margin structure.

Figure 11: Syndicate Identifiable Term Sheet Return (%) vs. Stream Exposure (Annual Volume, oz.) Outcome 1: Full 8% Stream Repurchased

Outcome 2: Stream Reduced to 3%

Outcome 3: Outcome 4: Full 8% Stream Stream Reduced Repurchased to 4%

Outcome 5: No Exercise, 8% Stream Applies

Outcome 6: Change of Control Clause

IRR 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0%

15.0%

15.0% 13.8%

15.0%

14.2%

AuEq oz. 35,000 30,000

12.7%

25,000 20,000 15,000 10,000 5,000 -

If Exercised December 31, 2018

Syndicate IRR on Stream

If Exercised December 31, 2019

January 1, 2020 or Until Capital is Recovered

Syndicate Annual Stream Volume

This is the point where traditional DCF and IRR models mislead as they don’t properly account for the stream holder being positioned for leveraged gain. President and CEO of Franco-Nevada David Harquail recently pointed out this gap in stream analysis by commenting, “The market is so focused on IRR and I think it’s a mistake,”17 going on to note that visible returns are not the best measure of deal value since higher volume streamed for a longer period of time offers much more optionality to the finance provider. Considering only static discounted cash flows while ignoring the underlying exposure causes an apparent misalignment to materialize between the scale of capital being deployed in stream transactions and the estimated return generated on that capital. Over $4B in stream capital was transacted in 201518 within a range of projected returns of 5-15% as indicated by conventional DCF and IRR analysis.19

This being in an

environment where mine developers may need to cite returns well in excess of 20% just to get Board approval to move forward, let alone meet the challenge of financing the project. And should a stream be sought to that end, undervaluing the streamer’s potential return means the miner’s true cost of capital will also be grossly underestimated.


13

The Price To assess the cost of the stream to Pretium, the total value realized per ounce sold under the stream will first be defined, considering both the ongoing metal purchase price and the initial capital payment received.

Pricing the Future As stated in the stream agreement, the Syndicate will purchase gold for $400/oz. and silver for $4.00/oz. Using a gold to silver ratio of 64.71 based on the feasibility study assumptions of $1,100/oz. gold and $17.00/oz. silver, the 26.28 Moz. of saleable silver convert to approximately 406,000 gold equivalent ounces. Weight-averaging the saleable silver with the 7.07 Moz. of gold, the average price paid for the stream equates to $392 per ounce of gold equivalent.l That will be referred to as the Average Apparent Contract Price.

Figure 12: Average Apparent Contract Price for Metal Purchased Under Stream, $/oz. $450 Gold Stream: $400/oz. Au $400 Average Apparent Contract Price: $392/oz. AuEq

$350 $300

Silver Stream: $4/oz. Ag ($259/oz. AuEq basis) $250

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

$200

The Average Apparent Contract Price is to be paid for each ounce delivered over the 18-year mine life. However, selling gold for $392/oz. tomorrow is not the same as selling gold for $392/oz. today. Using the 2015 daily average 10-year Treasury yield of 2.14%20 as a proxy to discount for time, the following chart shows the corrosive effect an inflationary environment has on time value. A simple solution to retaining this value is to include an inflation factor on the Average Apparent Contract Price. The $4.00/oz. silver purchase price converts to approximately $259 per gold equivalent ounce using a ratio of 64.71 based on the June 2014 Feasibility Study assumptions of $1,100/oz. gold and $17.00/oz. silver. l


14

Figure 13: Discounted Average Apparent Contract Price, $/oz. $450 Average Apparent Contract Price: $392/oz $400 Time Value Loss Due to Inflation

$350 $300 $250

Discounted Average Apparent Contract Price

2035

2033

2034

2032

2031

2030

2029

2027

2028

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

$200

Silver Bullet In addition to the Average Apparent Contract Price, the other value source Pretium realizes on the stream is the initial capital payment received from the Syndicate. This capital payment is often cited as the silver bullet in the deal, justifying the discount on future metal sales in exchange for the cash infusion today. Since the capital is received upfront, no time value discounting on the initial capital payment is required in this piece of the analysis. The capital sum is just amortized over LOM metal deliveries and is added to the Average Apparent Contract Price. Assuming Pretium does not reduce the stream interest, the Syndicate will be owed a $20M payment at the end of 2019 to signal the end of option exercise period and crystallize the implementation of the 8% stream. The present value of the $20M payable is netted out of the $150M initial capital advanced by the Syndicate, and that net sum is divided by the 598,000 total LOM streamed gold equivalent ouncesm resulting in an additional $220/oz. of amortized capital value. The Amortized Capital Value is added to the Discounted Average Apparent Contract Price which yields the Total Contract Price for which Pretium has sold its 8% stream of production.

LOM streamed gold equivalent ounces calculated as 8% of 7.067 Moz. of gold plus .406 Moz. of gold equivalent ounces from the 26.28 Moz. of silver production. m


15

Figure 14: Total Contract Price Paid for 8% Stream on Brucejack Production, $/oz. Total Contract Price = Discounted Contract Price + Amortized Capital

$600 $550 $500 $450

$220/oz Amortized Capital Added

$400 $350 $300 $250

Discounted Average Apparent Contract Price

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

$200

The same calculation is used to derive the relative unit value for streamed ounces should Pretium reduce the stream interest under one of the other available options. Because repurchasing the stream requires a cash payment that in essence repays the initial capital deposit, the net value of capital received is reduced from $220/oz. to $41/oz. But what Pretium gives up in amortized capital value it gains in retained ounces subject to spot market pricing, as shown by the yellow bars in Figure 15.

Figure 15: Total Contract Price ($/oz.) vs. Pretium's Retained Annual Production Share (oz.) $700

385,000

$612

380,833 oz.

$600

$536

$500 $400

$433

$433 $392

380,000

376,907 oz. $358

$357

$316

375,000 370,000

$300 $392

$200 $100

$220

$220

8% Stream - 8% Stream Undiscounted Discounted Amortized Capital Value


$392

$317

361,202 oz.

