Pretium 2017 recap – “they will not have a mine producing 425,000 oz. a year for the next 20 years”

(Pretium has a US$1.8B market cap and the borrow is in the low single digits.  I have written about this stock previously.)

Back in 2013, Strathcona resigned from the Brucejack gold project due to disagreements over what Pretium was telling investors.  Graham Farquharson (Strathcona’s head honcho) was being a gentleman and allowed Pretium to disclose on their own terms (with their own PR spin).  Unfortunately, Pretium instead tried to discredit Strathcona.

So, Farquharson did an interview with The Northern Miner, a trade publication.  You can read the interview on the website (no paywall):

Yes, and we told them that it has an excellent chance of being a small-tonnage, high-grade mine 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 oz. a year for the next 20 years, as they have been advertising so far.

Here’s the crazy part.  This is 2017 and Pretium is almost finished building that mine.

Because things have changed in the past few years, the numbers might vary a little.  You can read Pretium’s SEDAR filings and investor presentations for updated numbers.  Pretium’s latest Dec 2016 investor presentation quotes numbers from a June 2014 feasibility study:

pretium-presentation-numbers

An average of 404,000 ounces over years 1-18 of the mine is fairly close to the 425,000 oz./year number thrown out in Farquharson’s interview.  Farquharson basically said in late 2013 that Pretium will not have a mine producing anywhere near 425,000 oz/year.  So there is a big discrepancy between what the two sides are telling investors.

For a longer description of what happened, look at the class-action lawsuit’s complaint against Pretium.  (Take the complaint with a grain of salt because parties in a lawsuit tend to be extremely biased towards their own position.)  Page 23 of the complaint has some commentary from a mining expert hired by the plaintiffs.

EDIT (Oct 9, 2017): It seems that the US class action has some errors in the complaint.  Strathcona likely did not have material concerns (about Pretium’s lack of timely disclosure) until July, not June.  The complaint alleges that Pretium intentional oversampled the Cleopatra vein when they adjusted the bulk sampling program; I would disagree as the changes didn’t affect the amount of Cleo vein material in the 10,302t sample (also consider that management doesn’t really like to talk about the Cleopatra vein).  The complaint states that 16g/t is the threshold needed for bulk mining to be viable, but the complaint seems to have missed a nuance of mining.  For bulk mining to work, the grade over large volumes (e.g. comparable to that of a stope 15m wide) needs to be above the cut-off grade.  In The Northern Miner interview, Farquharson was implicitly saying that the grades at bulk mining dimensions would not be economic (e.g. close to the 5g/t cutoff or below).  However, selective mining techniques would be more appropriate- Farquharson is implying that the economics would be better with selective mining.

Dr. Simon Dominy

When Pretium was trying to discredit Strathcona, it issued a press release saying that it would get an expert- Dr. Dominy- to review the technical work:

Snowden’s Response

Given the heterogeneous nature of the Valley of the Kings mineralization, Snowden has consistently advised Pretivm that the entire 10,000-tonne bulk sample needs to be processed prior to completing a reconciliation that can be considered robust. Dr. Simon Dominy of Snowden is reviewing the sample theory underlying Strathcona’s sampling protocols for the sample tower and will be providing a formal expert opinion to Pretivm. Dr. Dominy has noted that he concurs with the current approach of submitting the entire bulk sample (as batches) for full processing through the Montana plant, and has advised that such an approach is always the best route to fully evaluate bulk samples and/or trial mining parcels.

Dr. Dominy has provided a preliminary report to Pretivm that covers several areas of consideration for the evaluation of the design of the sampling Program. This includes the appropriate application of mineralisation characterization study, and the difficulties in achieving representative samples in a high-nugget coarse gold environment.

