Pretium recap

This is a chronological summary of everything that’s happened to make the story easier to follow, plus my updated thoughts on this strange saga.

Pretium had its Valley of Kings (VOK) deposit which looked very, very promising.  Pretium was reporting drill results in the ballpark of thousands of grams per ton.  These are incredible grades.  However, the intercepts were very narrow: 0.5m or basically one core length.  This was also a high-nugget gold deposit so it is very difficult to measure the overall grade with drillcore data alone.  So, Pretium decided to perform a bulk sampling ($30M) and drill fan ($15M) program on its deposit.  It wanted to have a better idea of the deposit’s overall grade and how drillcore data relates to the actual grades of the deposit.

Strathcona was brought it to oversee the bulk sampling program.  Henrik Thalenhorst of Strathcona has overseen many bulk sampling programs over his career and has published various papers on the subject.  Strathcona is a reputable engineering firm and their reputation would lend credibility to the project in the eyes of a potential acquirer.  Strathcona worked with Snowden, the engineering firm who built the resource model for the VOK deposit.

Before the bulk sampling data came in, it is likely that Strathcona critiqued the resource model that Snowden built, presumably for being overly aggressive and overstating the tonnage of the deposit.  A later press release would imply that Strathcona had concerns even before initial data came in.

When it withdrew, Strathcona advised Pretium that it had previously asserted similar views critiquing the Snowden resource model for the Valley of the Kings, accompanied with “recommendations” for public disclosure of the preliminary bulk sample data supporting their conclusions. At one point, these assertions, conclusions and “recommendations” were made on the basis of approximately 20% of the underground drilling results, no assay results from the sample tower and no results from production.

The VOK deposit turns out to be something different (before Oct 9, 2013)

The bulk sampling program was designed to have a sample tower take a representative subsample of the overall 10,000t sample.  The assays on the sample tower material would be available before the results of processing the 10,000t sample in a commercial mill.  As the assays from the sample tower material came in, Strathcona realized that the gold mineralization was very different from what was originally expected.  A later Oct. 22 press release quoted Strathcona as saying:

[Strathcona] The infrequent high-grade intercepts reported in the press releases have been shown in the underground exposures of the bulk sample program to usually be of very narrow width (0.5 meters) and associated with narrow geological structures that occasionally have mineable continuity as in the case of the Cleopatra Vein.

Here’s what I understand.  When the rock was removed from the deposit, the geologists could see the rock was exposed (the “underground exposures”).  They can visually identify what type of rock it is.  The point is to figure out the correlation between the valuable metals (gold and silver) and their correlation with the type of rock and the “geological structures”.  Strathcona saw that almost all of the gold was “associated with narrow geological structures that occasionally have mineable continuity”.  The gold is still extremely high grade but it exists in very narrow veins as opposed to the broad zones of mineralization that the Snowden model assumed there would be.  The implication is that the tonnage in the deposit is less than originally thought, which means that the deposit isn’t worth as much as originally thought.  A very minor factor affecting the economics of the deposit is that extra money will be needed for exploration to figure out where these veins are and how they are shaped.  This will require more drillholes than normal.

The second major discovery was the Cleopatra vein.  Going into the bulk sampling program, the engineers didn’t realize that the Cleopatra vein was there and would be part of the material excavated in the bulk sample.

There are two things happening with the bulk sampling program:

  1. Snowden’s resource model is flawed.  It overpredicts the amount of gold in the deposit.
  2. The engineers didn’t know that the Cleopatra vein was there.  The Cleopatra vein is the reason why there is a lot of gold in the bulk sample.

There are two forces at work which go in opposite directions.  It is a bizarre coincidence that the two would (mostly) cancel each other out.  This is the reason why subsequent events would be confusing.

Oct 9, 2013 press release

On October 9, Pretium issued a press release titled “Pretium Resources Inc.: Bulk Sample Update“.  It disclosed that Strathcona resigned from the project and gave no reasons for it.  At this point, I believe that Strathcona had already written letters to the company and advised Pretium to disclose the developments with its deposit.  The right thing for Pretium to do would have been to release material information about why its deposit’s economics aren’t as good as originally thought.  Strathcona strongly felt that Pretium should have done the right thing.  And when Pretium didn’t do it, Strathcona decided to resign.

According to Pretium’s press releases, Strathcona resigned when most (but not all) of the sample tower assays were in.  None of the results from processing the bulk sample were available.  But at this point, everybody (Strathcona, Snowden, Pretium) pretty much knows what is going on.

The stock tanks on this press release.

Oct 22, 2013 press release

This press release stated a lot of different things.

Firstly, Pretium released a few sentences from Strathcona’s written communications.  One of them was:

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.”

