(This is a follow-up to the post about Pretium’s disappointing grades.)
Pretium’s current production should exceed 13.1g/t, yet it has been 4.660g/t so far.
According to the latest feasibility study (filed June 30, 2014), Pretium should have a stockpile of 81kt of material grading 13.6g/t gold. The feasibility study anticipated that this stockpile would be processed in years 2 and 3 of the mine’s production phase while higher grade material would be processed first. This is because conventional mine engineering calls for maximizing the Net Present Value of the project by mining and processing the most profitable ores first (where possible). So, current production should exceed the stockpile head grades of 13.6g/t. If we assume recoveries of 96.6% on 13.6g/t gold, then we would expect a hypothetical 81kt stockpile of 13.6g/t gold to yield 13.1g/t. Production results so far indicate grades of 4.660g/t for June and July (after processing losses), well below the 13.1g/t level.
It seems inappropriate for Pretium to continue to cite its feasibility study in its investor presentations (they are all on Slideshare) when current production differs so materially from what the feasibility study anticipated.
(To get up to speed on Pretium, you can refer to previous posts such as this and then this.)
In July 2013, Strathcona began voicing its concerns about Snowden’s resource model. Sometime in the months after (likely as a reaction to Strathcona’s concerns), Pretium changed its underground exploration program to excavate additional material from the Cleopatra and 615L lateral veins (among other changes). While there were press releases that mentioned the additional exploration in passing, those press releases did not disclose the reasoning behind the additional exploration.
(*Disclosure: I have no position in Callidus Capital.)
Callidus is currently suing West Face Capital (a hedge fund) and Veritas Investment Research (an independent research firm) for defamation… and I want no part in being sued. So I will try to be neutral as I talk about my speculation as to why the borrow is expensive. The first thing that comes to mind is the defamation lawsuit against Veritas, a firm that does not do activist shorting. Some short sellers really pay attention when companies sue their critics- more so when the criticism was private rather than public. I’m not saying that short sellers are necessarily right or wrong to bet against such companies- the counterexample would be Fairfax Financial (Fairfax’s stock has done quite well since launching its lawsuits). But it is certainly something that (in my opinion) attracts short sellers.
Some key lessons on mining companies:
- They regularly withhold key information from investors.
- Technical reports should not be relied upon because many of them are disconnected with reality.
Without key information on a mine’s economics, these companies cannot be accurately valued. So… mining stocks aren’t a great place to look for longs. You might spent a lot of effort trying to value a mine and still fall short of being able to find reliable information on that mine.
On the short side, there are some opportunities.
(*Disclosure: Pretium is by far my largest short position so I am biased. Take what I say with a grain of salt and do your own homework.)
The production figures reported in Pretium’s MD&A filed on August 10, 2017 fall far short of the projections from Pretium’s latest published feasibility study.
According to the feasibility study filed on June 30 2014 (effective date June 19, 2014), year 1 production from Pretium’s flagship project would have a head grade of 15.4 g/t gold with a recovery of 96.8%. The effective grade after recovery losses would be 14.9072 g/t gold.
Figures are from Table 17.2 of the technical report.
Compare this with the data from page 2 of the MD&A:
- For June, 8510 ounces of gold were produced and 70805 tonnes of ore were processed. 8510 / 70805 X 31.1035 gram/ounce = 3.738 g/t for June
- For July, 16882 ounces of gold were produced and 83667 tonnes of ore were processed. 16882 / 83667 X 31.1035 gram/ounce = 6.276 g/t for July
- An average of 5.113 g/t for June and July
The 3.738 g/t and 6.276 g/t fall far short of hitting the 14.907 g/t mark projected from Pretium’s feasibility study three years ago.
EDIT (10/3/2017): Changed the gram<–>ounce conversion to reflect troy ounces rather than avoirdupois ounces. I apologize for the error.
While grades so far have been low relative to the estimates from the feasibility study, Pretium does expect grades to ramp up [page 4; emphasis mine]:
As the Brucejack Mine continues to ramp-up grade, we expect the increased production and concomitant proceeds from the sale of doré and flotation concentrate will enable us to overcome our short-term working capital deficit. We expect as gold production ramps up this deficit will reverse (refer to the “Liquidity and Capital Resources” section below). In addition, we are evaluating other opportunities to bolster our short-term working capital.
There is a free website called Change Detection that can send you email alerts whenever a webpage changes. I use it to keep track of:
- Hedge fund letters, e.g. Bronte Capital’s.
- Scumbag client lists. There are certain firms that specialize in helping scumbags. Some of those scumbags are investment banks that publicly post their coverage list.
So instead of constantly re-checking a website, you can simply use ChangeDetection.com to receive email alerts.
I don’t think that Home Capital is a great short at the moment due to the expensive borrow (>60%). The expensive borrow and rising share price suggests a short squeeze.
However, I do think that there are serious issues with the company such as systemically poor underwriting.