Dr. Dominy is a dual qualified mining geologist-engineer with 25 years of experience, across mine operations, academic research and consulting. He has an extensive global track-record of auditing, designing and managing gold sampling and assaying programmes. He is a leader in the sampling of coarse gold deposits, and consulted, lectured and published widely on the topic. Recent sampling assignments have included: audits and reviews; integrated studies of ore characterisation, gold deportment and metallurgical testing; sample size determination; sample protocol design and optimisation; the application of the Theory of Sampling; metallurgical plant sampling; metallurgical sampling; and grade control systems. He also has extensive practical experience in surface and underground bulk sampling/trial mining programme design, planning, management and interpretation.

As far as I can tell, this was the first and last time Dominy’s name appears.  You can use Google to search pretivm.com but you won’t find a subsequent press release about Dr. Dominy’s findings.

What Pretium’s technical reports should say

Technical reports will have a section on the history of the deposit.  Unfortunately, all of Pretium’s technical reports whitewash history.

  1. The disagreement between Strathcona and Pretium is not mentioned.  Strathcona’s resignation is not mentioned.
  2. Thalenhorst, the Strathcona engineer that did most/all of the technical work that Strathcona was hired to do, is not mentioned.  Graham Farquharson is not mentioned.
  3. Dr. Dominy is not mentioned.
  4. Dominy’s preliminary report to Pretivm (Pretium) mentioned in that press release?  Nowhere to be seen.
  5. Snowden’s reports don’t mention any of Dominy’s work.  Dominy works for Snowden.  It is a little strange that the author of Snowden’s reports doesn’t mention any of his colleague’s work.

Apparently not a lot of people care about Pretium

The Northern Miner has an interesting article on the most-clicked stories of 2013.  Farquharson’s interview published Dec. 2 was #15.  An earlier interview with the CEO of Pretium on Nov. 11 was #14.  It’s a little strange that the interview with Pretium’s CEO gets more clicks than the interview with Farquharson that discloses material information about the project.  But I suppose that The Northern Miner might have a lot of retail investors who subscribe to it and tend to be long junior mining stocks, not knowing how scummy the industry is.

Aren’t regulators supposed to step in?

Ha ha ha.

Yes, technically the BCSC (the provincial regulator for BC that oversees Pretium) is supposed to protect investors.  What they actually do is another story.  Clearly, they did not do anything about Pretium failing to disclose Strathcona’s concerns.  Nor have they done anything about the technical reports that omit Dr. Dominy’s work and Strathcona’s written communications to Pretium outlining their concerns.

What David Baines is saying about the BCSC

David Baines has an interesting take on the BCSC over at stockwatch.com (free sign-up required).  He may be suggesting that Paul Bourque installed people loyal to him at the BCSC… and then left for a job at the IFIC, where he faces conflicts of interest whenever the IFIC lobbies Bourque’s former colleagues at the BCSC (people that Bourque installed):

ADDENDUM

The original notice of hearing against Verdmont, Fisher and Housser was signed in November 2015 by Brady’s predecessor, Paul Bourque. He had served as the BCSC’s executive director since April 2010, but never took up permanent residency in BC. Instead he commuted from his Toronto home.

In March 2012, Bourque fired Martin Eady, the commission’s director of corporate finance, “without cause.” It was an expensive dismissal. The commission was obliged to pay $398,342 in severance.

In September 2012, Bourque announced that Brady, who had previously worked as enforcement counsel at the commission, would replace Eady as corporate finance director. BCSC staff began speculating that Bourque was grooming Brady to become executive director, a prophecy that would soon come true.

At the same time he announced Brady’s appointment, Bourque announced that former Crown prosecutor Teresa Mitchell-Banks would replace Lang Evans as enforcement director. (Evans had stepped aside to manage the BCSC’s new special investigations unit, which was to focus on illicit offshore securities dealings.) Although Bourque introduced Mitchell-Banks with much fanfare, he quietly fired her “without cause” just three years later, in November 2015. It was another expensive dismissal. The commission paid her $416,858 in severance.

