Summary- Pretium's third-quarter production numbers are excellent.
- Fears surrounding this company should continue to dissipate.
- Price should now be tied more tightly to gold.
Pretium Resources Inc. (TO:PVG) announced production results that vindicate years of uncertainty hanging over the stock. After July's update, in which Pretium released production numbers the market wasn't impressed with, these latest numbers change that story. The stock immediately popped 15% on the news.
Pretium's Aug.10 release detailed their initial production results from July, when the firm processed low-grade mining muck. The results were an unimpressive 3.4 g/tonne, and some commentators on Seeking Alpha tried to resurrect the worries from 2013 that Brucejack was not an investment-grade deposit due to engineering firm Strathcona's disagreement over the site's economic assessment.
I've been following this project for four years and know that 1) the risks below $9 per share were minimal, and 2) Valley of Kings is a superlative asset based on knowledge of sampling techniques. The market was overvaluing the risks that lingered from 2013's bad press. Today's press release vindicates not only the company's stated average grade of 13 g/tonne, but also the speed with which the staff there are achieving full production. This bodes well for 2018's revenues.
Mill feed grade and gold recoveries averaged 12.36 grams per tonne gold and 96.92%, respectively, during the last two months of the quarter, as the mill transitioned to processing stope ore exclusively. The mill processed a total of 261,262 tonnes of ore for the third quarter for an average of 2,840 tonnes per day.
Back in July, I told readers that Pretium represented uncommon value in the gold sector, including making it my signature pick at the Seeking Alpha Gold Investment Round Table:
SA: What's your favorite gold-related play? What's the story?
Tom Luongo: My favorite play is still Pretium Resources. Valley of Kings is an incredible deposit, 13 g/tonne. The management is top-notch. It's built a $700 million mining facility with a pay-back time of just two years … at current prices.
And it is entering full production now at the end of a grinding bear market. The majority of this mine's life will occur during a rip-your-face-off bull market as we approach the major breakdown of faith in our political systems. Gold will shine here, and so will silver. Pretium has both since Valley of Kings' ore is mostly electrum. All-in sustaining cash costs should come in, even with a stronger Canadian dollar, under $500 per ounce. That's simply fantastic in this market.
Right now, the market hates the stock. That's even better -- more to accumulate. The market continued to hate the stock even though gold rallied during Q3 until this morning. Everyone is always chasing the next big thing rather than staring at the really great thing in front of them. The market hated the stock because it's not an interesting story until the moment comes when the news tells investors to be interested in it.
The essence of contrarian investing is patience and understanding the odds. Once the probability of further downside action is low, buying in tranches over time is the right play. The longer a stock refuses to break down below a certain level, the higher the probability that upside is in its future. Sometimes the best returns come to those who stop trying to out-time the market and just accumulate high-quality assets at great prices.
My opinion of Pretium has never changed because my opinion of the underlying asset itself, Valley of Kings, never changed. All we had left was execution risk, but with a property as good as Valley of Kings, it's capable of paying for a lot of mistakes made during a company's growing pains.
The quarterly chart of this stock tells the story. All of 2014 and 2015 were dominated by fears that Strathcona was correct and that Pretium wouldn't be able to finance the buildout of the $684 million project on reasonable terms with gold hovering around $1,100 per ounce. Then, in Q2 2016, the firm released eye-popping infill drilling results while gold and silver rallied on Brexit fears (see chart above).
Once gold dropped after Trump's election, the market is simply uninterested in a new gold mine hitting the market. Pretium languished on poor sentiment because there was nothing to drive the stock higher. The move up today toward $12 further confirms that resource markets move based on news and sentiment far more than they do on fundamentals or correlation to the underlying asset.
That said, there will be some more upside to Pretium as the market properly re-prices the company's risk profile. But now that geology and execution risk look to be behind the firm, its market valuation will be free to rise and fall with the price of the underlying asset. And sentiment will be all about gold.
So, looking ahead, is Pretium a buy or a sell above $11 a share? For traders, this was the move you were looking for to grab that "event trade" profit from support at $8. Until gold breaks above the post-Brexit high of $1,375, there is still too much risk of downside action while political risks both in Europe and the U.S. evolve. I'm still waiting for that final drop in gold as priced in dollars.
So, selling Pretium on the first sign of weakness on a daily basis is a good plan for short-term scalpers. For investors, however, looking to make the most of the upcoming gold bull market, keep accumulating on pullbacks. This stock has a long run ahead of it. But, if today's news taught us anything it's that the days of accumulating Pretium below $10 per share are very likely behind us.
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.