Extracted from HRA Special Delivery #922 - Apr 15, 2020
Precipitate Gold (PRG-V)
Hard Rock Analyst
Posted Apr 17, 2020
Precipitate Gold (PRG-V, PREIF-OTC, even on 771k shares at $0.12-not rated) surprised the market, and me, with the announcement of a JV on its Pueblo Grande project in the DR. As most of you know, I was a founder of PRG and remain a large shareholder, friend to management and occasional unpaid advisor. That means I sometimes know stuff that isn’t public which is why I don’t rate the stock in HRA, though I update it as needed. For the record, the agreement with Barrick is one I didn’t know about ahead of the release. I knew there were conversations between PRG and Barrick Gold (ABX-T). It would have been surprising if there weren’t given the physical proximity at Pueblo Grande/Pueblo Viejo. I wasn’t expecting an option agreement though. I don’t think PRG’s predecessor was able to get ABX interested in its holdings and because the “JV model” is not Precipitate’s MO.
As announced yesterday, PRG has agreed to option Pueblo Grande to Barrick. In order to earn a 70% interest in PG, Barrick must:
- Spend US$10 million on exploration within six years, specifically, $2 million in the first two years, US$1.5 million in the 3rd year, US$1.5 million in the 4th year, $US2 million in the 5th year and US$3 million in the 6th.
- $1 million of the first spending commitment is firm – not optional – and must be spent.
- Complete 7500 metres of drilling by the end of year 6.
- Complete and deliver a pre-feasibility study on the project.
- Barrick completes a $1 million US placement at 30-day VWAP, about 11 cents.
There have been a lot of questions on this one and many shareholders who don’t love the deal. I don’t think its a secret I’m not a “prospect generator guy”. I prefer to lay down my bet and take my shot on projects. I’d rather see companies swing for the fences than try to stay on the field by bunting over and over. I understand the logic behind JVs and consider it somewhat valid. Let other people spend money on high-risk projects and live to fight another day if they don’t work out. In the end, it always comes down to risk/reward and your own risk tolerance and optioning some projects while working other has worked out for many companies.
PRG did a good job of marketing PG which is why some shareholders aren’t happy to see it optioned. They were willing to roll the dice. I agree with that to a point and I’d say Jeff Wilson, Precipitate’s CEO does too. I know Jeff well and know he’s someone who prefers to drill things himself.
PRG agreed to the JV because they view it as strong enough to trade the project interest for option commitments by Barrick. I agree that it’s a stronger deal than shareholders are viewing it as. I’d prefer to see more year one commitment but the reason the first spending period is two years is due to covid-19. Barrick wants to get on with exploration, but they don’t know how long local restrictions will last. Uncertainty about that is the reason the first spending period isn’t one year. In return, ABX agreed to half the first commitment being firm. They’ve got to spend $1 million US or pay PRG the difference. It's also an all-or-nothing deal. There are no “interim” earn-ins. If Barrick doesn’t do everything it committed to under the agreement, PG goes back to Precipitate 100% and Barrick earns nothing.
Most importantly for me, the agreement calls for Barrick to deliver a pre-feasibility study to complete the earn-in. Obviously, ABX won’t be doing a study unless it makes a discovery. Still, it’s important to understand that this item, while undefined in terms of spending commitment, is really the most important term for the deal. Unless ABX makes a discovery, it thinks is important enough to do pre-feasibility level work on, it’s handing the project back.
It’s the pre-feas that defines the amount of work, and spending Barrick must do to earn in. Many focused on the relatively light 7500 metre drilling commitment. I’d agree that’s a small number for a six-year deal but it's also a meaningless one, a red herring really. While PRG was more interested in the shallow (say <300 metre depth) targets at PG, the deeper ones are arguably more interesting. I can’t read the minds of Barrick’s exploration team, but I wouldn’t be surprised if they plan drilling some of the deeper stuff below 500 metres. If they make a discovery, they’ll have to drill enough to bring it to “indicated’ tonnage category as that’s the minimum confidence level used in a pre-feasibility study. To get enough tonnage to matter to ABX to Indicated category, even on shallow targets, would take tens of thousands of metres of drilling. That’s just the math.
My point is that, on any real success, the spending under the agreement would end up being way more than $10 million, just to fulfil the main underlying term, a pre-feasibility study. If Barrick doesn’t find anything interesting, the project comes back to PRG 100% and we don’t feel bad PRG did the deal.
As a side curl, Barrick is completing a US$1 million placement. It’s being done at 30-day VWAP, about 11 cents, which is a bit painful. Wilson admitted as such, pointing out that term was agreed to when the VWAP would have been several cents higher, but they couldn’t’ get ABX to move on the pricing formula. I don’t think Barrick tends to be a seller when it comes to this sort of share position, it’s a rounding error for them. And I think having ABX as a named major shareholder will be a big help when it comes to navigating DR politics. Barrick is, arguably, the most important company in the country by far and the source of almost all the DR's export earnings.
In summary, I agree with the frustrations but wouldn’t overdo it. The deal gets Barrick to test targets that, while high potential, are not low risk as I’ve stated several times in the past. PRG didn’t’ spend time on Ponton until late 2019 as they were busy at PG. It moved up the target ranking significantly since they started compiling old data and got on the ground late last year. And don’t forget Juan de Herrera. PRG stopped work there while GoldQuest awaits an exploitation permit. PRG never had issues itself and has permitted drill pads at JdH on several strong targets. The odds of GQC getting its licence should improve after DR elections this year. That would open the Tireo again in the eyes of the market. Precipitate’s odds of moving JdH forward at a regulatory level are much higher with Barrick onside. That’s just the reality of the politics. I understand the disappointment, but don’t judge too harshly, especially ahead of seeing details on Ponton and remembering JdH. It may turn out the best targets weren’t optioned after all.
Precipitate Gold Corp.
Precipitate Gold website
Apr 15, 2020
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