In February 2016, Bourque announced that Brady would replace Mitchell-Banks as enforcement director, but he wouldn’t stay there for long. In June 2016, Bourque resigned as executive director to become head of the Toronto-based Investment Funds Institute of Canada (IFIC) and two months later BCSC chairman Brenda Leong announced Brady would replace him.

Bourque’s new employer, IFIC, represents the mutual fund industry, a large and highly controversial segment of the securities industry. As president and CEO, Bourque has already been lobbying the provincial commissions including the BCSC – against certain mutual fund reforms proposed by the Canadian Securities Administrators, the umbrella organization for the provincial commissions. The fact that Bourque, just weeks after leaving the BCSC, is now lobbying his former colleagues at the BCSC, raises potential conflicts of interest. Precisely for this reason, the SEC has mandated a one-year “cooling off” period for senior staff who are contemplating such moves, but the BCSC has no such restrictions.

Regardless of the BCSC’s politics and motivations… the Canadian stock markets are a great place to look for shorts as long as you don’t go activist on one of the BCSC’s issuers.

Valuing Pretium

You could try a “garbage in garbage out” model with something like:

  1. Multiply the 7.27 million Oz from Pretium’s presentation slide by some arbitrary number, based on how much gold you think there is.  If that estimate is off by a factor of 4, then there’s 1.8M Oz.
  2. Make some wild, highly incorrect assumption about the profit margin on those ounces, discounted to today.  e.g. US$260.  (This is the US$434 margin on Goldcorp’s Musselwhite mine, multiplied by about 0.6 to account for the present value of the future cash flows.)
  3. Multiplying step 1 by step 2 yields a net present value of US$473M.  Adjusted for the USDCAD exchange rate (1.3113), that’s C$620M.
  4. Use Pretium’s book value of C$1,118M and replace the book value of the mineral assets (C$1470M) with the number from Step 3.  Adjusted book value becomes C$268M.  Pretium’s market cap in Canadian dollars is C$2.49B.

Or another way of looking at it… you can take Pretium’s market cap of US$1.84B, add in a few hundred million to account for Pretium’s debt + liabilities – cash – uncompleted construction (US$300M?), and divide by the 7.27M ounces from the presentation slide.  This gives a profit ‘margin’ of US$294/ounceMultiply by 1.65 to arrive at a margin of US$486/oz undiscounted for the present value of future cash flows.

That kind of margin seems a little on the high side.

  • Goldcorp’s Musselwhite mine has all-in sustaining costs of US$766/oz, implying a margin of US$434 at $1200 gold.
  • Goldcorp’s Red Lake mine has all-in sustaining costs of US$906/oz, implying a margin of US$294 at $1200 gold.
  • I didn’t check to see if Goldcorp is cheating on its all-in sustaining cost metric, e.g. no corporate G&A.  (This probably doesn’t matter though.)
  • These are apples to oranges comparisons due to differences in how remote a location is, differences in taxation and royalties, metallurgy, electricity costs, etc. etc.
  • I did not put in that much effort in looking for comparable gold mines.
  • Margins eventually hit zero.  I did not model in any declines in margins.  (I would point out that Musselwhite has been producing for 2 decades.)
  • This assumes that the land and exploration potential is worth nothing.

My feeling is that Pretium is anywhere from being slightly overvalued to the equity being a 0.  In any case, any estimate will likely be quite different than what actually happens.  There is also the garbage in garbage out problem.  Assumptions about the amount of gold in the deposit may be spectacularly wrong.  The amount of gold in the deposit is likely the biggest unknown.

Why I look at actual mining costs of “comparable” mines

The actual costs are almost always worse than the costs initially projected.  Partly this is because human beings tend to be optimistic.  Partly this is because mining is a cesspool and human beings lie.  Virtually every single junior mining company out there is actively trying to mislead its investors.  Almost all engineers who write technical reports bend their integrity and will manipulate the results.  Unfortunately, the degree to which they bend the truth varies widely.  Sometimes it is a tiny amount.  And sometimes it is by a massive amount (e.g. it was written by Peter George, who was finally banned from writing NI 43-101 technical reports).  The wide variation in how inflated technical reports are makes them less useful.  In my opinion, estimates are more accurate when actual numbers from actual mines are used.

