On Thursday, September 6, 2018, a group of short sellers called Viceroy Research published an attack piece against Pretium Resources. The stock dropped 10% on a day when gold was up. What follows is an analysis of what was said and why it’s wrong.
FULL DISCLOSURE: I own 1,377 shares of Pretium Resources (PVG), bought at an average price of $7.26 on April 13, 2018 at 12:59 p.m.
If you think I’d sell my soul and trash my reputation to protect a $10,000 investment, then you should discount everything I’m about to say. But if you do, you should keep the same skepticism in mind when you consider Viceroy’s claims, and admitted that they were short the stock at the time they published their attack.
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.
At the same time, Viceroy claims to be acting in the public interest—even though they say everything in their report might be wrong.
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. …
Any investor interested in the truth should keep this in mind.
Meanwhile, I read all 47 pages of the report, trying to be as objective as I can.
I found one issue that seemed to require clarification.
A central thesis to the attack is that Pretium used the bonanza-grade Cleopatra vein within the Valley of the Kings zone to bias the bulk sample taken in 2013.
If true, the entire project was a fraud. The company would have to be desperately scrounging around for high-grade ore now, to maintain the illusion, as the short sellers claim.
Before we get into that, it’s worth nothing that management couldn’t pull off a fraud like this on their own. They couldn’t sneak down into the mine when no one was looking and take a pick to some ultra-high-grade material lying around to skew the results. It would take hundreds of employees working for several different companies to join the conspiracy. It would take even more to keep the illusion going now that the mine is in operation.
That this could happen with no leaks over the last five years is very hard to believe. It’s also contradicted by the lack of significant insider selling (apart from exercising options) that one would expect to see if management was desperately trying to cash in before the fraud is exposed. And that’s not to mention a court examination of the issue that concluded that Pretium was right.
At any rate, this is the central thesis of the short sellers’ attack. They included one of Pretium’s slides as evidence in their report. It seems to show the 2013 bulk sample selectively following the super-high-grade Cleopatra vein. Without context, this looks bad. Here is the slide the short sellers used and marked up.
The yellow areas on the map are places where material was taken for the bulk sample. Blue areas were for access and exploration. Material from the blue areas was not included in the bulk sample. Note the blue tunnel at a different angle than the rest. It follows the Cleopatra vein, which seems to curve around and get included in the only yellow area that goes east-west instead of north-south. That exceptional orientation of the area sampled sure looks suspicious… unless you know that it was planned all along, well before Cleopatra was discovered.
Below is a diagram of the planned bulk sample area, published by Pretium on August 21, 2013.
It shows the resource model blocks in green, orange, red, and purple. This clearly shows Pretium’s intention to sample material from high-, low-, and no-grade areas to test its model. This was drawn before Cleopatra was discovered, which is why there are no purple blocks where we now know Cleopatra was. It’s hard to see, but the vital point is that the east-west sample area that looks so exceptional in the previous chart is already there in the plan. This next slide, from the same 08/21/2013 presentation, shows that east-west sample area more clearly.
As is clearly shown, the east-west sample was already planned. The drill traces on this slide also show some purple-coded hits that would later be seen as part of Cleopatra—but Pretium did not move the 615E sample area a bit to the east to try to capture more of this material. You can see that in the next slide taken from Pretium’s October 30, 2013 The Bulk Sample: Questions and Answers presentation. It shows the actual areas Pretium mined for its bulk sample.
This is busier than the previous slide, as it includes a lot of the underground drilling Pretium did once it got into the deposit underground. It shows all the bulk sample areas taken as planned, including the east-west zone highlighted by the short sellers—but only the eastern half of this area.
I understand that this was because the density of the rock mined for the bulk sample was higher than expected. If Pretium had mined all of the areas completely as planned, the sample would have exceeded the 10,000 tonnes contracted. The company stopped when it reached 10,000 tonnes. If they had mined the western half of the east-west area, it could have taken a bunch more of the purple- and red-coded (very high-grade) rock found in later drilling. This would have made the sample deliver even more gold, exceeding expectations even more than it did.
Experts can, did, and I’m sure will argue about whether Pretium’s bulk sample was done correctly for years. My point at the moment is that the short sellers’ slide doesn’t tell the whole story—and the part it does tell is misleading.
I know this because I was there at the time. I remember that the bulk sample was deliberately designed to extract material from areas with a range of grades, from almost nothing to super-high-grade. That’s reasonable, because such bonanza-grade areas exist scattered throughout the deposit.
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.
This held up in court when a bunch of unscrupulous lawyers sued Pretium, using Strathcona’s departure as a basis for a class-action lawsuit.
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, like Strathcona. That management would not want to spread false or inaccurate information seems understandable to me, but more important is that the court surely saw all of it, and it sided with Pretium.
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 opinion and belief. 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 known facts seem unfounded, or the math is done using the wrong numbers.
Here are other key arguments and my rebuttals:
- 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 after Bob left. This happens a lot in exploration, especially when one goes from exploration to building and operating a mine. I was also covering this story at the time, and I remember that there was a technical issue with the part of the ore that contained mostly tin. After careful study, they decided not to mine this, and to this day, Pirquitas has no official tin listed among its resources. The projects resource model underwent other changes as the company went from exploration to production, as well, which is quite common. The mine went on to make a lot of money, making SSR into the major producer it is today—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 silly, since Pretium kept finding more super-high-grade mineralization—all 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 mine 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 company has since issued a press release correcting the amount reported in 2017, which accidentally included all the rock excavated in previous years. That was a mistake, but not a material one, and not one that unduly benefitted Pretium. Regardless, 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 calculations regarding 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. In short, pretty much all the math that bulks out the short sellers’ report and makes it look so authoritative can be thrown out.
If Pretium is in trouble, this report doesn’t show it.
That’s enough for me to side with management. But aside from that, consider how many people would have to either be duped or be in on a criminal conspiracy for the short sellers’ claims to be true:
- The many independent contractors that work with Pretium, and all their technical employees.
- Pretium’s hundreds of employees who see what’s really going on.
- The regulators and their inspectors.
- The financiers and their due diligence teams.
- The royalty holders and their due diligence teams.
- The many independent analysts who have visited the mine.
- The local First Nations bands who are important stakeholders.
It simply makes no sense.
Am I biased? Perhaps, but I have seen dismissal of the Viceroy report from those who do not stand to gain from higher share prices, including geologists who have long been critical of Pretium’s mine plan and an investor who is short Pretium himself (who fears that the Viceroy report will give short sellers a bad name).
This whole thing looks like a classic “short and distort” campaign. Viceroy was already short the stock. Even if others like me debunk all their claims, it won’t matter, because they were able to make a killing on the first day their report hit the market.
What to do?
Should one sell and get out of harm’s way? Maybe. Between this and the potential for lower precious metals prices in the near term, it could be rough going for Pretium shareholders for a while.
But 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.
Today, the stock has already recovered substantially. I like this speculation a lot, but I’d watch for down days on the market to create opportunities if I was still looking to go long.
