Firstly, I should admit that I was wrong about Pretium. I thought that the situation would be like Rubicon Minerals where the resource modelling issues would cause the stock to immediately blow up. That did not happen. The company has generated a substantial amount of cash that it has used to pay down debt and interest. I was surprised that the grades did ramp up to high levels and that the mine did generate substantial cash.
Going forward, management hasn’t provided a serious guidance as the range is unreasonably tight at less than ±4% (see slide 25 of the earnings presentation). This is fresh off of missing its previous guidance and (rightfully) blaming that miss on the variability of the deposit. Bizarrely, it seems that management hasn’t learned from its past mistake.
My takeaway is this:
- Management is guiding for a weak first half of 2019 (presumably below 10.4 g/t), as indicated by their remarks on the conference call.
- Beyond that, I don’t think that management / Pretium’s geologists have a great idea as to what grades will be. If there was good news, such as the mine consistently producing grades in the 10g/t range or higher, it would make more sense for management to behave more normally.
To recap the earnings press release and outlook:
- Management is guiding towards 10.4 g/t in 2019. Compare this to the 11.9 g/t achieved in 2018.
- Beyond 2019, the press release is suggestive of grades higher than 10.4g/t. The press release states: “The average gold grade is representative of the areas to be mined in 2019 and is not representative of the estimated life of mine grade, which will be provided in the second quarter […]”.
- On the earnings call, management stated that grades would be higher in the second half of 2019. However, management did not want to provide any guidance on the upcoming quarter.
- The stock is trading down a few percent, perhaps reflecting the lower grades versus those anticipated from the 2016 feasibility study (roughly 15g/t in years 1 and 2 of production) and the last update of the mineral reserve estimate (14.5 g/t for reserves).
However, the are parts of the guidance that are strange. On the conference call, the CEO seemed unnecessarily tight-lipped about providing details on the outlook. When asked to provide a range on the grade guidance, the CEO declined to do so:
Steve Emerson from Emerson Mariner Investment Group
Not to beat a dead horse, but on the grade, can you put a range. I know you’re trying to be meet and beat guidance, but would you care to put a range around that 10.4 and does that incorporate possible improvement. And what improvement might be reasonable for the launch of [the longitudinal mining] trial?
Joseph Ovsenek – CEO
Good questions, Steve. So that’s an average rate for the year. So we’re going to be put up and down on that. Lower early on, higher later on. And I can’t really give you a range, but as long as mining is very important thing we’re looking at, longhole stoping. We’re going to present on that when we have a technical session in April and look at the initiatives as we kick off. We’re going to be running a few test stopes longitudinally this quarter, and we’re opening up part of the deposit for longitudinal longhole stoping. And so we will provide more information on that the geology looks, as well as how the reserves are looking and how it this fits together with longitudinal mining come April. So we have a lot of information we want to talk about then and that will be a good part of it, and I think that’s a big part of the future of the mine.
The reason why this is strange is because the mine engineer preparing the estimate would also be able to provide a range (e.g. he/she would be able to estimate that the grade should be between ___ and ___ 95% of the time). As well, the press release also implicitly provides a range on the grade as you can work out the range by taking the ounces guidance (390,000 to 420,000 ounces) and dividing that by the expected milling rate (3500tpd) and assuming a recovery of 97%, which gives a range of 9.8 g/t to 10.5 g/t. It’s also weird that the 10.4 g/t guidance is at the top end of the 390,000 to 420,000 ounces guidance.
The second bizarre area is the CEO’s reluctance to comment on the upcoming quarter’s production or provide guidance for the first half of 2019. It should be much easier for management to predict the upcoming quarter than it is to predict the next 4 quarters (e.g. management already knows actual results for part of the coming quarter). Nonetheless, management has changed how it provides guidance (yet again) and hasn’t provided much detail on the upcoming quarter other than the first half of 2019 being lower than the second half.
What will happen at the mine?
I believe (perhaps wrongly) that Strathcona will be right about “they will not have a mine producing 425,000 oz. a year for the next 20 years”. They are the credible party in this saga and had access to Pretium’s technical data. The part that is hard to reconcile is that Pretium so far has pretty much produced at roughly 80% of the 425,000 oz / year rate (if the mine operated at 2700tpd rather than its higher current rate). *If* Pretium is running out of ultra-high-grade veins like the Cleopatra vein, then Strathcona’s comments would make sense. The problem with this narrative is that it’s hard to verify. Pretium’s management and Ivor Jones aren’t going to come out and say this.
Another possibility is that management has plans to increase grades for the second half of 2019. For example, they could perform exploration drilling outside of the depleted areas of the mine to find more high-grade veins. That could support high grades for a while longer until that too runs out. The issue for shorts is that it would take longer for the short thesis to play out as any depletion of ultra-high-grade veins would not be apparent until it finally happens.
Right now it’s difficult to figure out what will happen because management is unreliable when it comes to disclosing accurate data about the mine.
*Disclosure: I am short PVG.