Pretium: Strathcona says that there is no gold

See Pretium’s press release for yourself.  The stock is currently down around 26%.  Here’s one juicy tidbit from the press release:

Strathcona withdrew from the Program on October 8, 2013 before any results from the processing of the bulk sample were available. In withdrawing from the Program, Strathcona advised Pretivm that “…there are no valid gold mineral resources for the VOK Zone, and without mineral resources there can be no mineral reserves, and without mineral reserves there can be no basis for a Feasibility Study.” They also advised that “…statements included in all recent press releases [by Pretivm] about probable mineral reserves and future gold production [from the Valley of the Kings zone] over a 22-year mine life are erroneous and misleading.”

Strathcona is saying that there is no gold (“no valid gold mineral resources”).

Then the press release gets into a technical argument why Strathcona is wrong.  Previously, I misunderstood what Pretium was saying about Snowden’s disagreement with Strathcona.  Here’s my understanding now.

The bulk sample consists of a number of cross-cuts.  I previously thought that all of the material would be mixed together into one giant >=10,000t sample.  This is not the case.  The bulk sample will consist of a number of different smaller samples.  Cross-cut 426585E is 2,167 tonnes (dry).

That cross-cut was ground up and Strathcona took a small sample out of all the ground material (0.01% of the excavated material would be 0.2167 tonnes, which is several hundred pounds).  One way to sample this material is to pour all of the ground ore and to take tiny amounts of ore out at timed intervals.  This should be fairly representative of the overall ore.  Strathcona’s sample (from the sample tower) of the 2,167 tonnes found the grade to be 2.08 grames per tonne gold.  Based on this, the 2,167 tonne sample from the cross-cut should contain 145 ounces of gold.

Pretium/Snowden has released “preliminary” mill results.  Total contained gold is 281 ounces, which corresponds to 3.67gpt.  That grade may or may not be economic.  But the bigger issue is this: why is there such a large discrepancy between the sample and the overall results?  There could be highly unusual geological characteristics to the ore.  It is likely (in my opinion) that Strathcona has accounted for this by taking multiple samples from the entire 2,167 tonnes.  If the gold distribution is highly erratic, then the multiple samples will have very high variation.  Fraud is also another potential explanation (though this fraud would have to be very large, expensive, and sophisticated).  Maybe the 2,167 tonne sample was somehow salted with additional gold.

I think that Strathcona is highly reputable (e.g. Farquarhson realized that Bre-X was a fraud, though he is not working on the the Pretium bulk sample).  The Strathcona engineer probably understands geology and sampling very well.  On top of that, the previous QC checks have been consistent with fraud in my opinion.  Pretium should publish Strathcona’s written communication in its entirety instead of selectively quoting Strathcona.  But in typical junior mining fashion, management is trying to promote the stock and trying to put a positive spin on everything.

The stock has dropped by about a quarter.  I don’t think that it has fallen enough.

EDIT:  Let me make it clearer.  If Strathcona says that there is no gold, they are probably right.

*Disclosure:  Still short Pretium common, and added to the position in another account.  I did not buy put options because I thought that they were really expensive.

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11 thoughts on “Pretium: Strathcona says that there is no gold

  1. Your anaysis may make you some money in the short run but I think you are backing the wrong horse. Pretium hired Strathcona for a second opinion that was to be compared to the actual results obtained from processing the bulk sample at the end of the exercise. If you look at the October 30/13 Pretium Q&A explanation on their website there is an excellent explanation as to why the Tower methadology will more than likely be in error as opposed to the MIK method.
    Quartermain is a geologist with an excellent reputation (at least as distinguished as Farquarson) and who has presented the opinions of both Strathcona and Snowdens. Granted the opinions are diametrically opposed but the initial results from the processing appear to support Snowdens. I have read some of your writings on mining stocks and promotions and for the most part agree with you but be careful as there was a major problem for the shorts when the Afton project was discovered by a junior in the mid 1970 s. The stock went from .25 to $14.00 in the space of a few weeks and the shorts who could not believe that there could possibly be a mine within site if a major highway 5 miles outside of a city paid dearly when a major bought the company on the open market. I hope you have some stops in place.