365,000 360,000

$41

$

$316

$41

4% Stream - 4% Stream Undiscounted Discounted Apparent Contract Price

$41

$41

355,000

3% Stream - 3% Stream Undiscounted Discounted Pretium Production Subject to Spot Market Price

16

The ‘H’ Word In the instance a fixed-price is utilized in a stream agreement the Apparent Contract Price is a known variable. When spot-linked pricing is used for the ongoing metal purchases, the Apparent Contract Price becomes an unknown variable as it is dependent on the prevailing market price at the time of metal delivery. Therefore, spot-linked pricing carries more uncertainty but it allows the miner to participate in upward price movements on the streamed production. For Pretium, the fixed-price is a tradeoff of price participation for price certainty. Pretium has also limited metal deliveries to the estimated saleable production as defined by the feasibility study, making total deliverable ounces under the stream a known variable. The alternative of an open LOM carrying interest on the stream would make total metal deliveries unknown. With an unknown eventual volume of streamed ounces, the amortized capital per ounce becomes no longer calculable. Moreover, the longer the mine life is extended, the lower the value of amortized capital per ounce is driven for the miner. With this open LOM stream the mine operator is then carrying a perverse incentive to production efficiency gain, resource conversion, and resource expansion since every additional ounce it delivers reduces the value of the initial capital payment received on an amortized basis. Pretium has eliminated that disincentive to increased production by defining all variables in its total value equation, but in doing so it has also effectively hedged 8% of its production for the first 18 years of mine life at a price of $612/oz. on an undiscounted basis, or $536/oz. on a net present value basis.n

Price Predicament Should that hedge remain in place, the stream puts Pretium in a price predicament. Using the 8% base stream interest as an example, the Total Contract Price can be plotted against spot gold prices discounted for inflation which is depicted in Figure 16. This comparative price plot shows that streams implicitly and unavoidably force the miner to take one of three positions in regards to price: 1.

It has just committed to a scenario where it is always losing on price on its streamed production; or

2.

It has placed a bet that in the future the spot price will decline to a point where its Total Contract Price is higher than spot prices; or

3.

The risk premium it attaches to volatility and uncertainty in spot market pricing is greater than the NPV of foregone sales.

Discounted using the 2015 daily average 10-year Treasury Yield of 2.14% as a proxy to discount for time only. No risk premium assumed to be included in the discount rate. n


17

Figure 16: Total Discounted Contract Price vs. Spot Gold Price, $/oz. $1100 $1000 $900 $800 $700 $600 $500 $400 $300 $200

Discounted Spot Gold Price

Opportunity Cost of Foregone Revenue

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

Total Discounted Contract Price

Whichever should materialize, none results in a positive outcome for the miner. Further, as spot price rises the opportunity cost of foregone revenues correspondingly increases. The revenue foregone is captured by the streamer, meaning they benefit directly at the expense of the miner. This perverse incentive to rising prices is attached to 8% of Brucejack’s production, whether the carrying interest on production is openended or not. This is one manner in which the percent of the stream is a very important term: it determines what share of the miner’s production bears a perverse price incentive.

Figure 17: Present Value of Foregone Sales on 8% Stream, $M ($250M) ($350M) ($450M) ($550M) ($650M) ($750M) ($850M)

Opportunity cost creates inverse leverage to rising price $1,100

$1,200

$1,300

$1,400

$1,500

These terms were apparently the price of the completing the funding with the Syndicate. Having seemingly recognized these impending dangers Pretium implemented a shrewd defense, and as we will see later, those defense mechanisms may provide Pretium an opportunity to secure Brucejack value.


18

The Cost The opportunity cost on foregone revenues is one of two components to the total cost of a stream to a miner. The other component of cost is defined by the margin at which the streamed ounces are sold. Profit Erosion Brucejack’s AISC of $446/oz. of gold increases to $509/oz. when the credits from silver production are backed out.o Under the feasibility study assumptions, if no stream were in place each ounce of gold could be produced for a profit of $654/oz., with unit revenue of $1,100/oz., cost of $509/oz., and a silver credit of $63/oz. With the 8% stream in place, the streamed gold production is mined at the same $509/oz. cost but sold for $400/oz.p instead of $1,100/oz. resulting in a ($109/oz.) loss. Streamed silver is sold for $4.00/oz. instead of $17.00/oz., reducing the silver credit against gold costs from $63/oz. of gold production to $15/oz. of gold for an aggregate net loss of ($94/oz.) on each ounce streamed.

Figure 18: Brucejack Profitability, $/oz.

$/oz.

Pretium Profit Retained Share, 92% Revenue: $1,100 Cost: $509 Silver Credit: $63 Profit: $654

$1,200 $1,100

Pretium Profit Streamed Share, 8% Revenue: $400 Cost: $509 Silver Credit: $15 Loss: ($94)

$654

Pretium Profit Total Mine, 100% Revenue: $1,044 Cost: $509 Silver Credit: $59 Profit: $594

$594

$1,000

$60/oz. in profit eroded by stream across 100% of production

$900 $800 $700 $600 $500

($94)

$400 $300 Profit (Loss) on Gold, $/oz.

Silver Credit, $/oz.

Taking the weighted average profit of $654/oz. on 92% of production and loss of ($94/oz.) on 8% of production, profitability across 100% of Brucejack’s production is reduced to $594/oz. Said otherwise, the cost of carrying the 8% stream is $60 on every ounce of gold produced.

Total silver produced of 26.28 Moz. and 7.07 Moz. yields a ratio of 3.72 ounces of silver for each ounce of gold produced. At $17.00/oz. silver, the implied credit is $63.22 for each ounce of gold produced. p The stream contract price is used, which excludes the amortized capital value, as this portion of the analysis considers the pre-tax profit impact of the stream on the income statement. o


19

This is a central thrust of stream financing. Streams which provide for payment at a discount to then current market prices erode profitability across 100% of mine production, not just the streamed ounces. It is a misnomer to assert that only the streamed volume bears the cost of carrying the financing.

Figure 19: Cost of Stream, Pretium Option Scenarios, 100% Production Basis, $/oz.

Profit Potential - No Stream

$654/oz

Option 1: Repurchase full 8% stream, 2018

$654/oz

$632/oz

Option 2: Reduce stream to 3%, 2018

$654/oz


$624/oz


Option 5: No option exercised, 8% stream applies

$22/oz

$594/oz

Pretium Profit Realized

$30/oz

$60/oz Pretium Profit Foregone on Stream

Cents on the Dollar Bringing the opportunity cost on price increase back into the equation, the total cost of the stream can be depicted in a dynamic price environment. Let’s assume spot gold price increases $100/oz. from $1,100/oz. to $1,200/oz. Where Brucejack could be producing at a profit of $754/oz. with no stream in place, the mine is only producing at $686/oz. on average across all production. Pretium’s cost on the stream is now derived by $754/oz. potential margin less $686/oz. realized margin, or $68/oz. paid out on the stream. As compared to the base case cost of $60/oz., the incremental cost in profit erosion is $8/oz. That incremental cost is 8% of the $100/oz. spot gold price increase from $1,100/oz. to $1,200/oz. Meaning, the stream can be restated in dollars and cents rather than production interest. Pretium is giving up eight cents on every dollar of price upside. This is the second major implication of the percent stream interest variable. It first determines the share of production bearing a perverse incentive to price, and second it determines the magnitude of upside sacrificed.


