The independent Qualified Company Strathcona Mineral Services Ltd. ("Strathcona") resigned from the analysis of the Pretium Resources (NYSE:PVG) 10,000-tonne bulk sample. The result of this was that the stock suffered a tremendous 25% drop in price to less than $5 per share - but is this justified?
Before we take a look at that question lets quickly take a look at the bulk sample program.
Quick Overview of the Program
Pretium Resources , a Canadian mineral exploration company owns two properties in British Columbia, Canada. The company owns both the Brucejack and Snowfield project, but their flagship property is the Brucejack project and that property consists of the majority of the value of PVG, and is the key to evaluating PVG's potential.
The Brucejack deposit is a very large high-grade deposit with over 7 million gold ounces classified as mineral reserves, and would be one of the highest grade deposits in the world if the mineral reserves are confirmed.
Currently, the company is undergoing a two-step bulk sample program to confirm the accuracy of the resource estimates because there is some question in the market on the quality of these reserves. This bulk sampling program will be released over the next few months in 1000 tonne increments and so investors can expect significant market reaction to these news releases.
Is the Investor Reaction Justified
On October 9th, 2013 Pretium Resources released a news release that stated that the independent Qualified Company analyzing the bulk sample Strathcona, has resigned from the analysis. This sent the stock into a tailspin since investors presumed that the resignation of the company analyzing the bulk sample meant that the bulk sample's quality was problematic or there may have been disagreements between its methods and PVG. Obviously all of these things would be negative for the results of the bulk sample.
But we believe that the reaction has been significantly overdone and there are some serious questions that need to be answered regarding this assumption.
First, why would Strathcona resign if the analysis was poor? Why not complete the analysis and issue the report? They are an independent evaluator of the results and so there really shouldn't be any problem with them issuing a poor report.
Secondly, investors seemed to miss something very important that was also included in the press release.
The processing of the excavated 10,000 tonnes is proceeding as planned at a rate of approximately 1,000 tonnes per week to produce gold/silver gravity and flotation concentrates. It is expected that approximately 4,000 ounces of gold will be produced in total from the material excavated for the Program, as defined by the Valley of the Kings November 2012 Mineral Resource estimate prepared by Snowden Mining Industry Consultants ("Snowden") for that area of the Valley of the Kings.
If 4,000 ounces of gold are produced from the 10,000 tonne sample, that would signify a 12.44 gram per tonne average. That would suggest that Brucejack does have the high grades that the earlier reports do claim, and would mean that the market reaction is significantly overdone (and maybe completely wrong). In fact we find it very strange that PVG would include the expected amount of gold if they didn't believe that the sample was going to register good testing results.
Conclusion for Investors
There is definitely a lot of risk with PVG, much more so than actual gold miners such as Goldcorp (NYSE:GG), First Majestic Silver (NYSE:AG), and Barrick Gold (NYSE:ABX). The fact that Strathcona resigned their bulk sample analysis does raise serious questions. But there are also unanswered questions that would seem to suggest things aren't as bad as investors think, and at this point PVG longs may want to hold tight (we know its tough) and wait for more clarification from the company - there are a number of unanswered questions from this recent release that may be quite beneficial for the stock. This may be an excellent opportunity for investors to buy an over-reaction.
Disclosure: I am long PVG, AG, SIVR, SGOL, GG. 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.