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.
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.
According to Pretium’s filings, an average of 63.28% of the gold produced was recovered in the doré (with the rest being recovered in the flotation concentrate). However, the company’s metallurgical testing indicated that only around 45% (rather than 63.28%) of the gold produced should be found in the doré. There is a big difference between the feasibility study expectations and reported results (in red):
Something is very wrong here. Here are two possibilities:
- The metallurgical testwork is wrong. Pretium’s CEO is blissfully unaware that the mill’s economics are better than he thinks. The Brucejack deposit is more suitable for gravity concentration at lower grades, completely opposite to what the feasibility study and bulk sampling results found.
- The metallurgical testwork is correct. Somebody may be introducing non-Brucejack doré to the Brucejack output to boost Brucejack numbers. Ounces produced and ore grades may have been fraudulently overstated.
Additionally, the CEO’s comment about the composition of Brucejack doré bars (60-65% gold, 30% silver) implies that Pretium’s silver sales in Q3 were impossibly low (or that gold sales were impossibly high).
Whoever did Pretium’s accounting did something subtle: they decided to re-classify the current portion of the offtake obligation from “accounts payable and accrued liabilities” (the Q3 classification) to “Current portion of long-term debt” (the Q4 classification).
Why this matters: In Q3, Pretium included the offtake in its working capital calculation (“working capital surplus of $7.2 million“). For Q4, Pretium is suggesting to investors that they should omit it from their working capital calculation.
I’m interested to see what Pretium’s cash flow looked like in Q4. What I’m expecting is that the mine didn’t generate positive cash flow at the Q4 head grades (8.24g/t). Using Q3’s spending numbers, Pretium needs head grades of at least 9.5g/t to pay off all of its Brucejack opex and capex (before servicing its debt, offtake, and streaming commitments). Capex should eventually decline so the breakeven point will drop in the future.
As I anticipate Pretium’s Brucejack mine being cash flow negative, small nuances in the mine’s economics really matter. If Pretium were to run out of cash in the coming months, such a cash flow situation would greatly increase the value of put options. (I own put options expiring in March ’18, June ’18, and January ’19.) So I will be paying a lot of attention to Pretium’s operating and capex costs. One factor that may raise Q4 opex over Q3 opex are the lower margins on concentrate sales versus doré sales. Q3 had very low concentrate sales, presumably because much of it is in transit. By my calculations, each ounce of gold in concentrate will incur around $301/ounce in transportation costs plus treatment and refinery charges.
My expectation is that the shift towards normalized concentrate sales will decrease margins by $10M in Q4. Because Pretium reports on March 8 after the market closes, we’ll see if I’m right about the added costs on concentrate sales. There’s a small chance that Pretium surprises investors with a miss on margins (Pretium reports “all-in sustaining costs”).