20

Figure 20: Cost of Stream, Sensitivity to Gold Price, $/oz. and $M $1,100

$1,200

$1,300

$1,400

$1,500

$2,000

$2,500

($60)

($60)

($60)

($60)

($60)

($60)

($60)

($8)

($16)

($24)

($32)

($72)

$5,000 Gold Price

$ ($50) ($100)

($60/oz)

($68/oz)

($150)

($76/oz) ($84/oz)

($92/oz)

($200)

($60)

Cost of Profit Erosion

($312)

Opportunity Cost on Price Upside

($112)

($132/oz) ($172/oz)

($250) ($300) ($350) ($400)

($372/oz)

($450) $1,100

$1,200

$1,300

$1,400

$1,500

($24M)

($27M)

($30M)

($33M)

($36M)

$2,000

$2,500

$5,000

Gold Price

$M ($20M) ($40M) ($60M) ($80M)

($52M)

Total Cost of Stream, $M

($67M)

($100M) ($120M) ($140M) ($160M)

($146M)

Unknown and Unknowable This dynamic nature by definition makes the cost of the stream both unknown and unknowable at deal signing. The miner cannot tell its shareholders what the true cost of the stream will be. It is a black box form of financing with an outcome whose odds are geared in favor of the capital provider. Only once the mine life has fully run its course will the miner be able to retroactively calculate the cost incurred. The dynamic cost of the stream is what makes it such a potentially dangerous financing structure. This extraordinary characteristic of stream financing is even further highlighted when compared to three other elements commonly found in a mining company’s capital structure.


21

The Debt In Pretium’s credit agreement with the Syndicate all terms were known at deal signing. The 7.5% annual interest rate, maturity date of December 31, 2018, the principal amount to be advanced at closing and subsequent drawdown of the remainder of the facility were all terms delimited by the contract. Pretium is not at risk of those terms changing, those terms are not dependent on a shifting market, and the Syndicate is not counting on any extraneous source of value for leveraged return on the loan.q In order for the loan to reflect the characteristics of a stream, the debt would need to carry a variable rate whose interest expense is determined by the prevailing price environment and have a required payment schedule for the full mine life. The stream component of Pretium’s financing package is also relatively high cost when compared with its term loan from the Syndicate. In the base case $1,100/oz. gold scenario Pretium’s cost on the stream is $60/oz. or approximately $23.50M in average annual pre-tax margin.r If that was an interest payment on a $130M loan, the net amount of capital Pretium procured under the 8% stream, it would equate to an interest rate in excess of 18%.s That 18% interest expense would carry a maturity date of 2035, and in the event of a $100/oz. upward move in gold price, would exceed 20%.

Figure 21: Cost of Stream Restated in Terms of Loan Interest Rate Equivalent, %

Cost of Stream: Interest Rate Equivalent

8% Stream Sensitivity to Gold Price: Interest Rate Equivalent Gold Price

8% Stream

18.1%

$5,000

112.3%

$2,500

51.9%

$2,000 4% Stream

9.0%

$1,500 $1,400 $1,300

3% Stream

6.8%

$1,200 $1,100

39.8% 27.7% 25.3% 22.9% 20.5% 18.1%

This is in reference to the credit facility as standalone financing component and does not consider the potential value in securing the other portions of the funding package in conjunction with the loan, namely the offtake, stream, and equity share. r 7.5% interest on the term loan is a pre-tax cost to Pretium, thus pre-tax cost of the stream is used for comparison. At the 41% aggregate tax rate as cited in the June 2014 Feasibility Study, the after-tax cost of the term loan is 4.4% and the equivalent after-tax cost of the stream is 10.7%. s The interest rate equivalent for the 4% and 3% stream interests are calculated on the net $130M capital amount since the exercise of those options requires a cash repayment in excess of the initial $150M stream capital received. q


22

Streams can impose even greater strain on mining companies when they are used in combination with debt. The stream siphons away valuable earnings which can deteriorate coverage ratios, accelerate credit risk, reduce the capacity to raise new debt, and make existing principal and interest payments more burdensome. By stacking a stream on top of debt the miner adds leverage to its leverage. It gears up on its gearing. And it puts that gearing out of the miner’s control as the cost will change in accord with price movements, a particularly high risk feature in a cyclical industry.


23

The Royalty These high-cost, high-risk features are evident in contrast with royalty terms as well. Brucejack has an existing legacy 1.2% net smelter return (NSR) t royalty with a history of changing hands. In 1999 the Brucejack property was 60% owned by Newhawk Gold Mines Ltd. and 40% owned by Black Hawk Mining Inc.21 Silver Standard then gained control of the Brucejack Property by acquiring Newhawk, and subsequently purchased the remaining 40% interest from Black Hawk in 2001; a deal which initiated the 1.2% NSR as part of the purchase consideration.22 Black Hawk and its retained royalty interest in Brucejack were acquired by Central Sun Mining Inc. in 2003, which was then gobbled up by B2Gold Corp. in 2009.23 In 2013 B2Gold sold the 1.2% NSR to Franco-Nevada for $45M, which remains the current holder of the royalty today.24 By definition, this royalty is the amount the mine operator will pay out of revenues at a rate of 1.2%. Though the dollar amount that will ultimately be paid out on the 1.2% royalty is unknown, the percentage is fixed. Whether the gold price is $500/oz. or $5,000/oz., Pretium will pay 1.2% of market prices on the royalty.u In addition to being the equivalent of an uncapped sliding-scale royalty, the $60/oz. cost of the 8% stream divided by the revenue assumption of $1,100/oz. equates to a 5.4% NSR, which is 4.5 times greater than the existing royalty Franco-Nevada holds on the project.

Figure 22: Cost of Stream Restated in Terms of Royalty Equivalent, % 8% Stream Sensitivity to Gold Price: NSR Equivalent

Cost of Stream: NSR Equivalent Gold Price 8% Stream

5.4%

$5,000

33.8%

$2,500

15.6%

$2,000 4% Stream

2.7%

$1,500 $1,400 $1,300

3% Stream

2.0%

$1,200 $1,100

12.0% 8.4% 7.6% 6.9% 6.2% 5.4%

The NSR applies only once commercial production of 503,386 ounces of gold and 17,907,080 ounces of silver has been achieved. Reference the “FrancoNevada Royalty” definition found on page 9 of the Purchase and Sale Agreement between Pretium and the Syndicate. u Refining, transportation, and treatment charges are to be deducted from sales price in calculating the net smelter return royalty. Reference sections 19.2 and 22.3 of the June 2014 Feasibility Study. t


24

The Equity Even with these features, a common rationalization for using streams as a component of total capital structure is that they are a non-dilutive source of financing. While the alternatives of loading the balance sheet with more debt or issuing shares at a market bottom may be imprudent at best and impossible at worst, it is misinformation to tout streaming as a non-dilutive source of funding. Pretium’s equity raise of $146.2M in the first quarter of 2016 brought total shares outstanding to 177.2M.v Each of those shares is a claim ticket on the present value of Brucejack’s future earnings. With average annual net income of approximately $130M,w each of the 177.2M issued shares holds a claim on 74 cents of annual earnings. If more shares are issued and annual earnings remain constant, each one of those tickets has a smaller claim on the profit pool. If 10 million new common shares are issued, the claim each one of the 187.2M shares has on expected earnings decreases to 69 cents. Alternatively, if the number of shares issued remains constant at 177.2M but the profit pool shrinks, each one of those shares similarly ends up with a smaller claim on a per share basis. It is a different means to the same dilutive end. In Pretium’s case, the 8% stream strips $23.5M in pre-tax profits annually from Brucejack hitting after-tax earnings for about $13.9M. On the base of 177.2M shares outstanding, the earnings per share drop from 74 cents to 66 cents, diluting shareholders by 11.8%.

