Pretium questions from a reader of this blog

Self-described “anonymous fan” writes:

1) Why do a press release when just 80% of the sample has been completed? Presumably, results on earlier portions (first 10%, first 20%) were coming in over time, and they had a sense that the news was good. But, given that they didn’t issue a press release for each portion (assume that is true), they could have just waited two weeks and released the complete results. Why not?

Bear thesis: They wanted to squeeze the shorts and knew that the Friday before Thanksgiving week (in the US) was a good time to do it. And/or they knew/know that the final 20% has little gold, so releasing just the 80% with a great result, and implying the hope/expectation that there is more to come, is better spin.

2) What data points in the next few weeks would support the bear or bull thesis? If we see a lot of insider selling after the price pop, that would be very bearish. If they rush to issue equity, that would also be bearish. But what possible events in the next few weeks would be bullish? That is, if you were PVG and you knew that there was a lot of gold, what actions would you take in the near future?

Why release data early? I think there are plausible explanations for releasing the data when only 80% of the sample has been processed.  It makes sense for Pretium management to inform shareholders because everybody wants to know if the deposit is real.  If I were in their shoes, I would release preliminary bulk sample data early.  I don’t think it’s right for shareholders to mistakenly panic out of their shares.  (I also would have released Strathcona’s written communications, but that’s another story.)

Secondly, insiders need to be very careful about what they say and I’m sure that they are double-checking all of their facts.  I’m sure that insiders are lawyering up because they are being sued by multiple ambulance chasing law firms.  (Who wouldn’t?)  Also, they are also probably trying to figure out what is going on: why is there a discrepancy between the sample tower and the bulk sample results?

At this point, I’m not sure what work they have done on the bulk sample because it is unclear to me.  Presumably they have milled/crushed the ore and sent it through gravity and flotation separation.  After that, they have taken a portion of the resulting material and sent it off to an assay lab.  Assay labs often have a backlog of work.  They may not always perform the assay right away.  (I have no idea what the current backlogs are.)

I don’t think that the ore concentrate has been sent to a smelter yet and turned into pure gold.  The press release says that they are in the process of selling and shipping.  It’s possible that the ore needs additional processing before smelting.  In the future, I would expect that the company announce the final amount of recovered gold.  (It’s possible that I am misunderstanding why the current results are preliminary.)  The company should also release metallurgical results such as what % of silver and gold was recovered when the bulk sample was sent through a commercial mill.

Regarding a short squeeze:  I doubt that insiders would get anything out of that.  It would have made more sense for insiders to sell when the stock was at $15.  Canadian Insider shows no insider selling (I haven’t looked on Sedi.ca because that site is mostly a pain in the ass to use).  Also, this stock doesn’t seem heavily shorted.  On IB, the borrow is currently 1.6%.  This is lower than Canada Lithium (somewhere around 5.5%), Veris Gold (around 8.75% on Canadian exchanges), and Nautilus Minerals (somewhere around 21%).  I don’t know how to check the % of float short.

The last 20% of the bulk sample:  I don’t see the spin in selectively releasing data early.  Let’s suppose that in the worst case scenario the last 20% has no gold when there is supposed to be lots of gold.  Longs in the stock might actually be ok with that.  It could simply be due to the resource model having problems figuring out where the mineralization is.  This will increase the cost of mining because the somebody will have to spend extra money figuring out where all the mineralization is (or they could mine more rock and suffer more mining dilution).  But the gold is already there in the bulk sample and that’s what really matters.

Would a rush to equity be bearish?  I’m not so sure.  Juniors almost always have to raise money.  Without the mine infrastructure, they can’t get the value out of the ground.  It is also good if the company can build a mine quickly to maximize the NPV of the future cash flows.  So it makes sense to raise money so that the company can advance the mine by paying for engineering, permitting, community relations, etc.  While there are illegitimate reasons to raise capital, there are also legitimate reasons.

It would be very suspicious if they sell stock at very low prices.

What would support the bull thesis?  I think that the bulk sample results are a huge milestone for Pretium (assuming that the assays are correct).  It is the evidence that Pretium needed to come up with to demonstrate that the deposit is real.  To Pretium’s credit, the company has taken the right steps to prove that their deposit is real and that it is probably economic.  They could have tried to shop the deposit around without a bulk sample.  They could have hired some overly optimistic engineers instead of a reputable firm like Strathcona.  They have been taking the right steps in my opinion.

For the mine to be economic depends on a number of factors, including ones unrelated to the resource estimate.  I honestly haven’t read the feasibility study so I don’t know if this mine has potential issues (it probably doesn’t???).  Usually deposits with high grades and high tonnages (such as Pretium’s) are the ones that are the most likely to turn into profitable mines.  The surrounding land might also be worth a lot because it may host similar high-margin deposits that are close to where infrastructure will be.

What would support the bear thesis?  The bear thesis would be right if some type of fraud is revealed and it turns out that the bulk sample results are wrong.  I think that this scenario would be bizarre and unlikely.

The piece of the puzzle that doesn’t fit is why Strathcona’s sample tower data is so different.

Is Pretium a ridiculous short seller trap?

Going into it, I thought it was an amazing short.  You have a shady industry, overpaid insiders, a promotional management team, and independent QC checks that are very suspicious.  Most importantly, Strathcona resigned and was later quoted as saying that there are no valid mineral resources or reserves.  Of course I’m going to short the company.  How can I not?!

I think that time will probably show that it was a trap and that I was wrong.

*Disclosure:  I own puts and calls on PVG (more puts than calls); no position in the common.  I don’t have much conviction in my PVG position and am honestly confused.  I am shorting CLQ (but am net long the stock) and NUS common.  I am not shorting Veris Gold.

EDIT:  Now that I think about it, it seems like the preliminary bulk sample results are based on assays of the processed ore.  I suppose there could be flaws with the methodology if the small amount of material used for assays is not representative of the entire bulk sample.  Sort of like how the tower samples may not be representative of the entire bulk sample.

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