Summary
Pretium Resources Inc. (TO:PVG) announced benchmark grade production in Q2.
Cost estimates are higher going forward than previously thought.
Weakness in gold prices create buying opportunity.
This idea was discussed in more depth with members of my private investing community, Stocks, Shocks & Rocks.
Since 2014 worries over Pretium Resources’ (PVG) flagship property, Brucejack, have dogged the company. It continues today as there are still contributors here at Seeking Alpha who believe Pretium to be, if not outright a scam, then definitely an overvalued collection of assets.
The debate stems back to the controversy over engineering firm Strathcona refusing to classify Brucejack as an economically-viable deposit. Simultaneously another firm Snowden did issue a preliminary economic assessment.
This cost the company time and money as then CEO Robert Quartermain had a massive bulk sampling of the ore performed to bridge the gap between the two firms. Since then fears that this was the wrong approach and that Pretium would never be able to mine the deposit profitably have proliferated.
Speaking to a number of people in the industry at that time I got the sense they all felt Brucejack had tremendous potential. It also would be a very difficult deposit to mine because of its geology.
Fast forward to 2017 when the company moved into production and that assessment proved to be correct. The first few quarters of Pretium’s performance as a mining company have been less than stellar. And it fueled the bears’ argument that this company would fall behind the curve and have to make up in volume, mining more ore, what it couldn’t achieve through mining high grade.
The most recent press release from Pretium has finally begun to put most of those lingering fears to bed. The firm pre-announced its Q2 production with results that were right in line with the resource assessment grade of 14.5 g/tonne. From that press release:
“With more than 187,000 ounces produced in the first half of 2018, we have delivered on our first half 2018 guidance of 150,000 to 200,000 ounces of gold,” said Pretium President and CEO Joseph Ovsenek. “The successful integration of our grade control program into our mining process has resulted in increased grade to the mill with production exceeding grade control estimates for the quarter. Brucejack has now achieved steady-state production, and we expect to deliver 200,000 to 220,000 ounces of gold for the second half of 2018.”
The focus of management’s comments during the Q1 earnings call was on the implementation of Pretium’s grade control program. And in Q1 the grades mined began to rise. However, there was no indication from those results, in my mind, that the company would achieve the benchmark grade in the company’s PEA, again 14.5 g/tonne.
And because of that I was cautiously optimistic about all of this, and, personally, was looking for stepwise improvement in Q2. Anything above 12 g/tonne would have been encouraging to me.
That the firm achieved benchmark grade in Q2 is a stunning result. Will it be enough to put the bears back in hibernation? Probably not. And I would say that the firm will need to produce similar results for the rest of 2018 to finally put them in their place.
Now, that said, all is not perfection here. All-in sustaining cash costs at this grade level will be between $710 and $770 per ounce. This is quite a bit higher than the estimated AISC’s from the Economic Assessment which were $500-$550 per ounce.
So, in the end both the bulls and the bears were partially right about Brucejack. There’s plenty of gold and silver there to be mined and mined economically at today’s prices. But this is proving to be a more difficult deposit to mine than originally expected. Pretium’s grade control program is adding significantly to COGS, and as such, valuation will not likely rise back to the heights of 2017’s price range, above $12/share, when gold was firmly above $1,300 per ounce.
With gold trading in the $1250s and weakening on a rising US dollar I expect Pretium to bounce between $8 and $10 for the next few months.
Gold will not catch a technically significant bid until the political unrest within the European Union results in a catastrophic loss in investor confidence. There are plenty of potential flashpoints for this.
Italy and Germany are headed for a showdown over Italy’s fiscal policy and its debt burden. And a weakened Merkel will not have the same leverage to keep Italy from implementing either a "fiscal money" solution to its structural problems thanks to an over-valued euro or an outright exit from the euro.
In 2015 when Greece was faced with this, Merkel refused to allow her finance minister, Wolfgang Schauble, to go forward with letting Greece leave the eurozone. Then she had the clout. Today, not so much. Today, the German electorate is even more dead set against any form of bailout.
That leaves Italy with a lot more leverage to get what it wants this time around, and the markets may not like what the Italians come up with.
As such, I would continue watching the poor performance of US and European bank stocks as leading indicators of potential problems.
The MSCI European Financials ETF (EUFN) is off 25% from its January high and from a monthly and quarterly perspective looks terrible technically, for example.
Once there's a shift in confidence that there's no workable solution to Europe’s political and financial troubles, that’s when gold will begin to enter a new bull market.
For holders of Pretium, thanks to their Q2 performance, continued weakness in gold should be seen as a great buying opportunity until that eventually occurs.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.