Figure 23: Cost of Stream Restated in Terms of Equity Dilution Equivalent, % Cost of Stream: Equity Dilution Equivalent 8% Stream

8% Stream Sensitivity to Gold Price: Equity Dilution Equivalent 11.8%

Gold Price $5,000 $2,500 $2,000

4% Stream

5.6%

$1,500 $1,400 $1,300

3% Stream

$1,200 4.1%

$1,100

9.1% 9.6% 9.9% 10.5% 10.7% 11.0% 11.3% 11.8%

As of 15 April 2016 and using a basic earnings per share basis. An additional 9.1M unexercised incentive options have been issued which would be included to calculate fully-diluted earnings per share. Includes the 31.9M common shares issued in Pretium’s marketed offering in the first quarter of 2016, including the full exercise of the over-allotment option and Zijin Mining Group and Orion exercising their right to maintain proportionate ownership. w Net Income as modeled by Santeri using the June 2014 Feasibility Study assumptions. Accounts for approximately $20M in after-tax depreciation expense calculated using straight line methodology on the approximate $700M in mine capital assuming a 21-year useful life. v


25

There is one key difference to note in the equity cost equivalent as opposed to both the debt and royalty cost equivalents. The equity dilution percentage decreases, rather than increases, with rising prices. This is due to the fact that the equivalent dilution is function of the profit share the Syndicate has at each price point. To illustrate, Brucejack’s pre-tax profit potential is $654/oz. with average annual LOM production just over 400Koz, for gross pre-tax profits just shy of $260M per year. The $23.50M in profits transferred to the Syndicate through the stream are approximately 9.2% of the mine’s $260M total annual profit potential. If the spot price rises, Brucejack’s total profit pool grows. At $2,000 gold, Brucejack’s total profit potential would be $610M and the Syndicate would generate about $52M on its 8% stream, which would only be 8.5% of Brucejack’s profits. This trend continues as the Syndicate’s 8% production interest translates into a smaller share of the total profits the higher price goes. However, that share of the profits does not converge to zero. It converges to 8%, its carrying interest in production volume. The Syndicate will have a minimum 8% share of Brucejack’s profits for the defined mine life no matter how high prices rise. And in a declining price environment, the Syndicate gains an increasing share of the Brucejack’s net profits as margins are compressed.

Figure 24: Pre-tax Profit Share of Brucejack, % 100.00% 10.00% 9.50% 90.00% 9.00% 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% 5.50% 5.00%

$1,000 $1,250 $1,500 $1,750 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $7,500 $8,000 $8,500 $9,000 $9,500 $10,000

0.00%

Pretium Profit Share

Gold Price

Syndicate Profit Share

This is the third major conclusion drawn in regards to the stream interest variable: it determines the cap on the mine operator’s profit potential. Those three implications highlight the power of the stream percentage. In Pretium’s case, 8% of mine production carries a perverse incentive to price, the cost of the stream will increase by 8% of upward price moves, and the miner’s capture of cash has been reduced by 8% at minimum.


26

The Protection Since the series of stream repurchase options has been incorporated within the arrangement, there is an innovative layer of protection against these vulnerabilities. Many factors will come into play as it considers each of those options, but for simplification Santeri has reduced Pretium’s decision-making universe to four dimensions: Value, Profit, Volume, and Liquidity.

Figure 25: Pretium's Dimensions of Management VALUE Brucejack Pre-tax NPV5, $M Option 1: Repurchase full 8% stream, 2018

VOLUME

Pre-tax Profit, $/oz.

Retained Spot Exposure, Koz.

2,165


Option 4: Reduce stream to 4%, 2019 1,906

150 272

377

624 594

237

393

654

2,035

Call Option Cash Payment, $M

381

632

2,165

LIQUIDITY

393

654

2,067


Option 5: No option exercised, 8% stream applies

PROFIT

361

150 20

The lowest value optionx is to leave the 8% stream in place, which also leaves Brucejack carrying the implied streaming risks. The option that results in the highest overall asset value is to repurchase the entire 8% stream. This is driven by profits being maximized since all volume becomes subject to pricing on the spot market. However, in order to unlock that option in 2018 Pretium is required to make the cash payment of $237M to the Syndicate. That payment aligns in timing with the maturity date of the project loan, when both $350M in principal and approximately $60M in accrued interest are due.

Pre-tax discounted cash flows using 5% discount rate as modeled by Santeri using the June 2014 Feasibility Study assumptions for guidance. Pre-tax cash flows used to illustrate asset value prior to any stakeholders being paid out, including taxes, royalties, and financing costs. x


27

Figure 26: 2018 Stream Repurchase and Loan Repayment Scenario, $M Loan Facility, $M

8% Stream Repurchase, $M 150

150

150 50

(237)

2020

2019

2018

2017

2016

2015

2020

2019

2018

2017

2016

2015

(410)

Since the options on the stream and the loan can be exercised independent of each other, Pretium can stagger the payments between 2018 and 2019, either repaying the loan first and then repurchasing the stream or vice versa. In any scenario, a minimum of $410M in loan repayment is required before January 1, 2020, while gross cumulative after-tax cash flow generated by mine operations before that date will be just over $330My if Brucejack’s planned production profile is achieved. Assuming Pretium extends the loan maturity date to delay repayment and also elects to repurchase the stream in 2019, then over $700M in cash must be transferred back to the Syndicate prior to January 1, 2020.

Figure 27: Pretium Net Liquidity, 2019 Loan Extension and 8% Stream Repurchase Scenario, $M Financing Inflows $600M

Brucejack After-tax Unlevered FCF

Financing Repayments

Cumulative After-tax Levered FCF

$400M $200M $M

Required Loan Repayment

($200M) ($400M)

Optional Stream Repurchase

($600M) ($800M) 2015

y

2016

2017

2018

2019

After-tax cash from operations, excluding capital expenditures, as modeled by Santeri using the June 2014 Feasibility Study assumptions for guidance.


28

Risky Business Having borrowed from Brucejack’s future to fund construction today, Pretium has exposed its balance sheet in the short-term and its income statement in the long-term. With critical decision points rapidly approaching in 2018, this looming liquidity crunch may preclude an exercise of the value-protecting stream repurchase options. In spite of this, Santeri sees an opportunity to leverage the financing terms in a play to capture Brucejack value through a takeover, with the stream repurchase options being the lynchpins that facilitate the deal. We see this strategy as a wager that having the mine built and the geology proven out will make Brucejack attractive enough to solicit a takeover bid, with the options in place allowing a buyer with deeper pockets to cut all attached financing strings upon acquisition. In short, we see a takeover as a means to turn risk into secured return for Pretium.


