Pretium update: disappointing grades

(*Disclosure:  Pretium is by far my largest short position so I am biased.  Take what I say with a grain of salt and do your own homework.)

The production figures reported in Pretium’s MD&A filed on August 10, 2017 fall far short of the projections from Pretium’s latest published feasibility study.

According to the feasibility study filed on June 30 2014 (effective date June 19, 2014), year 1 production from Pretium’s flagship project would have a head grade of 15.4 g/t gold with a recovery of 96.8%.  The effective grade after recovery losses would be 14.9072 g/t gold.

Figures are from Table 17.2 of the technical report.

Compare this with the data from page 2 of the MD&A:

  • For June, 8510 ounces of gold were produced and 70805 tonnes of ore were processed.  8510 / 70805 X 31.1035 gram/ounce = 3.738 g/t for June
  • For July, 16882 ounces of gold were produced and 83667 tonnes of ore were processed.  16882 / 83667 X 31.1035 gram/ounce = 6.276 g/t for July
  • An average of 5.113 g/t for June and July

The 3.738 g/t and 6.276 g/t fall far short of hitting the 14.907 g/t mark projected from Pretium’s feasibility study three years ago.

EDIT (10/3/2017): Changed the gram<–>ounce conversion to reflect troy ounces rather than avoirdupois ounces.  I apologize for the error.

While grades so far have been low relative to the estimates from the feasibility study, Pretium does expect grades to ramp up [page 4; emphasis mine]:

Working Capital

As the Brucejack Mine continues to ramp-up grade, we expect the increased production and concomitant proceeds from the sale of doré and flotation concentrate will enable us to overcome our short-term working capital deficit. We expect as gold production ramps up this deficit will reverse (refer to the “Liquidity and Capital Resources” section below). In addition, we are evaluating other opportunities to bolster our short-term working capital.

Is Pretium’s resource model reasonable?

On December 13 2013, Pretium announced the results of its bulk sampling program.  10,302 tonnes yielded a concentrate with 5,865 gold ounces.  The head grade was 17.5 g/t and the recoverable grade was 17.3 g/t.

The latest MD&A disclosed recoverable grades of 5.113 g/t based on 154,472 tonnes processed.  (Head grades and recoveries were not disclosed.)  This significantly larger tonnage of material had a significantly lower grade.

Based on the very limited information disclosed so far, it looks like Strathcona’s comments about the deposit have been playing out.  From The Northern Miner interview [emphasis mine]:

Farquharson does not believe that Brucejack is a fraud. He does believe the resource model is wrong and that the actual resource at Brucejack could only support a much smaller mine.

Pretium’s share price, which fell more than 50% in October, rebounded notably when the company announced there was more than 4,000 oz. gold in the bulk sample. Through it all Pretium had maintained the bulk sample would contain at least 4,000 oz. and that such results would validate its model.

Farquharson disagrees. In a confusing twist, it turns out he too expected 4,000 oz. from the bulk sample – but only because Pretium stumbled on an unknown vein while mining the sample. Such stumblings being unreliable, he says the problem is not with the bulk sample but with the rest of the deposit, where he is certain the grade is nothing close to 16 grams gold.

However, the production data disclosed so far does not conclusively refute or support Strathcona’s claims.  It is theoretically possible that Pretium has a reason to process low-grade ores initially and that its model accurately estimates the grades of that ore.  A good way to check the model would be to compare the model’s estimates versus head grades and mill production.

At the BMO conference (webcast link) on Frebruary 26 2017, the first Q&A question was regarding stockpile grades and its reconciliation with Pretium’s resource model.

Q:  Hi, that 130,000 tonne stockpile — have you guys disclosed what grade that is and then kind of how that’s reconciled with the model.

A:  Well, we’re not disclosing grade of the stockpile and we’re not actually giving guidance for ’17, our focus is on getting that 2,700 tonnes per day as quickly as we can, and working the bugs out of the mill.  All I can say is that while we’re doing our development and we’re cutting into the stopes we’re expecting to see certain vein types in the stopes and we’re seeing those vein types and we’re seeing the visible gold so we believe the model is working out the way it should be.  Welcome to come by the core shack tonight, talk to our chief geo.  He’s responsible for grade control and happy to chat with you about it.

Management has stated its intention of not providing grade information on its stockpiled ore.