 

Of course, if you go to the Goldcorp website and scroll through the numbers for their various mines, you can see that the numbers vary wildly.  Many different factors affect a mine’s economics.  So using actual numbers is only good if two mines are directly comparable (which is almost never the case).  Please keep that in mind.

Closing remarks

As always… do your own homework.  Make up your own mind about this stock.

 

*Disclosure: I am short Pretium so I am biased.  I am shorting the common stock and I am long put options.  I may potentially buy the common stock in the future to hedge my put options (to lock in gains, if any).  I have lost money shorting Pretium in the past.

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6 thoughts on “Pretium 2017 recap – “they will not have a mine producing 425,000 oz. a year for the next 20 years”

  1. Mining is a complex undertaking. Glenn, you have been explicit in the past about your anti-mining views so your article is read within that constraint but I am not in a position to comment as to the accuracy of the information you have presented. I have to say as a hydrogeologist who is engaged in helping mines determine the impacts to the economics from the potential inflow during development and mining, that I believe “we” tend to be conservative so that unanticipated excess inflows don’t end up changing the economics or worse, killing miners. I cannot comment on the optimism by exuberant geologists but one needs to appreciate the level of uncertainty in mining ALL geologic deposits. Some of the inherent optimism is balanced by inherent pessimism, e.g. how good mining companies practice safety for instance. Certainly as much as possible, accuracy is the finest approach but even that is not easily discerned at all scales. I just thought your article might need a little clarification of the huge uncertainty but the practical need to move ahead responsibly. Thanks, barbara

    • Thanks for the comment.

      I’m actually pro-mining. Natural resources support a high standard of living.

      I’m against the questionable practices in the junior mining sector, such as risks that are downplayed.

      In the case of hydrogeology, it is rare to see those types of risks (e.g. flooding) understated except when it comes to potash deposits. Usually if investors get hurt (from risks being downplayed and things like that), it has to do with the feasibility study being unrealistic.

      I certainly don’t mean to attack your profession as a whole. I think that engineers have created far more value to society than Bay Street and Wall Street types. However, the profession does have bad apples when it comes to writing inflated technical reports and shoddy technical reports that omit important history relating to a deposit. Bad apples exist everywhere. It just so happens that there is some adverse selection when it comes to the public markets… the Peter George types get more work.

  2. Usually-once bitten twice shy. You still are flogging the Strathcona withdrawal as being the correct action by Farquarson The report prepared by Snowden’s senior geologist may have been submitted but my supposition is that the report may be show up as testimony in one of the lawsuits that are still unresolved. The bulk sample results were reported in full and there is high variability and uncertainty as to the accuracy of the Snowden methodology but there is no doubt that the bulk sample exceeded the gold predicted. As per our last discussion-the mine performance will be the test of all of the arguments. My money is on the Pretium management and both the current resources and the potentially fantastic expansion of this deposit as exploration discloses the hidden gold that is to the east and at depth in the Flow Dome area.

  3. I’m baffled by the revised economics in Pretium’s February 3rd press release. How can the company increase the cost of the project by 16% and yet report that the project IRR has actually improved from the February 2016 estimate? The longer the life of a mine, the more sensitive its IRR should be to any change in front loaded costs; and this project has an 18 year mine life. Accelerating commissioning by 3 months wouldn’t even come close to offsetting the time value of money impact but that appears to be the only other change. What am I missing?

  4. I think shorting a gold miner in rising gold price market is not wise. If you were to short it, it should be once they start the production or for best result, falling gold market.

    I am long TGD, TImmins gold so was wandering if you can look into it. The angry geologist has good article on a project that TGD has. thanks.

  5. Pingback: Pretium: the additional underground exploration program management doesn’t like talking about – Glenn Chan's Random Notes on Investing

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