29

The End Game A takeover has been a possibility alluded to in the past. In a 2013 interview Quartermain was asked whether his primary focus for Brucejack was securing a takeover bid or building the mine. Quartermain simply replied his objective was to, “Get the best value possible,” continuing, “Right now the major companies are focusing on organic pipelines, and their interest will depend on the bulk sample and feasibility. If they both deliver what we feel they will, the project will be very robust, and we think they’ll be interested.“25 By March of 2015, with his course set towards developing the mine at Brucejack, Quartermain backed off the M&A speak just a bit. “Doing any M&A activity at our stage is unlikely, when you have such a good quality asset, the best way to return value back to shareholders is through dividends,”z he said, going on to cite Pretium’s three-year strategic objectives likely including debt repayment in addition to returning value to shareholders.26 It is no surprise that Quartermain keeps his public commentary aligned with corporate objectives as they shift as well as remains reserved, holding the company’s cards close to his vest. Even still, the time could be ripe for Pretium to solicit offers as the broader industry landscape has set the stage for buyers to target an asset like Brucejack. “There is an acknowledgement that larger companies are short on ounces and their reserves are depleting,” commented Paul Wong, a Senior Portfolio Manager with Sprott Asset Management, asserting the decline has contributed to, “…a very big wave of M&A that has already begun.”27 It’s a concise summary of a sentiment purported by many, including Quartermain himself who recently referenced Goldcorp’s now famous slideaa contending the industry has reached “peak gold.”28 RBC Capital Markets adds to this position citing cuts in capital and exploration budgets have set up an M&A environment that, “…could blossom in the three to five-year time horizon.”29 A Brucejack-led Pretium production may end up being the star of that coming show.

z

The context of a dividend payment was assuming Brucejack achieves commercial production as planned and Pretium retained ownership of the mine. Refers to slide 19 in Goldcorp’s Corporate Update Presentation dated May 2015 showing time series charts of gold discovered and gold produced.

aa


30

The Body of Evidence Though circumstantial in nature, Pretium’s recent corporate behavior seemingly supports this thesis. In the seven months since the financing package was concluded,bb Pretium has published 24 news releases with 11 related to drill program results, nine relating specifically to financing and construction updates, and the remainder being general corporate updates. Given that the geology of the orebody is the defining risk of a company currently hanging its hat on the development of a single asset, it is expected that Pretium be quite active in publishing drill results and construction updates, as it may well have had to in order to meet regulatory requirements. But this volume of news flow pouring from the Pretium camp also stirs thoughts of an aggressive marketing campaign attempting to allure buyers and boost confidence in the deposit. One of the non-geology related news releases lends additional credence to the possibility of a takeout. On April 15, 2016 Pretium announced the adoption of a Shareholder Rights Plan which is intended to provide shareholders with: “…sufficient time to fully consider any unsolicited takeover bid for the Company, to ensure that Pretium's Board of Directors has sufficient time to explore alternative transactions that would maximize value for shareholders, and to encourage the fair treatment of all Pretium shareholders.”30 This is complemented by the change of control clause included in the stream agreement with Orion and Blackstone. The clause gives Pretium and/or the acquirer the option to repurchase the full 8% stream interest for the greater of either 13.6% of the transaction consideration or a cash payment in an amount that generates a 15% return for the Syndicate from the time of deal closing.cc This clause is applicable should a triggering event occur either prior to January 1, 2020 or as long as the Syndicate has not yet recovered its initial $150M through stream proceeds. Should a transaction occur under these terms the Syndicate also has a right to make a call on the clause and require payment. As an aside, at the listed date of January 1, 2020 a $272M payment would generate the Syndicate’s threshold 15% return. Backsolving for the transaction value that generates an equivalent 15% return by receiving a 13.6% share of the consideration reveals the Syndicate had a breakeven price target of $2.0B on Pretium. Regardless of the opacity surrounding Pretium’s plans, given the reality of its situation and notwithstanding the challenges of the liquidity position, Santeri believes a takeover is a viable avenue for realizing Brucejack value.

From 15 September 2015 through 31 May 2016. The formula to be used for calculating change of control payment is $150,000,000 * (1.15)D/365 where “D” is the number of days between 21 September 2015 and the “Triggering Event” as detailed in Article 7.3 of the Purchase and Sale Agreement. bb cc


31

The Buyer A good place to start the hunt for a buyer is China. Chinese mining companies have not been bashful in vocalizing their mission to globalize their production base. Weng Zhanbin, Chairman of Zhaojin Mining Industry Co., recently commented, “Now the price is at the bottom, we want to perform some financial investments…When it comes to international M&A, we still have a long way to go, but now is the time for us to plant our seeds.”31 Chinese producers have put their money where their mouths are, with nearly $2.0B in outbound investment in gold assets in the last five years.32 That number swells when a broader spectrum of metals is considered, with China-based firms winning competitive bids for the Peruvian Las Bambas copper mine at $5.85B,33 FreeportMcMoRan’s Tenke Fungurume copper and cobalt mine in the Democratic Republic of Congo for $2.65B,34 and Anglo American’s Brazilian niobium and phosphates businesses for $1.50B,35 to name a few of the more prominent purchases of late. One of the producers leading the way in this global buying spree is Zijin Mining Group. It is one of China’s largest gold, copper, and zinc producers by volume and generated more gross revenue than any other gold mining company in the world in 2015.36 In its 2015 Financial Results Presentation, Zijin explicitly laid out its strategic ambitions for the coming years stating its focus has turned to “…[Starting] a new round of development with the guiding principles [of] internationalization, project upsizing, and asset securitization, and becoming an international mining giant of high technology and efficiency.”37 In a written response to Bloomberg, Zijin Chairman Chen Jinghe was clear in his intent to deliver on this quest: “Global mining companies are selling high quality assets right now, so this is a rare chance for Chinese investors including Zijin to acquire first-tier assets. Global mining giants are facing various challenges amid a commodity downturn, this will largely reduce their competitiveness and willingness for M&A, which will be a good opportunity for Zijin and other Chinese investors. Chinese mining companies’ domestic development is limited by domestic resources, and the future, the hope lies overseas. If Chinese mining companies failed to grasp the opportunity in this round of the commodity downturn, it will be a big failure.”38 Zijin backed its commitment with a number of investments in 2015. In May it acquired 49.5% of the Kamoa Copper Mine from Ivanhoe for $412M, followed by a purchase of 50% of the Porgera Gold Mine in Papua New Guinea from Barrick for $298M.39 Zijin made one more equity investment outside China’s borders in 2015 which just happened to be in a now familiar company - Pretium.