Unfortunately, some people like myself misinterpreted this to mean that there is no gold in the bulk sample (and therefore there is no gold in the entire deposit).  By ‘no gold’ I actually mean that there is no gold that is economically viable.  I believe that this misinterpretation is the reason why the stock fell so much after this press release was issued.  A Financial Post article was titled Pretium shares sink as geologists declare ‘no valid gold’ at B.C. project.

Secondly, Pretium tried to portray everything as a technical dispute between Snowden and Strathcona.  The press release makes many points and has many areas where it shows ‘bickering’ between Strathcona and Snowden/Pretium.  For example:

Both Pretivm’s management and Snowden share a number of significant concerns with respect to Strathcona’s conclusions. They contend that the Strathcona conclusions are based on: (a) the interpretation of preliminary data, (b) the interpretation of too few data, and (c) the incorrect interpretation and application of preliminary local data for comparison to the resource estimate model. Pretivm management and Snowden also share significant concerns that the sampling tower approach for the Valley of the Kings deposit may be flawed.

One of the key points that the press release makes is that Strathcona’s approach “may be flawed”.  The press release notes that the preliminary bulk sample results are 94% higher than what Strathcona’s data would predict.  The implication is that Strathcona’s sample tower approach is wrong and does a very poor job of predicting the grade of the processed bulk sample.

Thirdly, the press release basically makes many attacks against Strathcona’s competence and credibility.  This put Strathcona is in an awkward position.  It is inappropriate for mining companies to publicly trashtalk their contractors such as Strathcona.  And inappropriate for contractors to trashtalk their clients.  I think that this is an unspoken social rule that should be respected.  In any case, Pretium decided to attack Strathcona.  As a courtesy to Pretium, Strathcona was fairly tight-lipped about the reasons for its resignation.  The firm gave Pretium time to disclose the information on its own terms, with whatever spin doctoring Pretium chose to use.

I personally think that Robert Quartermain behaved unethically for trying to drag Strathcona’s reputation through the mud when Strathcona did nothing wrong.

Graham Farquharson and Henrik Thalenhorst give small amounts of information to the press

#1- Pretium has misportrayed Strathcona’s reasons for resigning.  In the press release and in interviews with the press, Robert Quartermain has led other people to believe that Strathcona resigned due to technical disputes over methodology.  Farquharson of Strathcona came out and stated that the reasons for resigning were because Strathcona disagreed with Pretium’s lack of timely disclosure of material information.  One newspaper interview with Farquharson states:

“Our differences with Pretium management are all about when is public disclosure of material facts appropriate,” he said in an email.

#2- Henrik Thalenhorst is nice to Pretium and states that Strathcona does not suspect fraud.  He states that Pretium is no Bre-X.  (source)

#3- In the same article, Henrik Thalenhorst states that Pretium’s deposit “may very well turn out to be a mineable deposit, just much different from what it has been made to look like”.  The first part of the statement suggests that there is gold in the deposit and that the deposit has good chances of turning into a mine (in other words, the deposit has a good chance of being economic).  The second part of the statement (“just much different from what it has been made to look like”) alludes to what Pretium hasn’t said about its deposit.

At the time, it was never clear to me what Thalenhorst was alluding to.  At this point, Strathcona is still giving Pretium time to disclose Strathcona’s real reasons for resigning.

Nov 22, 2013 press release / apparently all the gold is there

The press release stated preliminary results from the processing of the bulk sample, which were very good.  At the time, I was definitely confused by this release.  I personally thought that there were problems with the QC checks on the drillcore data so I thought that the problem was grade.  Also, it could have simply been that the resource model was too aggressive and would overstate the grade and/or tonnage of the deposit.  This is extremely common with junior exploration companies.  In the bulk sample, an overly aggressive resource model would show up as the bulk sample having less gold than originally projected (less than 4,000 ounces of gold).  I think that many people expected the bulk sample to miss and show lower gold than expected (because it is common for technical reports to be inflated).

Pretium has come out and basically proven that all the gold is “there”.  So I thought that either:

  1. Strathcona screwed up, as Pretium has been suggesting all along.  I think that this is the interpretation that most people would go with.
  2. There is a bizarre case of fraud that would make little sense for the perpetrators to commit.

The stock rallied strongly on the news.

Farquharson tells the story in a Northern Miner interview

On November 27, the Northern Miner published an interview with Graham Farquharson (it’s behind a paywall and the copy was taken down) where he breaks the silence and explains what is going on.  He has finally come out to defend the reputation of his firm.  There is no crazy fraud and Strathcona did not screw up.  There is simply a very unusual set of circumstances because of the unexpected Cleopatra vein.

I think that it’s interesting that Farquharson chose an industry publication instead of a mainstream media outlet.  He is trying to remain a class act in all of this and to be respectful of his firm’s former client.

