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.
Human beings are wired to hold self-serving beliefs about the world regardless of the accuracy of those views. While it is easy to see these tendencies in other people (e.g. flat earthers, Donald Trump’s anti-vaccination views, conspiracy theories), all human beings are wired to have blindspots when it comes to the inaccuracy of their own views. Why? Ideologies are often arbitrary but they serve social and political purposes. Nelson Mandela was once on US terrorism watchlists; nowadays, he is celebrated as a freedom fighter and human rights activist. Clearly, it’s not possible for Nelson Mandela to be both a terrorist and a hero. Yet, society conveniently ignores conflicting evidence when it distorts history to fit a particular political agenda. My theory is this: human beings participate in the mainstream ideology when it benefits them. When it doesn’t, social outcasts and misfits band together to form their own alternative ideology that benefits them. In both scenarios, the ability to ignore, downplay, and dismiss conflicting evidence lessens the mental burden of upholding a particular ideology.
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. Continue reading
Viceroy’s research can be found on archive.org or Viceroy’s website.
First off, there is the issue of plagiarism. It’s so strange that Viceroy also happened to stumble across Simon Dominy’s paper on the Brucejack deposit. (To be fair, Viceroy did generate original research of very low quality.)
Secondly, the Viceroy report contains major inaccuracies. It insinuates that Strategic Minerals LLC improperly inflated the bulk sample results.
The facts surrounding Strategic Minerals LLC are as follows: […]
Grade results for the Brucejack mine from Strategic Minerals LLC were far higher than those reported by Strathcona’s tower sample.
In reality, grade results were very similar between Strategic Minerals and Strathcona. Table 9 of Dominy’s paper (draft version with working images, final version) shows that the difference was -10%… well within the expected error coming from a high-nugget deposit. Despite referencing Dominy’s paper, Viceroy seems to have reached some strange conclusions.
In the past, I have criticized Viceroy because they have not been transparent about their relationship with CTS Labs. Now, my problem with Viceroy is that they didn’t read up on mining or hire a fact checker before publishing their report. Viceroy’s reckless and irresponsible behaviour gives short selling a bad reputation and may make life more difficult for other short sellers.
According to Pretium’s financials published on SEDAR on Thursday evening, the Brucejack mine is generating very strong cash flow.
Cash and cash equivalents increased by $72.5M. This is largely inconsistent with fraud. If Pretium were engaged in Worldcom-style fraudulent accounting where expenses were improperly capitalized into capex, then the capex number would be dramatically higher than $5.771M while the increase in cash would be closer to 0. Given how low capex is (even lower than what the feasibility study anticipated, which is $76.8M over the first four quarters of production)… I think that we can safely conclude that Pretium didn’t engage in Worldcom-style accounting for Q2. The market seems confident that the cash generation is real, sending the stock up 19% following the filing of financials on SEDAR. Needless to say, this development is not good for my short position.
I’m aware that there’s information on mining stocks from guys like Angry Geologist, Exploration Insights (Brent Cook and Joe Mazumdar) and investment bank analysts with mining degrees (P.Geo, P.Eng, etc.). The danger is this: just because they CAN perform due diligence doesn’t mean that they ACTUALLY perform due diligence. I don’t mean to be disrespectful to these people. (*I do understand that I am attacking their credibility.) However, they often come to conclusions without having access to key technical data. For example, Simon Dominy and Strathcona have unique views on Pretium’s Valley of Kings deposit. They had access to all of the sample tower data, including the sample tower data on the Cleo vein. Strathcona had access to the drill core so they could make their own interpretations about the lithology (Wikipedia) of the rocks and therefore the appropriate geological controls. If you don’t have access to accurate lithological information (e.g. pictures of all of the drillcore), then you cannot build a reasonable resource model. Insiders have this information. The investing public doesn’t. When mining professionals make conclusions without access to key technical data, you should take their opinion with a grain of salt.
Secondly, one should question an analyst’s optimism about deposits. With the benefit of hindsight, we can figure out that mineral exploration has been a disaster since 2000. Past optimism about exploration stocks seems quite dubious with the benefit of 20/20 hindsight.
While I haven’t spent the time to piece together all of the data points, it is clear that high-risk mineral exploration stocks have found very few profitable mines since 2000. The only reason why junior exploration stocks haven’t been a complete disaster is because senior miners have thrown away money by acquiring uneconomic projects. The majority of “value creation” in high-risk greenfield exploration can be attributed to poor investment decisions from senior miners rather than the meagre cash flows from mines like Arista, Bloom Lake, and Legacy (potash).