Yesterday, gold was up for the day, but shares in Pretium Resources (PVG, PVG.TO) dropped 10%.
FULL DISCLOSURE: I own shares in Pretium Resources.
So what happened? A “research” report published by short sellers who claim to be acting in the public interest—even though they say everything in their report might be wrong—claimed that the project is a fraud and management is lying. (Emphasis in the below is mine.)
All expressions of opinion are subject to change without notice, and we do not undertake to update or supplement any reports or any of the information, analysis and opinion contained in them. We believe that the publication of our opinions about public companies that we research is in the public interest. We are entitled to our opinions and to the right to express such opinions in a public forum. …
As of the publication date of this report, you should assume that the authors have a direct or indirect interest/position in all stocks (and/or options, swaps, and other derivative securities related to the stock) and bonds covered herein, and therefore stand to realize monetary gains in the event that the price of either declines.
How anyone can say both of these things with a straight face is beyond me.
Why anyone gives heed to such reports is even more mystifying to me. But people do… so I read all 47 pages of the report, trying to be as objective as I could.
I found one issue that seems to me to require clarification.
The report focuses a great deal on the inclusion of super-high-grade ore from the Cleopatra vein within the Brucejack Mine’s Valley of the Kings (VoK) zone in the 2013 bulk sample. If it were true that Pretium tried to make the overall average grade of the project look better by including ore from Cleopatra in the bulk sample, the short sellers’ conclusions would be correct. The real grade would be lower. The current operation would be doomed. Management would have lied.
But I was there at the time. I remember that the bulk sample was deliberately designed to extract material from very high-grade areas—as well as average-grade areas, and low-grade areas. That’s reasonable, because such bonanza-grade areas do exist, scattered throughout VoK.
To be clear: if Pretium used more high-grade ore in the bulk sample than they were supposed to, that would indeed be cheating. But if they used as much high-grade as planned, there would be nothing wrong with it.
When I visited the bulk sample area after it was mined, I saw visible gold in the tunnel walls adjacent to the bulk sample areas. This was high-grade gold left in place because it was not in the tonnage planned for the bulk sample. This included portions of the Cleopatra vein. This is an important part of why I did not believe then and do not believe now that management was cheating.
The short sellers make a big deal of Strathcona (the first contractor running the bulk sample) resigning. I wrote about that at the time. The dispute was over method. The short sellers claim Pretium and its conspirators in other companies got eight times the gold out of the same sample that Strathcona did. That’s not how I remember it. Strathcona never finished the job, walking out over methodological differences. When the whole job was done, the results supported Pretium, not Strathcona.
That even held up in court when a bunch of ambulance chasers sued Pretium.
The short sellers also make a big deal of Pretium’s management not releasing all the details of the allegations made by the company’s critics. That seems understandable to me, but the court surely saw all of it, and it sided with Pretium.
Still, I have asked management for a meeting to clarify exactly what was included in the bulk sample, why, and whether any changes were made to the plan. I’m sure their phones are ringing off their hooks, so that may take a while, but I will pursue it.
As for the rest of the claims against Pretium, I found none of merit.
There’s a lot of innuendo and smearing that can’t technically be disproved, because it’s not presented as fact, but as opinions and beliefs of the short sellers. Other statements combine known facts with the short sellers’ negative interpretations, which are not facts, but seem compelling because they contain facts. In other cases, the conclusions drawn from facts seem unfounded, or the math is done using the wrong numbers.
I made scores of notes on the short sellers’ report. I’d like to post my marked-up version, but I don’t want to run into copyright trouble. I may yet go through the whole thing again, listing the errors and refuting them one by one, but that would take a lot of time, and I want this initial response published ASAP. So, for now, here are a few key examples of the problems I see with this report:
- The short sellers imply that Pretium founder and chairman Bob Quartermain is a known scoundrel because his previous company, Silver Standard Resources (now SSR Mining), restated mineral resources at its Pirquitas project. This happens a lot in exploration, especially when one goes from exploration to building and operating a mine. The mine went on to make a lot of money, making SSR into a major producer—a point the short sellers neglected to mention.