32

Vested Interest Through a private placement of $81M, Zijin purchased an 8.73% equity stakedd in Pretium. When Pretium tapped the market for more funding in the first quarter of 2016, Zijin exercised its participation right to maintain proportionate ownership by kicking in an additional $12.7M.40 While other potential bidders do some window shopping to assess Brucejack’s risk profile and value potential, the established relationship with Pretium gives Zijin a leg-up on due diligence: “Zijin sent two teams to review our project, one of which was led by Chairman Chen…He and his team visited our office and reviewed our model, went to site and visited the underground. They also had a group that reviewed socioeconomic aspects by meeting with some of the First Nations and visiting local communities. I can’t specifically speak to how they got their comfort level but as we often find with people who visit the site, they are better able to understand the distribution of the gold mineralization at Brucejack.

Obviously Zijin was comfortable with our resource to make its

investment.”41 In addition to its gained familiarity with the deposit, Zijin has checked several boxes at a potential buyer: 

Established, vested equity ownership in seeing the full value of Brucejack realized



$845M in cash on handee and access to ample liquidity in Chinese capital markets



Open avenues to low-cost, efficient construction, engineering, and technology platforms



A proven intent to diversify its geographical footprint globally

Another key benefit in having Zijin as a strategic investor is connected to its acquisition of Porgera. The transaction for Porgera was structured such that Zijin bought a 50% interest in Barrick Niugini Limited (BNL), the company that manages and owns 95% of the Porgera Joint Venture. As a result of the transaction, Barrick and Zijin now jointly control BNL with equal representation on the Board of Directors, seating three nominees each.42 The deal also included a Strategic Cooperation Agreement which, “…Outlines the intent of both companies to collaborate on future projects and joint investments, leveraging the strengths of each company.” 43 The release also noted, “As opportunities for major projects arise in the future, Barrick and Zijin may agree to develop the mine together if it is considered in the best interests of both companies.”44

Equity position as of 15 April 2016. In March of 2016 Zijin participated in Pretium’s marketed share offering subscribing for 2,786,849 common shares out of the 31,923,755 total offered, confirming its 8.73% position. Reference Pretium news release dated 14 March 2016. ee As of 31 December 2015 and converted using an exchange rate of 6.50 RMB per USD. Reference Zijin Mining Group 2015 Annual Results. dd


33

Strategic Partnership Like Zijin, Barrick has been very clear in stating its strategic objectives and has been active in restructuring its business in pursuit of those objectives. Holding $13.1B in debt when the year started,45 Barrick was laser focused on repairing its balance sheet in 2015. It was able to divest seven assets for total proceeds of $3.2B in 2015, achieving a 24% reduction in total debt.46 A further $2.0B in debt reduction has been earmarked for 2016, which will be supported by Barrick’s three other primary objectives of growing free cash flow through profitable production, lowering costs by streamlining its operating model across the business, and taking a more disciplined approach to allocating its capital investments to the, “best assets in the best regions.”47 With its near-term focus on its balance sheet, it doesn’t seem Barrick would be in the market to acquire a company with a term loan coming due that either requires a consumption of its cash or assumption of the liability. Still, Chairman John Thornton has a vision for the company that stretches beyond shrinking the portfolio. With 2018 production guided down to a potential 5.0 Moz. from a peak of 7.7 Moz. in 2010,48 Thornton recently pledged to his shareholders that, “…over time, we will create additional per-share value through discerning purchases of new assets,” and voiced his resolve to, “be nothing less than one of this century’s leading companies in any industry,” making Barrick, “a company you will hold forever.” 49 If Barrick is to fulfill its vision with an inorganic growth option, it will need an asset that fits the scale and cost profile of its portfolio yet does not undo the good work it has put into restoring the health of its balance sheet. Given the matched ambition and relative position of each company, Brucejack could provide the perfect opportunity for Barrick and Zijin to make use of their strategic partnership and go in on a 100% takeover bid of Pretium.


34

The Deal PRETIUM ANNOUNCES ACQUISITION TRANSACTION BY ZIJIN MINING AND BARRICK GOLD Vancouver, British Columbia - December 31, 2017 - Pretium Resources Inc. (“Pretium” or “The Company”) is pleased to announce that it has entered into a definitive agreement pursuant to which a Strategic Partnership of Zijin Mining Group and Barrick Gold Corporation (“Zijin” and “Barrick” or together “The Partnership”) will acquire all of the remaining issued and outstanding shares of Pretium not currently held by Zijin in a cash and share transaction for an equity purchase consideration of $1,320M and a resulting implied enterprise value of $2,042M including the assumption of debt and liabilities. This fictional press release illustrates how such a scenario, though hypothetical, could plausibly unfold. As of April 15, 2015ff (Reference Date) Pretium’s US listed shares were trading at $6.47 per share.50 With 186.3M fully diluted shares outstanding,gg that places Pretium’s market equity value at $1,205M.hh Assuming a 20% premiumii is offered on Pretium’s share price of $6.47, Zijin and Barrick would acquire the 91.27% of shares issued not already owned by Zijin in a joint cash and share bid of $7.76 per share, for a purchased equity value of $1,320M. Including Zijin’s current equity holding of 8.73% valued at $6.47 per share, the post-transaction 100% market equity value jointly held by Zijin and Barrick would be $1,425M.

Figure 28: Pretium Equity and Enterprise Value Acquired by Zijin and Barrick, $M $2,042M $7.76/share, 20% premium

$410M $1,425M

$1,205M

Current Zijin Ownership, 8.73%

$206M

$220M

Other Pretium Ownership, 91.27%

Pretium Premium to Acquired Market Equity Acquire 91.27% Equity Value, Value Shares O/S 100% Basis

Plus: 8% Stream Repurchase

Plus: Term Acquired Loan Enterprise Value, Repayment 100% Basis

Date used for Capital Structure and Shareholdings Overview in Pretium Corporate Presentation at the European Gold Forum on 19 April 2016. Assumes the Fully Diluted Method of accounting for unexercised options in which the common equity value is applied to the fully diluted share base. Does not consider the cash proceeds from in-the-money exercise nor potential share repurchase as the GAAP-compliant Treasury Stock Method would. hh Share base of 186.3M represents all issued and outstanding shares listed on both Toronto Stock Exchange and New York Stock Exchange. As a simplification, Market Equity Value is calculated using the NYSE prices applied to the entire share base. ii 20% selected a representative baseline premium that captures full asset value as modeled using discounted cash flows, generates excess return over the share price as of the Reference Date, and is commensurate with recent comparable transactions. Assumed transaction and premium is illustrative only. ff

