On Thursday, September 6, 2018, a group of short sellers called Viceroy
Research published an attack piece against Pretium
Resources Inc. (PVG:TSX; PVG:NYSE). 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.
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, as they admit 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.
As for myself, if it gets any cheaper, I just might do the same.
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Lobo Tiggre, aka Louis James, is the founder and CEO of
Louis James LLC, and the principal analyst and editor of IndependentSpeculator.com.
He researched and recommended speculative opportunities in Casey Research
publications from 2004 to 2018, writing under the name "Louis
James." While with Casey Research, he learned the ins and outs of
resource speculation from the legendary speculator Doug Casey. A fully
transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com
services going forward. Another key feature is that Mr. Tiggre will put his
own money into the speculations he writes about, so his readers will always
know he has "skin in the game" with them.
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