- They imply that there’s something fishy about the large increases in the size and grade of the deposit after an initial 2011 resource estimate. That’s ridiculous. Pretium kept finding more super-high grade mineralization, verified by independent third-party labs. Of course it got bigger. And of course the numbers changed in various ways as more drilling increased understanding of the deposit.
- They say that since starting commercial production, Pretium selectively mined the super-high-grade Cleopatra vein to make whole VOK zone look better. They say the company is now “frantically” expanding mining to try to find more such veins. I’ve seen the Cleopatra vein underground. It’s a twisty little thing. I don’t think Pretium could have mined it very selectively with the bulk equipment they use. But if they did concentrate on it initially to deliver unsustainable numbers, what are they mining now that grades have improved again? Also, the company has long said it was increasing “development” mining to access more stopes to give it more flexibility. This explains the company’s actions without invoking a conspiracy that would require hundreds of employees of many different companies to keep silent.
- The short sellers make a big deal out of a difference between the tonnes of ore Pretium reported mining and the actual amount mined as estimated by the short sellers. As I read it, the short sellers are conflating the amount of ore reported mined in Q3 and Q4 2017 with the total amount of rock mined in 2017—which included a large amount of development mining in waste rock. The waste rock would tend to have a lower density than the ore, by the way, and the short sellers used the ore density number in all their tonnage calculations. But it’s true that Pretium has mined more than projected in the 2014 feasibility study. Those changes and their reasons (to access more stopes for more flexibility, as above) were announced and are public knowledge.
- The short sellers constantly reference the 2014 feasibility study as the basis for many calculations and interpretations. But a feasibility study is not a current mine plan and is never intended to be. Detailed engineering is done after publication of a feasibility study (the cost of that engineering is one of the things in the study), and even that always changes once shovels hit dirt. Feasibility studies are just as the name implies: documents that can show a banker or other funder that a project should work. It’s just a theory. Every mine deviates from it in reality. That’s not suspicious; it’s normal. And applying numbers in a study to actual mining conditions can produce a lot of errors. That’s all the more so in cases like this in which the company has already announced major departures from the study, aimed at improving results.
I could go on, but I’m sure you get the picture. I encourage people who doubt my objectivity to read the short sellers’ report themselves. It’s full of impressive tables, maps, calculations and highly critical statements from experts and supposed experts. Pretium’s Brucejack mine has been different from the get-go, and a lightning rod for critics. The existence of criticism doesn’t make the critics right—especially the ones who’ve never been on site to verify what they’re talking about. Maps and calculations don't prove what is alleged, if the assumptions and interpretations are incorrect. Keep this in mind, and I’m sure you’ll see many of the flaws I saw in the report.
But I own the stock, so I’m biased myself, right?
Maybe, but the first thing I found when I started digging into this was a rebuke from another short seller who asserts that the report I’m criticizing is “terrible.” This guy wants to see Pretium shares go down, and even he is unhappy with the attack piece I’m debunking. He’s afraid it will give short sellers a bad name.
Regardless, this is just my initial review of the situation. As above, I will keep digging. I’ll consult with experts I trust in my network—some of whom are no fans of Pretium—not just management. I’ll let you know if I find any legitimate issues.
For now, this whole thing looks like a classic “short and distort” campaign. These guys are already short the stock and have already made money on yesterday’s 10% decline, whatever happens next.
My turn to express a belief and an opinion.
I don’t believe the short sellers are acting in the public interest, and in my opinion, their report is at best deeply flawed and frequently wrong.
One thing is certain: a new swarm of ambulance chasers is going to jump on this band wagon. This has started already this morning, with three law firms already announcing lawsuits as I type.
Should I sell and get out of harm’s way? Maybe. Between this and the potential for lower precious metals prices in the near term, it’s likely to be rough going for Pretium shareholders for a while.
But I don’t want to reward the bad apples here. The last time this happened, in the wake of the Strathcona debacle, it turned out to be the best buying opportunity in years. Many of my readers back then made a lot of money buying while the stock was down.
As for myself, if it gets any cheaper, I just might do the same.
That’s my take.
