Glenn Chan's Random Notes on Investing

Pretium: Now the pieces of the puzzle are coming together…!

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Read the article “Strathcona Minerals responds to Pretium’s bulk sample result” if you haven’t already.

Originally I thought that there was either (A) fraud or (B) Strathcona screwed up.  In a totally bizarre and unexpected turn of events, Strathcona is right but there is no fraud*.

So what actually happened

Snowden’s resource model is wrong.  It overpredicts the amount of gold in the deposit.

However, there was a previously undiscovered Cleopatra vein that affected the results of the bulk sample.  This is why the bulk sample has well over the predicted 4,000 ounces of gold.  This deposit is very different than what was originally presented.  Farquharson basically lays it out for everybody in the Nov 25 Northern Miner interview:

[…] we told them that it has an excellent chance of being a small tonnage, high grade mine mining in the Cleopatra vein and a couple of other similar occurrences that they found in the last drilling program. If they lined all those up, there’s an excellent chance that they could have a small tonnage, high grade gold mine. But they will not have a mine producing 425,000 ounces a year for the next 20 years as they have been advertising so far.

Basically, the tonnage is much lower.  Because selective mining will be used (and due to the lower scale of the deposit), operating costs will likely be a little higher.  A future mine would likely incur significant exploration expenses to figure out where all of the veins are.  A potential future mine would be lower tonnage and lower margin.

I am no good at figuring out the economics of a mine.  I don’t have the same expertise as a team of specialized engineers and access to the technical data.  However, I would guess that the deposit is worth $50-100M+ at the very least.  Maybe as high as $300M???  (This is just my gut feeling.)  Pretium’s latest MD&A states that it has $30.564M in cash and cash equivalents as of Q3 2013.  All juniors tend to have a high burn rate so the cash should be slightly lower now (not that it really matters).

If the shares get in the $0.50 to $1.00 range it is extremely likely that I will be trying to close my position in some form or fashion.

I hope that Robert Quartermain is never employed in the mining industry again.  Kudos to Strathcona for providing timely disclosure of material information and having the integrity to resign.  I need to get some sleep.

*Disclosure:  No position in the common; long much more puts than calls.  I bought some call options intending to turn them into puts but then decided not to.

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