What Pretium chooses to disclose

Here’s the thing: Pretium presumably discloses it stockpile grades (as well as recoveries) to its lenders.  The credit agreement between Pretium and its lenders details the content of a monthly production report (exhibit 99-3 of this SEC filing):

1.1.94        “Monthly Production Report” means a written report in relation to a calendar month with respect to the Project that contains, for such month:
(a)the tonnes and estimated grade of Minerals mined during such month;
(b)the tonnes and estimated grade of Minerals stockpiled during such month (and the total stockpile at the end of such month);
(c)the tonnes and grade of Minerals processed during such month and recoveries for gold, silver, and other types of marketable minerals;
(d)the number of ounces of gold and silver outturned by the refinery during such month;
(e)the estimated number of ounces of gold and silver contained in Minerals processed as of the end of such month that have not yet been delivered to or outturned by the refinery; and
(f)the aggregate number of ounces of refined gold and refined silver delivered to the Stream Purchasers under the Stream Agreement up to the end of such month.

So it’s a little disappointing that Pretium chose not to disclose its estimates to investors even though it is presumably comfortable with disclosing this information to its lenders.  (One of these lenders, Orion, owns Pretium shares.  Regulation FD is clearly alive and well.)

So while Pretium management is saying that they “believe the model is working out the way it should be”, they do not seem willing to back up their words with data and the relevant disclosures.  And they continue to spend hundreds of thousands of dollars on so-called “investor relations” each quarter (as disclosed in the company’s financials).

Other points

Cash flow issues?

An unusual sentence in the latest Q2 MD&A may or may not suggest that the company forsees cash flow issues as it is trying to raise working capital [page 4; emphasis mine]:

Working Capital

As the Brucejack Mine continues to ramp-up grade, we expect the increased production and concomitant proceeds from the sale of doré and flotation concentrate will enable us to overcome our short-term working capital deficit. We expect as gold production ramps up this deficit will reverse (refer to the “Liquidity and Capital Resources” section below). In addition, we are evaluating other opportunities to bolster our short-term working capital.

Cost of capital

Page 14 of the latest financials (Q2 2017) states that “the effective interest rate on the credit facility is 15.0%”.  This is an interest rate that distressed companies pay; it is unusual for healthy companies to pay more than 10% on its debt because 2008/2009 was several years ago.  (The effective interest rate fluctuates and was lower in previous financial statements.)

Stock market reaction

The stock market apparently didn’t care about Pretium’s MD&A filed on August 10 after markets closed.  The next day, the stock closed down 2.60%… a rather minor price move for a fairly volatile stock.

At the moment, it seems like investors are buying into the narrative that grades will ramp up going forward.  Various sell-side analysts are aware of the low grades reported in Pretium’s latest MD&A; their reports contain their own estimates of Pretium’s head grades.  They know about the low grades and largely don’t see a problem with the low grades.

 

*Because I own put options, this faith in management is not helpful for my puts.  One of the ways for me to lose money is if investors maintain their faith in management’s projections up to my various options expiration dates.

 

(*Disclosure:  Pretium is by far my largest short position so I am biased.  Take what I say with a grain of salt and do your own homework.  I own puts and am short the common stock.)

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4 thoughts on “Pretium update: disappointing grades

  1. We are closer now to having the answers to the burning question as to who is closer to an accurate picture of the Brucejack orebody is correct-Strathcona or Snowdens. i think the votes are coming in and I would say that we are about 60-40 in favour of Snowdens but I admit that neither of the estimates are particularly accurate, but Snowdens came closer to predicting grade
    for the bulk sample. Give it another couple of months for the 3rd quarter report and I think a reasonable certainty will be forthcoming. I would hope you hedge your bets as being wrong could be very expensive.With respect to profitability of the operation- throughput is important and will help if the grade profile is not up to snuff. The mine and mill look like they will meet
    the nameplate rating after operating for about one month. This if a very rapid ramp-up and makes something close to 3,000 T/D achievable in a very short period. I was disappointed not to get grade or recovery numbers from the quarterly report but will just have to wait like everyone else. You have to remember that there is a poison pill in place for any one attempting a hostile takeover so I would expect that any attempt to acquire this company would have to come through management and the less ammunition that is given makes valuation difficult.

  2. It is impossible for me to place any value in what you say, nor read past the beginning, because you start with a serious error. It seems a waste of my time to comment but others may unknowingly believe what you write. I know, I know do your own DD but still they might not.

    You comparing production expectations (see 1* below) and then comparing that to (see 2* below) the expected natural processing out the mud / sludge or whatever else it is called must be an error on your part since they are NOT comparable at all. And are not meant to be compared and one has no (zero) relationship to the other.

    see 1* above “…a head grade of 15.4 g/t gold with a recovery of 96.8%”

    see 2* above (“For June, 8510 ounces of gold were produced and 70805 tonnes of ore were processed.  8510 / 70805 X 28.3495 gram/ounce = 3.407 g/t for June
    For July, 16882 ounces of gold were produced and 83667 tones of ore were processed.  16882 / 83667 X 28.3495 gram/ounce = 5.720 g/t for July
    An average of 4.660 g/t for June and July”)

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

  4. Pingback: Pretium: the feasibility study is not playing out – Glenn Chan's Random Notes on Investing

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