Interestingly enough, the stock did not drop significantly after this interview was published.

What will happen next?

I obviously don’t know.  It will be interesting to see if Pretium will revise its resource estimate down in terms of tonnage and if so, by how much.  The resource estimate should use a higher cut-off grade so the reported grades will be higher.

Pretium’s management is being sued by multiple law firms.  It will be interesting to see what the judge thinks.  It is unlikely that the judge will understand all of the technical details.  On the surface, it might look like Pretium did nothing wrong because there is a lot of gold in the bulk sample.  Of course, there is an important nuance to the bulk sample (and drill fan) results.  Strathcona’s argument is that the deposit is very different and of lower tonnage.  Because resource estimation is subjective and uncertain, Pretium’s management will have some leeway.  It will be a clash of two different competing technical theories, neither of which the judge is likely to understand.  It is possible that a court will find that both theories should have been disclosed, not just Snowden’s/Pretium’s.

A second potential issue is that Quartermain tried to paint a scenario where Strathcona resigned because Strathcona saw too little gold based on its flawed sample tower data.  This is extremely misleading because it is not the real reason why Strathcona resigned.  Quartermain certainly tricked me because I thought that Strathcona might be wrong, not knowing Strathcona’s real reasons.

I really hope that Quartermain is convicted of something.  However, I am definitely not a lawyer and don’t understand the legal system.  In the unrelated Barkerville gold debacle with Peter George (I’ve blogged about it previously), nothing really happened to Peter George for releasing an absolutely ridiculous resource estimate.  I don’t believe he was ever sued.  John Felderhof was sued but never convicted of securities fraud (it is difficult to prove that he must have known that Busang was a fraud; the point of a fraud is so that other people won’t figure it out).  People get away.

The final bulk sample results

So far, Pretium has only reported around 80% of the results of processing the bulk sample.  I haven’t done the work to figure out if the Cleopatra vein should affect the results of the last 20%.  The bulk sample is processed in order from the lowest grade to the highest grade.

Supposing that Strathcona is right, we may see that the last 20% of the bulk sample will not have much gold in it.

The f word

As far as fraud goes, I don’t think that there is any salting fraud or tampering with the data occurring.  In the past, I had concerns over Pretium’s QC checks.  I think that I may never get an answer on that issue.  In any case, it isn’t too relevant now.  The Cleopatra vein is almost certainly real.  We won’t know the exact grade of the other veins from drilling alone.  We will know after a mine is built (assuming that the deposit is considered economic and a mine is built; the chances are high).  I think that the other veins will turn out to be real too, if further drilling can define their continuity.

I originally bet against the stock because I thought that the chance of something darker was very high.  It turns out that I was wrong.  It turns out that Snowden’s resource model was overly aggressive.  I call this fraud (because I am always dropping the f bomb) although many people wouldn’t characterize it as fraud.

As far as securities fraud goes… I guess we’ll see.

*Disclosure:  I am short the common, own puts, and own synthetic puts on Pretium.  Please do your own thinking on this one.  For example, owning expensive puts with very high implied volatility may be a terrible idea.  The deposit is very difficult to value and the stock may actually be fairly valued.


3 thoughts on “Pretium recap

  1. Glenn , I truly appreciate your rethink on the situation on Pretium as it is unfolding Until the revised resoure estimates are released- 1st quarter 2014, (probably calculated by Snowdens)
    we will still will be in the dark as to the how the project will proceed.
    I hope you do not get hit too badly on this one and your analysis certainly gave me some reasons to dig deeper into the story.
    We came to diffent conclusions but that is how humans eventualy get to the truth.

    • Knowing me, I will probably automatically assume that the Snowden resource estimate is inflated.

      They seem like your typical engineering firm that prostitutes itself to the client. I’m sure that they know that their resource estimate is bad (in hindsight). They should not be standing behind it.

  2. December 16, 2013
    I have now seen enough to convince me that Strathcona’s Thalenhorst should nave been a bit more sure of himself before misleading the investors atbout the Brucejack project.
    “There are no resources”-a blatent mis-statment of fact as it turns out. Not only are there resources- now there are reserves and the feasibility study will turn out to be an understatment rather than a pipe dream. How two respected engineering firms with good reputations could have such divergent opinions is one thing but to air the laundry in public without waiting for the proof of your position is unethical and as it caused investor losses-borders on the criminal-if slander is a criminal offence. Instead of helping investors-Strathcon’s main man on site as well as his boss did nothing to improve the reputation of Geologists as resource estimators because they would not wait for facts on the efficacy of the sample tower as a reliable method for evaluating the hetrogenous deposit at Brucejack. Whatever happens going forward-this soap opera is drawing to a conclusion and it is extremely unfortunate that the lifelong work of Farquarson as a respected geologist will come to an ignomious end.

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