Pretium Declining Amid Doubts on Gold Project

Pretium Resources Inc. has plunged more than 50 percent in Toronto in the past five weeks after a dispute over how much gold is at a property in British Columbia fuels speculation the deposit is less promising than previously estimated.

Strathcona Mineral Services Ltd., a contractor hired by Vancouver-based Pretium, resigned Oct. 8 after finding “no valid” gold resources. Strathcona disagreed with Pretium about how much data should be disclosed, said Henrik Thalenhorst, a Strathcona geologist. Pretium says it has published all the drilling results from the site.

“It’s not the role or domain of an engineering consultant I think to decide what is material,” Pretium Chief Executive Officer Robert Quartermain said in an Oct. 30 phone interview. More evaluation is needed before conclusions can be drawn about the viability of the deposit, he said.

While there’s no suggestion of any wrongdoing by Pretium, John Stephenson, a fund manager with First Asset Investment Management Inc. in Toronto said some people are wondering if there are similarities with Bre-X Minerals Ltd. Calgary-based gold explorer Bre-X’s shares slumped to zero in 1997, erasing C$6.17 billion ($5.89 billion) of market value, after its Indonesian project was shown to be a hoax. A Strathcona report, on which Thalenhorst worked, proved the Bre-X deposit was worthless.

Bre-X Comparison?

“Because Strathcona was on the right side of the Bre-X scandal back in ’97, everybody thinks, well, if they’re pulling out there must be something wrong,” said Adam Graf, a New York-based analyst with Cowen and Co LLC, in an Oct. 29 phone interview. Graf has a buy rating on the stock, one of six buys and four holds, according to ratings compiled by Bloomberg. There are no sell recommendations, the data show.

“I think we’re actually past” any comparison to Bre-X, Michelle Romero, a spokeswoman for Pretium said in a Nov. 7 phone interview from Vancouver. “People have been able to see from the results that we’ve published even subsequent to that, as well as any number of other ways, that you can see that frankly the gold is there.”

There’s “no real similarity between Bre-X and Pretium,” Strathcona’s Thalenhorst said. Bre-X’s project “was a non-deposit” while Pretium’s “may very well turn out to be a mineable deposit, just much different from what it has been made to look like.”

Shorts Rise

Pretium slumped 28 percent on Oct. 22 after it said Toronto-based Strathcona found “no valid gold mineral resources” at the Valley of the Kings deposit.

The shares fell 2.8 percent to C$3.42 in Toronto today, giving the company a market value of C$359.3 million. The largest shareholder is U.S. miner Silver Standard Resources Inc. with an 18 percent stake, according to data compiled by Bloomberg.

Pretium has seen the biggest increase in short interest on the Toronto Stock Exchange in the past month, according to data compiled by Bloomberg.

Gold explorers are under pressure this year after a 23 percent decline in the price of the metal. A 63-member index of such companies including Pretium that was compiled by Bloomberg has declined 44 percent in 2013.

“The risk, given the complication of the geology, the decision by Strathcona and the process that lies ahead of the company, has been priced into” Pretium’s stock, Joseph Reagor, a Newport Beach-based analyst with Roth Capital Partners LLC, said in an Oct. 29 phone interview. “But it’s also in a depressed sector.”

Ore Sampling

Valley of the Kings is part of Pretium’s Brucejack project, located about 65 kilometers (40 miles) north of the town of Stewart in British Columbia. Pretium said Jan. 9 it hired Strathcona to vet a November 2012 resource estimate carried out by Perth, Australia-based Snowden Mining Industry Consultants Ltd.

Strathcona started digging a 10,000-metric ton ore sample. It started checking some of the rock at the site using a sample tower, a machine that mixes up batches of ore and separates a small amount for testing on site. The entire sample was then taken away for testing at a processing mill in Montana, Strathcona’s Thalenhorst said.

Minerals can sometimes be distributed unevenly in a geological formation. Explorers such as Pretium face the challenge of drilling from the surface and taking samples of ore to build a model of what a deposit below looks like.

Vertical Mineralization

The gold in Valley of the Kings is tricky to measure by drilling down into the rock because the mineralization runs almost vertically, said Thalenhorst, who worked at the site.

“Either you totally miss the damn thing or you drill right through it,” he said. Pretium’s answer to the problem was for Strathcona to cut horizontally into the deposit, Thalenhorst said. After a while “it became fairly clear” that Strathcona’s work wasn’t backing up the Snowden estimate, he said.

Snowden estimated Valley of the Kings had a so-called indicated resource of 16.1 million tons of ore containing an average of 16.4 grams of gold per ton. Thalenhorst said that when Strathcona made the horizontal cuts, it saw the Snowden estimate had been extrapolated from drill results that hit high-grade sections of the deposit.

Snowden doesn’t comment on its work without the client’s permission, Ivor Jones, a Snowden spokesman, said in an Oct. 30 e-mail. Snowden maintains the November 2012 estimate is valid and continues to support it, Pretium’s Quartermain said.

More data

Strathcona told Pretium three times over the summer that it should disclose the tower-sample results, which it considered material, according to Thalenhorst.

In response, Quartermain said in the Oct. 30 phone interview that he questions the tower-sample methodology because it “appears to significantly understate” the amount of gold found in the ore tested at the Montana mill. The whole 10,000-ton ore sample needs to be run through a mill before it can be concluded how much gold there is, he said. Snowden will issue a final report on the milling when it’s complete, Pretium said Nov. 7.

“All the drill results that we have to date have been released totally to the market,” Quartermain said. Pretium rose 21 percent on Oct. 24 after it published a set of drill results from the property, although it lost those gains in the following two weeks.

“The stock’s going to be under pressure until there’s a lot more data points, a lot more clarity on what they really have,” said Stephenson at First Asset Investment.

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