    • There are a number of issues here.

      1- How the resource model was built. Strathcona has apparently criticized the resource model. They are probably right because most engineers will be overly aggressive in building the model because most engineers will give the numbers that the client wants.

      Almost all juniors do it and it is not a reason to short Pretium, unless the resource estimate is absurd (e.g. Barkerville).

      The discussion about ID2 versus ID3 versus MIK has to do with this. In no way is the MIK model based on drillcore data superior to the sample tower data; I’m guessing you were referring to something else.

      2a- The tower data versus the data from the fully processed bulk sample. So far Pretium has disclosed that there is a very significant difference between the two. I would be concerned because that isn’t supposed to happen. There is sampling theory and math that will predict how close the two sets of data should match up. Either somebody screwed up, the gold is extremely heterogenous, or there may be fraud involved.

      2b- The presentation doesn’t really say anything new. Pretium could have provided data on how heterogenous the rock is, but they didn’t really do that.

      3- Quartermain did not disclose Strathcona’s concerns right away (after having his own staff double check the data and analysis). This is probably unethical. If there is strong evidence that there is no gold, Pretium is obligated to disclose that to shareholders. So far, it looks like the reason why Strathcona resigned is because they were saying that there are no mineral resources (let alone reserves) and were frustrated that Pretium did not disclose their concerns right away.

      This is very unethical behaviour on Quartermain’s part.

      If he wanted to argue against Strathcona’s points, he could provide data on how heterogenous the deposit is and point out the variability in the tower sample assays. If the deposit truly is extremely heterogenous, then it would also show up in the tower data.

      • I have been around the mining business long enough to read between the lines in an engineering report and to know that an error of significance would cause the supervising body that provides the authority to the professional giving a report without validity woud suspend his/her ability to practice.
        The argument as to the correct method for evaluating a hetrogeneous deposit is where Strathcona and Snowdens disagree. The “delay” in issuing the final report of the bulk sample is the result of the requirement to perform the work that was in the contract beteen both Strathcona and Snowdens.
        If you read the Q&A on Pretium’s board you will see that neither of the methods selected are perfect as the bulk sample only removes about 14% of any mineable block.
        This means that any release of assays prior to the conclusion of the milling would be a professional error.
        The release of the one drift result was a demonstration that the tower sample method expected 2 g/T and the actual was >4 g/T (a significant difference). which does not in itself call Strathcona a liar but shows that their method appears to give a result that is significantly below the actual grade that will be recovered when the deposit is mined.
        There was also some discussion that has occured regarding the topcut that Strathcona used when reporting assay results. Apparently the Strathcona topcut was 31.1 g/t as opposed to the 420 g/t topcut employed by Snowdens. This makes a significant variance in the resulting conclusion as to the viability of the deposit.
        It is interesting to note that when the West zone original feasibility was done back in the early 1990’s- there was no topcut applied in calculating the reaource due to the consitency of high grade hits with closely spaced undrgroung drilling.

        I appreciate you taking the time to respond to my viewpoint but I still think the that the proof of model will be revealed in the milling and analysis of the bulk sample and my bets are on Quartermain and Snowdens.

      • James, I think that you are confused about the technical aspects here.

        1- If the deposit is mined in blocks in an open-put bulk method, then the bulk sample would only remove 14% of any mineable block. This would cause sampling issues. The bulk sample would actually OVERSTATE the grade of the recovered material as there would be less mining dilution.

        If the deposit is mined using a more selective method than open-pit mining, then mining dilution would be lower. The presentation is a little confusing as it talks about both open-pit and underground mining. But the point of the presentation was an exercise in PR and spin doctoring, so I’m not surprised that you are confused.

        2- As far as I can tell, Peter George (of Barkerville Gold infamy) has not been suspended from practice. He should have been suspended long before Barkerville in my opinion as his previous reports were just as erroneous.

