Thoughts on mining (2017 edition)

Some key lessons on mining companies:

  1. They regularly withhold key information from investors.
  2. Technical reports should not be relied upon because many of them are disconnected with reality.

Without key information on a mine’s economics, these companies cannot be accurately valued.  So… mining stocks aren’t a great place to look for longs.  You might spent a lot of effort trying to value a mine and still fall short of being able to find reliable information on that mine.

On the short side, there are some opportunities.

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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 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

The 3.407 g/t and 5.720 g/t fall far short of hitting the 14.907 g/t mark projected from Pretium’s feasibility study three years ago.

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.

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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.

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As commodity prices plunge, miners are stretching their numbers

My July 8 post “Mine economics explained” explains why I think capitalization of stripping expenses is bullshit.  The current trend is for miners to make more aggressive assumptions in that department to boost their earnings.  This is contrary to reality.  Lower commodity prices means that mines will close earlier.  It would make sense to take impairments on previously capitalized expenses.  (Or better yet, accounting rules should be overhauled to reduce accounting shenanigans, investor transparency should be improved, and the accounting burden on public companies should be reduced.  Simpler rules would benefit investors.  The problem is that the system has been co-opted by public companies that want to play games with their accounting and rulemakers who enjoy lucrative consulting gigs helping companies game the complex rules that they created.)

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Sentieo: a better way to perform due diligence

Since January 2015, I’ve been using a research platform called Sentieo (website).  The main attraction of Sentieo is “Document Search”, a tool that searches through EDGAR filings, investor presentations, and conference call transcripts at the same time.  It allows me to find key pieces of information that I otherwise would not find.

For short selling, Sentieo is incredibly useful since almost all of my short selling involves tracking down scumbags.  Much of my work is spent searching through SEC filings for names of people, company names, and addresses.

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Kingsway Financial’s activist battle with Kobex Capital

(KXM is an illiquid Canadian stock with a market cap of $26M.)

Kingsway Financial’s plan:

  1. Buy back shares because this company trades below NAV- roughly seventy cents a share in NAV trading at 50-55 cents currently.
  2. Cut director’s salaries to $10k/person.
  3. Not issue options below intrinsic value.  On August 19, 2015 Kobex issued options at $0.55/share.

The incumbents’ plan:

  1. Waste shareholder money entrenching themselves against Kingsway Financial.

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Kobex Capital: A pile of cash, trading at a discount, with an impending catalyst

(KXM is an illiquid Canadian stock with a market cap of $26M.)

Kobex’s liquidation value is in the ballpark of 70 cents/share and currently trades at 55 cents/share.

Kingsway Financial Services is going activist on Kobex Capital.  This makes me like the stock a little more as the catalyst of activism should raise the internal rate of return on a position in the stock.  However, I’m a little wary of activist investing mainly because management teams often like to fight activists with shareholder money. The legal fees and any severance payments will likely reduce the value that’s left for shareholders.

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