gg


35

To calculate total enterprise value, the seller’s cash balance acquired in the transaction is subtracted from market equity value while debt is added. Pretium listed a cash balance of $480M at the close of the first quarter of 2016 51 which we will assume is used to complete construction of the mine and for maintaining minimum needed working capital during commissioning. Thus, at a conjectural transaction date of December 31, 2017 (Transaction Date) no cash would be acquired in the takeover bid. We will assume the stream repurchase and loan repayment as the two primary liabilities for the debt applicable to the enterprise value calculation.jj The stream repurchase payment would be exercised under the change of control clausekk for $206M, a payment generating a 15% return for the Syndicate on its initial $150M stream capital investment. The term loan and accrued interest of $410M would be repaid upon maturity on December 31, 2018. Adding these liabilities to the market equity value results in a total enterprise value of just over $2.0B. For its share of the acquisition, Zijin would purchase 41.27% of Pretium’s issued and outstanding shares for $597M, bringing its total equity position to 50%. Zijin would contribute 50% of the stream repurchase and term loan repayment, bringing total funds required for the purchase to $905M.ll We will assume Zijin makes its portion of the bid in all cash as it has ample liquidity with $845M cash on hand and $16.0B in undrawn credit facilities52 - a staggering pool to draw from. Its Board also recently approved an equity raise of $1.4B to fund its 2015 acquisitions,53 proving Zijin has plenty of sources to draw on while keeping its capital structure in line with its objectives. To preserve its balance sheet strength, Barrick would purchase the remaining 50% of issued Pretium shares in a share-for-share exchange. From the start of 2016 through the Reference Date, Barrick’s shares were up 102% closing at $15.64 on its US listing.54 Barrick’s share price over Pretium at the offered price of $7.76 per share yields a share exchange ratio of .4964 shares of Barrick for each Pretium share.mm Purchasing 93.15M shares of Pretium at an offer of $7.76 per share is an equity consideration of $723M, requiring Barrick to issue 46.24M shares in the bid. Barrick would also provide 50% of the stream and loan remuneration, issuing an additional 19.70M shares to raise cash for the financing.

Pretium reported financials as of 31 March 2016 list total liabilities of $519.45M. As this is an illustrative scenario with a transaction date in the future, we have used the amounts of the stream repurchase and term loan facility in lieu of the listed liabilities on Pretium’s balance sheet for consistency with other portions of the analysis within this study. EV shown does not include any potential environmental liabilities or reclamation provisions. kk On a transaction date of 31 December 2017, the payment that generates a 15% return on the Syndicate’s $150M investment is $206M, which is greater than 13.6% of the $1,305 equity purchase consideration in acquiring 91.27% of shares issued and outstanding. ll As the offtake agreement provides for market pricing of metal products and is therefore revenue neutral, no provision has been made for its buyout, even though such an option exists. mm Though the Transaction Date is assumed to occur on 31 December 2017, share prices as of the Reference Date on 15 April 2015 used to calculate ratio. jj


36

Figure 29: Sources and Uses of Funds in Acquiring Pretium, $M Sources Zijin Equity Purchase in Cash Zijin Stream Financing

$M $597 $103

Uses Equity Purchase Price, 91.27% Stream Change of Control

Zijin Loan Financing

$205

Term Loan Repayment

Barrick Equity Purchase in Share Exchange

$723

Barrick Stream Financing Barrick Loan Financing Total Sources of Funds

$M $1,320 $206 $410

$103 $205 $1,936

Total Uses of Funds

$1,936

In total, Pretium shareholders would receive $3.51 in cash and .272 shares of Barrick, a $4.25 value, summing to the total consideration of $7.76 for each share they own. Post-closing, Pretium shareholders would have a 3.76% equity holding in Barrick.nn

Mission(s) Accomplished Though many other companies could make for proper suitors, this illustrative deal is unique in that all three parties contribute needed value components to the deal while also each benefiting from a transaction that meets their strategic objectives. Pretium will have achieved its first objective of advancing Brucejack to commercial production, which de-risked the deposit and facilitated the transaction. Had Pretium not taken the stream as a component of the financing package, it may not have been able to fully fund mine construction. And had the stream’s exit options not been included, Pretium may have sterilized Brucejack’s sale potential with burdensome long-term financing risk that impaired cash flows. Instead, Pretium would utilize that measure of risk to sell its equity at a premium to market. As the market share price reflects the current expectations of all future cash flows to be generated by Brucejack, Pretium will have achieved its second objective of capturing and returning the asset’s value to shareholders. It will have also found buyers that are able to repay the Syndicate, solving its imminent liquidity challenge and eliminating the profit-damaging stream interest. Through their Barrick shares, Pretium shareholders would retain exposure to the Brucejack asset in which they initially and faithfully invested. The equity value of their holdings may even see leveraged gain as Brucejack would join Barrick’s five core world-class gold mines to create a portfolio of six Tier 1 assets that would be the envy of the industry.

Barrick has 1,165M basic shares outstanding as of 15 April 2016. Including the 65.94M new shares issued in assumed transaction scenario raises the share base to 1,231M. Pretium shareholders receive 46.24M Barrick shares in the equity purchase, resulting in a 3.76% ownership position. nn


37

With Pretium and Barrick both dual-listed on the same US and Canadian exchanges, the share exchange would be simple and cost effective. It would also let Pretium shareholders cash out with familiar tax implications should they elect to sell their shares post-closing. For Barrick, the share exchange would allow it to capitalize on the increased relative value of its stock. The total issuance to fund both the equity acquisition as well as the liabilities would be approximately 65M shares on a base of 1,165M outstanding. With current 2016 consensus earnings per shareoo quoted at $0.5455 and conservatively assuming no earnings growth through the Transaction Date, the acquisition would be 4.2% accretivepp after the first year with 2018 Brucejack earnings attributable to Barrick of $65M.

Figure 30: Barrick Proforma Equity Structure Barrick Share Accretion/Dilution ABX Earnings ($M) ABX Shares O/S ABX Consensus EPS ABX Share Price

2016E

2017E

2018E

$629

$629

$629

1,165

1,165

1,165

$0.54

$0.54

$0.54

$15.64

$15.64

$15.64

ABX Shares Issued in Transaction

65.94

ABX Shares O/S Post Transaction

1,231

PVG Earnings

$129

PVG Earnings Attributable to ABX

$65

ABX Proforma Earnings

$694

ABX Proforma EPS

$0.56

Accretion/Dilution (EPS) Accretion/Dilution (%)

$0.02 4.2%

Though Brucejack would be a smaller mine in its portfolio and bring the challenges of an underground operation, Barrick would add a high-margin, long-life asset with organic growth potential to its core holdings, replacing a portion of the relatively higher cost reserve base it has divested.

oo pp

Earnings based on 2016 full year analyst consensus as of 1 May 2016 and assumes no growth. Analyst estimates subject to change. Does not include any assumed transaction costs or synergies.