        If you look at Bre-X, no geologist has been suspended. I agree with Farquharson that Felderhof committed fraud. The current reality is that there are few legal repercussions for all the nonsense that goes on in the junior mining world.

        3- You point out that a previous feasibility study did not apply a topcut. I didn’t read that feasibility study. However, for a highly heterogenous deposit, a topcut is clearly the right way of doing things. You need to apply a topcut to prevent outliers from skewing the overall estimate. This would be a fairly standard procedure for a deposit like this. I would suggest you read “Introduction to Mineral Exploration” by Charles Moon, Michael Whateley, Anthony M. Evans (or any other resource that describes when topcuts should be applied).

        3b- The Pretium website doesn’t say anything about the topcut value used by Strathcona. At least, I’m not aware of such information.

        3c- The topcut value isn’t relevant for bulk sampling. It is relevant for a resource estimate based on drillcore data, not bulk sampling.

        4- The difference between preliminary bulk sample results and the sample tower are a valid point on Pretium’s part.

        The sample tower should be fairly representative of what the bulk sample results will be. It is surprising that the difference is more than 20%. A reasonable engineer would scratch his/her head and try to figure out the cause of this discrepancy. It is unlikely that the deposit is so heterogenous that the difference would be so high. Also, if the heterogenous nature of the deposit is the cause, the sample tower’s error would swing both ways (*the sample tower results would likely underestimate most of the time, and massively overestimate otherwise).

        I don’t think that it is reasonable to say that Strathcona’s method is flawed. The sample tower method inherently has problems due to various forms of sampling error that could occur. It has the advantage in that you can have very strong security on the sample tower samples to prevent tampering and fraud.

        The best case scenario for Pretium is if Strathcona somehow screwed up and “ragequit” prematurely. The more likely scenario is that Strathcona is right. There are too many things in Strathcona’s favour.
        – QC checks for Pretium have come in extremely low
        – It is likely that Snowden’s resource model based on drillcore data is overly aggressive. If you want to inflate the resource estimate, you would use something like MIK.
        – Strathcona has an excellent reputation
        – The sample tower results should be pretty close to what the final results will be. It is likely that Strathcona resigned because the discrepancy was massive.
        – In the junior mining world, fraud is much more likely than honest mistakes. (But I would not rely on this rule.)

  2. Hi Glenn,
    The reference for the 31.1 G/T topcut that Strathcona wanted to use is more of an inference from comments that I have read. Snowden uses a topcut of 420 g/t in their work and because of their cutting out the outliers to a value that they feel comfortable with they will probably find their estimate of grade to be conservative. I do not see where you have any reason to state that the checks on the Snowden values have not been validated.
    With respect to the sample tower giving better results than MIK- I would refer you to the Q&A on the Pretium site where it is evident that with only a 14% sample of any given resource block there is a fairly low probability that this small a volume woild have much of a chance of being representative of the block grade.
    Both Snowdens and Strathcona have excellent reputations- one – basically in Canada and the other on the international stage.
    I could not find any reference to work by Strathcona on hetrogeneous deposits where they have used any modern geostatistical techniques where Snows\dens chief geologists have published peer reviewed papers in this area.
    Who would you rather follow-The Catholic Church or Gallileo?
    You have obviosly come to your conclusion based on a viewpoint that thinks that all junior miners need to raise money and will say anything that improves their chances but in the case of Pretium they are about a year away from having to go to the market and by that time the reality of this deposit will be common knowledge- one way or the other.
    You are short- I am long. One of us is wrong- Good luck.

    • Hi James, I would highly recommend that you read the textbook “Introduction to Mineral Exploration” or a similar textbook. It explains many of the concepts that you are having problems with.

      Strathcona has resigned because they are of the opinion that there are no mineral resources, let alone mineral reserves. This is not a claim that they would make lightly.
      Snowden hasn’t exactly said that there is gold in the bulk sample. They’re kind of saying that everybody should wait until all the bulk sample results are in so that we’re 99.99% sure that there is no economic gold instead of being 95% sure that there is no gold. Strathcona isn’t going to resign unless they’re pretty darn sure that this thing is going to be a disaster.

