I must admit that there is a somewhat useful tidbit of information in Pretium’s environmental filings that I discovered through Viceroy’s hit piece: Pretium was mining ore at a rate of only 2520tpd (tonnes per day) in the second half of 2017. I would note that management has repeatedly talked about expanding the mill to 3800tpd, possibly because institutional investors don’t understand why Net Present Value matters more than growth. Unfortunately, the mill expansion plan looks crazy when the underground mining was 2520tpd versus milling being done at 2895tpd; this indicates that underground mining has been the bottleneck. Management has not been forthcoming about this bottleneck. Nonetheless, I don’t think that this changes the short thesis much as it is overshadowed by the litany of Pretium’s other disclosure issues (e.g. the Ivor Jones resource model has the ultra-high-grade Cleo vein in a zero-grade domain).
This blog post will also discuss why I covered most of my Pretium short and has a section on why Viceroy’s research is nonsense.
I’ve compiled the data into a Google Spreadsheet. If you want to edit it, make a copy for yourself (instead of requesting access). Note that there may be errors in Pretium’s filing- the total number for “Surface – Waste” in 2016 was reported as 1,037,588 instead of 1,057,588. See the “raw data” sheet if you think that you can figure out what happened. The environmental filings can be found on this site → Site monitoring … → Annual Reports → Annual Reclamation Reports.
Underground ore mining rates were calculated by adding together “Underground – Ore” and dividing by the number of days in Q3+Q4.
I did not figure out why Pretium didn’t report grades for May 2017.
I’ve covered most of my Pretium put options
As discussed in my August 2018 Pretium post, I think that Pretium is a short but not the massively compelling short I originally anticipated (e.g. a Rubicon 2.0 that blows up immediately after the mine begins to produce). I worry that something like an Osisko takeover will cause my short position to fail. For example, we know that Osisko’s CEO could have gotten a look at Pretium’s stockpile grades but decided to buy Pretium’s debt and stream anyways. That says everything about Osisko’s due diligence. I think that it’s highly likely that Osisko will refinance Pretium once the debt is due. Such a refinancing likely will not create value for Osisko shareholders but Osisko shareholders will be too unsophisticated to figure it out. So, I’m not counting on debt maturity being a catalyst for my Pretium short position.
Thanks to the Viceroy bear raid, the implied volatility on put options has shot up while the share price has gone down. So, I’ve taken that opportunity to greatly reduce my Pretium short position while pricing has been relatively favorable. Currently I only have OTM put options expiring in Jan 2020 and have no position in the common. (*In the future, I will likely change my position without blogging about it. I don’t want my blog to be a day trading blog.) Pretium is currently my largest short position.
Because the Viceroy hit piece is silly, I expect Pretium’s share price to rebound and volatility to fall in the next few days. According to IKN, Pretium may release a rebuttal to Viceroy on Monday. I expect Viceroy’s short thesis to get destroyed and here’s why…
Viceroy’s research is nonsense
The first key argument of the Viceroy hit piece (archive.org) is that the naughty people behind Strategic Minerals LCC inflated the bulk sample results by >8 times. I have bolded the relevant statements from Section 2.9 on page 11:
5,865 oz of gold were said to have been produced from 10,302 tonnes of milled material, resulting in a grade of 17.7 g/t, 8.5x better than Strathcona’s 2.08 g/t sample tower grade and in line with Pretium’s 2012 Resource Report grade of 16.4 g/t15. Pretium’s stock appreciated 82% following the announcement. Octupling your mineral resource grade from the same sample over the space of a month defies reason.
As stated previously, Simon Dominy has done the math for you. He has calculated the difference as -10% and not the -88% that Viceroy claims. If you don’t want to read up on Gy’s sampling theory so that you can understand Dominy’s technical paper (draft version with working images, final version), simply read Graham Farquharson’s interview in The Northern Miner.
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
GF: The two will agree in the end (the sample tower and the bulk sample) and they will agree with the underground drilling that they did and that we agreed on.
We can infer that Farquharson expected the bulk sample to have grades in the ballpark of 17.7g/t rather than 2.08g/t. For a deep dive on the relevant issues, read Simon Dominy’s paper.
Viceroy’s second key argument is that (A) the Brucejack mine is secretly a 5000tpd mine and (B) management has lied about the mine only being a 2900tpd mine so that they can mislead investors about grade. I have bolded the relevant statement from section “4.2.2 Denominator” on page 26:
Applying a 96.47% of mined ore milled as was the case in 2017 according to the financial filings, ore milled would have been 917,697 tonnes.
As there were 184 days in Q3+Q4, this implies a 4,987tpd mine while Pretium’s story is that the mine was producing at 2,895tpd in Q3+Q4 2017. Viceroy’s theory is far-fetched. The mine was designed to produce at 2700tpd yet Viceroy’s theory would imply that the mine’s capacity is actually 85% above designed capacity. While engineers implement a margin of safety when designing mines, exceeding planned/nameplate capacity by that magnitude simply doesn’t happen. (*Let’s pretend that Silvercorp doesn’t exist because I don’t want to be sued by them. Let’s pretend that Silvercorp isn’t an exception to what I’m saying.) You’d also have to believe that Pretium is hiding the mine’s waste products (tailings) somewhere and that nobody will figure it out.
Lastly, you’d also have to believe that Pretium’s contract miner, Procon, is in on the scam. Procon would definitely notice that something is amiss because their revenues, expenses and logistics are directly relative to the amount of rock being mined. A number of Procon employees would be familiar with the amount of fuel and explosives being transported to the site, mine scheduling needed to achieve 5000tpd, etc. etc. A lot of people at Procon and Pretium would know. Such a fraud is highly implausible.
I’ll be honest. The Viceroy report has some very obvious errors and I am quite disappointed that the mining world is filled with unsophisticated analysts who haven’t figured it out. I am disappointed that the stock fell ~10% on the bear raid. I suppose that it shows how unsophisticated investors truly are.