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
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.
Pretium has reported excellent grades that are in line with their 2014 feasibility study and subsequent updates to their resource model.
- Q2 feed grade: 14.9 g/t gold
- Year 1 of feasibility study: 15.4 g/t
- Reserve update announced Dec 2016: 14.5 g/t
- H2 2018 guidance:
11.6g/t to 12.82g/t after recovery losses at 2900tpd operation. If recoveries are 97%, guidance implies 12.0g/t to 13.2g/t. 12.9 to 14.2 g/t. (EDIT 7/12/2018: Management stated that the guidance was based on 2700tpd on the conference call, so I should have calculated based on 2700tpd.)
The guidance range is insanely tight as it is roughly ±5% (200,000 to 220,000 ounces). Pretium has gone from complaining about the accuracy of the sample tower data, to saying that it would provide guidance at the end of 2017 and not do so, and now it is saying that it can predict production to within 5%. Simon Dominy’s paper (draft version with working images, final version), especially Table 9, is worth a read as this newfound level of precision is very suspicious to me.
My gut feeling remains the same: this story will not end well. There’s one way to validate or invalidate my short thesis. In the coming quarters, Pretium will release its financial statements. If the mine is the real deal, cash will pile up on the balance sheet. In theory, it’s possible for Pretium to cook the books a little simply by not reporting all of its liabilities. But there’s a limitation to that type of distortion, e.g. I can’t see how it would be possible to understate more than a quarter’s worth of expenses. Over the span of 1-2 years, the financials will paint a reasonably accurate picture as to the mine’s profitability so far. Looking at financials would therefore sidestep the issue as to whether or not the reported grades are real.
Ivor Jones’ technical report uses the wrong geological controls. When Pretium expanded the bulk sampling program, it went out of its way to trace and excavate the Cleopatra vein. The Contact Mill in Montana confirmed that the vein has grades above 80g/t. The issue is that the Cleopatra vein’s geological controls are completely different than those used for the resource estimate. Pretium’s technical reports were not updated to reflect this.
Management has attributed the poor showing in the first 7 months to the ‘ramp up’ process. Management is suggesting that the ramp up will continue as “steady state” production is guided for mid or late this year. This suggests to me that management continues to lack confidence in the deposit.
So far, the Brucejack mine has yet to generate free cash flow. Without needing to get too fancy, simply looking at Pretium’s cash flow is enough to see that Pretium’s shareholders will likely be wiped out or diluted close to zero eventually. Pretium may have extreme difficulty in coming up with the $423M+ needed to refinance its credit facility on or before December 2019.
Click here for the Google Sheet.
In this post, I’ll describe my opinion as to the correct geological model for Pretium’s flagship Brucejack mine. A lot of it is based on a paper that Dr. Simon Dominy published (with Isobel Clark) about something called conditional modelling (draft version with working images, final version). The paper uses the Brucejack project as an example and deviates from the Pretium party line in many ways. One important deviation is that Dominy seems to (unintentionally) analyze sample tower data that wasn’t disclosed to the public, suggesting that the unreleased data is material to understanding Brucejack’s geology.
One key implication of (what I think is) the correct geological model is that the amount of economic gold in the Brucejack deposit is significantly below what the Ivor Jones resource model estimated. In the diagram above:
- It was originally thought that the blue/teal areas would be worth mining. This is what the resource model and feasibility study predicted before the first bulk sampling program.
- However, all of the economic gold at Brucejack is concentrated in ultra-high grade veins like the Cleopatra and 615 Lateral (E-W) veins. If you simply compare the area of the red regions versus the blue regions, you can see that the tonnage involved is much, much lower. While the veins are very high grade (e.g. the second bulk sample mill results found grades of over 80g/t for Cleopatra material), the higher grade does not fully offset the massive reduction in tonnage.
Unfortunately, Pretium does not disclose the lithological information (rock type) associated with drill results. So, there is no way to independently estimate Brucejack resources.