      • I would direct you to the Bloomberg interview with Strathcona’s point man who indicates that Pretium’s Brucejack could well be mineable. I think this is a major shift from “No Gold”.
        Quartermain’s restatement of Pretium’s position that the hired consultant has no right to tell the employer what and when to release the results of any study-particularly when there is work under way that will clarify the results. It would be irresponsible to relase a contrary opinion without proof.
        This is exactly why Pretium is upset with Strathcona.
        Now that Strathcona is in reverse-are you ready to to rethink your position?

      • The Bloomberg interview you reference is here:
        http://www.bloomberg.com/news/2013-11-11/pretium-declining-amid-doubts-on-gold-project.html

        Here’s a relevant quote from the article:

        There’s “no real similarity between Bre-X and Pretium,” Strathcona’s Thalenhorst said. Bre-X’s project “was a non-deposit” while Pretium’s “may very well turn out to be a mineable deposit, just much different from what it has been made to look like.”

        You can read into that statement whatever you want. I think that Thalenhorst is saying that Bre-X was a complete fraud and that the deposit had no chance of turning into a mine. My interpretation is that Pretium’s deposit actually does have the potential to turn into a mine, “just much different from what it has been made to look like”. His statements are a little vague; there are different ways you can interpret it. Strathcona has already written that “there are no valid gold mineral resources for the VOK Zone”. Maybe he is saying that more drilling might lead to valid mineral resources or reserves. Maybe he is backtracking as you suggest. I guess we’ll have a better idea when more data is released. Thalenhorst certainly does suggest that there will be a huge drop in the resource estimate.

        2- Pretium should release the sample tower data because it’s the right thing to do. I believe this is why Strathcona resigned, because they actually have integrity.

  3. I did not draw the same conclusion that you did. Strathcona withdrew without waiting for all of the sample tower results (or if they did get all the results I believe they applied an unrealistic topcut.) As to releasing the sample tower results- the release of all of the results- Snowdens and Strathcona they will be part of the Snowden report-it is unfortunate that Strathcona will not be there to interpret whatever it is that they meant by running off at the mouth. Yes there is the possibility of a minor hygrade -follow the vein operation but from everything I have read the VOK resource is predicated on taking large amounts of low-to nograde to ensure that they get the super rich plums that occur with regularity throughout the deposit and to obtain an average of about 13 g/t. Not every block will average the 13G/t as some posters to Yahoo assume but if you look at the website gold ounce location you will see the majority of the ounces are within a relativly small volume of the deposit and it will be a mine engineers job to ensure that the average grade that is processed will meet the grade predictions over a period of time (monthly-quarterly or annually..I think the results of the bulk sample will vindicate Pretium;s caution. It may be that there that thee will be modifications necessary to the estimation methadology but I doubt that “There is no Gold”.

    • The topcut relates to resource models derived from the *drillcore* data. You would not apply a topcut to the bulk sample data or the sample tower data. Strathcona would not apply a topcut to the sample tower data; it would make no sense. I suggest you read a textbook on mineral exploration. You’re getting some basic stuff confused.

      Because you are long the stock, you seem to have tunnel vision. You are looking for data that validates your position. I don’t think that there is much point in having a conversation.

  4. I take your point as to their being no point as to having the bulk sample -Tower sample having a topcut and admit my ignorance. However the bulk sample method in itself appears to have been somewhat unlikely to give credence to either Stathcona or Snowdens viewpoint if you look at the Q&A description of the bulk sample being about 14% of any ore block. Snowden’s reliance on the milling report for gold recovery appears to be based on their reading that the mined volume and recovery will provide a closer co-relationship to the actual than Strathcona’s tower sample. Here we are back at the conflict between Snowden and Strathcona without really being able to sort out the deposit.
    Yes- I still am long but then again I have made my living from the mining industry over most of my working life and know that without optimism there will never be another mine found.
    I have learned from your comments but obviously have a different viewpoint. End of conversation on this project.

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