38

While these are only hypothetical transaction terms, at an offer price of $7.76 per share Barrick would be acquiring 50% of Brucejack’s M+I ounces at a price of $138 per gold equivalent ounce.qq This is both a reasonable and feasible entry price as Goldcorp has proven with its recent $406M acquisition56 of Kaminak, a purchase price of $137 per M+I ounce acquired.rr As Kaminak’s principal asset, the Coffee Gold Project, is carrying permitting, financing, and construction risk,57 Barrick would still have negotiating room given that Brucejack could command a higher premium as it would largely be de-risked at the time of the transaction. With the Americas being a core region for its operations, Barrick would bring critical value as an operator since, “These are jurisdictions where [it has] proven operating experience, a critical mass of infrastructure, technical and operational expertise, and established partnerships with suppliers, host governments, and communities.”58 In Zijin’s case, it would increase its equity stake in an asset with which it is already familiar having conducted extensive technical due-diligence. The acquired interest would allow it to diversify its geographic footprint outside of China’s borders while adding meaningful and profitable ounces to its portfolio. A 50% interest in Brucejack’s 10.45 Moz. of gold equivalent M+I resource would grow Zijin’s base by approximately 12.0%,ss advancing its mission to become a global leader on a production and reserve basis. Brucejack would then be under ownership that has exceptional operating knowledge in the Americas, comprise a portion of an unrivaled portfolio of gold mines, have access to the most globally competitive engineering, R&D, construction, and technology pipeline from both Canada and China, and all the cash backing needed to fund the mine’s ongoing operations and realize its potential as a world-class mine for decades to come.

Wide World of Outcomes This is of course just one speculative scenario in a wide world of possibilities. The diverse cast of characters involved, the complex financing terms, and the grand industry stage all add to the intrigue of the eventual outcome. With the clock ticking toward the expiring option exercise dates, if Pretium is unable to secure a takeover bid then Brucejack risks being hampered by an expensive funding package that requires refinancing. But if a takeover is indeed accomplished, it will be quite the feat of bold strategic planning and operative tactical execution.

Barrick would purchase 93.15M Pretium shares bringing total acquired equity value to $723M. Dividing by 50% interest in 10.45 Moz. AuEq M+I Resources yields $138/oz. Including debt, the enterprise value per M+I ounce would be $185/oz. Does not assign any value to Snowfield deposit. Equity value/M+I cited for fair comparison to Goldcorp purchase of Kaminak as no debt was assumed in the acquisition. rr Assumes a USD:CAD rate of 0.78 in converting Goldcorp’s C$520 total consideration for Kaminak, whose exploration-stage Coffee Project contains 2.97M oz. gold M+I Resources. Pre-production capital costs are scoped at C$317M which has not been included in the calculation of equity value per M+I ounce. ss Zijin holds stated gold resources of 1,261.28 metric tonnes or approximately 44.5 million ounces. Reference page 25 of Zijin’s 2015 Annual Report. qq


39

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2

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3

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4

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5

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6

Pretium Resources Inc. "Brucejack's Valley of the Kings Drilling Intersects 18,755 grams per tonne Gold." 08 June 2011. Press Release. .

7

Pretium Resources Inc. "Pretium Rouseources Inc.: US$540 Million Construction Financing; Production Decision for Brucejack. " 15 September 2015. Press Release. .

8

Id.

9

Pretium Resources Inc. "Pretium Announces Exercise of Participation Rights by Orion Mine Finance." 11 March 2016. Press Release. .

10

Pretium Resources. "Pretium Announces Closing of Private Placement." 31 March 2016. Press Release. .

11

Pretium Resources, Orion Mine Finance and Blackstone Tactical Opportunities. "Credit Agreement." 15 September 2015. Electronic Filing. .


40

12

Holmes, Frank. "Franco-Nevada: Royalty of the Gold Industry." 06 January 2016. Web Article. .

13

Pretium Resources, Orion Mine Finance and Blackstone Tactical Opportunities. "Purchase and Sale Agreement (Gold and Silver)." 21 September 2015. Electronic Filing. .

14

Pretium Resources Inc., supra citation 1.

15

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Paul, Sonali and Richard Pulin. "Franco-Nevada values long-term gain over fat returns in streaming deals." 25 February 2016. Web Article. .

18

Koven, supra citation 13.

19

Keen. Kip. "Franco’s Harquail defends ‘pricey’ stream deal." 08 October 2015. Web Article. .

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22

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41

25

Humphreys, Tommy. "Is Bob Quartermain's Brucejack the right-sized project for this market?" 18 April 2013. Web Article. .

26

Armstrong, Scott. "Pretium Resources CEO looks to China to develop one of Canada’s richest gold mines." 03 March 2015. .

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Ratner, Jonathan. "Sprott portfolio manager sees wave of M&A ahead in gold sector." 21 April 2016. Web Article. .

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Armstrong, supra citation 23.

29

Crittenden, Sam, Wayne Lam, Dan Rollins, and Stephen Walker. "Gold M&A Revisited - Not much left on the shelf." Equity Research Report. 18 March 2016. Electronic Publication.

30

Pretium Resources Inc. "Pretium Adopts Shareholder Rights Plan." 15 April 2016. Press Release. .

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Bloomberg News. "China's Gold Miners Come of Age to Scour Globe for Acquisitions." 22 April 2016. Web Article. .

32

Id.

33

MMG Limited. "MMG to acquire Las Bambas." 14 April 2014. Press Release. .

34

Freeport-McMoRan Inc. "Freeport-McMoRan Announces Agreements to Sell its Interests in TF Holdings Limited for $2.65 Billion in Cash and Up to $120 Million in Contingent Consideration." 09 May 2016. Press Release. .

35

Anglo American plc. "Anglo American Agrees to $1.5 Billion Sale of Niobium and Phosphates Businesses." 28 April 2016. Press Release. .

36

Zijin Mining Group. "Zijin Mining 2015 Full Year Results." 01 April 2016. Corporate Presentation. .


42

37

Id.

38

Bloomberg News, supra citation 28.

39

Zijin Mining Group, supra citation 33.

40

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41

Armstrong, supra citation 23.

42

Barrick Gold Corporation. "Barrick Announces Strategic Partnership with Zijin Mining Group." 26 May 2015. Press Release. .

43

Id.

44

Id.

45

Barrick Gold Corporation. "Barrick Annual Report 2015." 24 March 2016. Electronic Report. .

46

Id.

47

Id.

48

Els, Frik. "Risks mount for gold producers over deep capex cuts." 19 May 2016. Web Article. .

49

Thornton, John. "Remarks by Executive Chairman John L. Thornton at Barrick's Annual Meeting." 26 April 2016. Address to Shareholders. .

50

Yahoo Finance. "Pretium Resources Inc. (PVG) NYSE Listing." n.d. Online Database. .

51

Pretium Resources Inc. "Consolidated Financial Statement March 31, 2016." 31 March 2016. Electronic Filing. .

52

Zijin Mining Group. "Annual Results 2015." 29 March 2016. Electronic Report. .

53

Zijin Mining Group, supra citation 33.


43

54

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55

Yahoo Analyst Estimates. "Barrick Gold Corporation (ABX) Analyst Estimates." 01 May 2016. Online Database. .

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Goldcorp Inc. “Goldcorp Announces Acquisition of Kaminak Gold Corporation.” 12 May 2016. Press Release. .

57

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58

Barrick Gold Corporation, supra citation 41.


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Alex Godell | Managing Member [email protected] Santeri Strategies was founded to develop market-based capital management strategies that maximize the value of our mineral deposits. Please visit santeristrategies.com to learn more about the mission.

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